Illustration by David Lesh

Many of the nation’s 3,000-plus family offices face this conundrum. The economics of the business have prompted a host of family office mergers and acquisitions over the past decade (see sidebar). Hap Perry, CEO of Asset Management Advisors (AMA), a multifamily office based in Palm Beach, calls it "the jaws of death"—the squeeze many family offices face as they strive to deliver increasingly expensive wealth management services while, at the same time, family assets are diminished and progressively fragmented by taxes and inheritance.

The nation’s family offices differ considerably, ranging from glorified bookkeepers and bill payers to highly sophisticated providers of services that extend from investment management to family counseling. As family offices continue to offer these services while trying to contain costs, they need to review where they want to go and how they want to get there, says Peter Frye, CEO of Frye Louis Capital Management, a Chicago-based multifamily office that sold itself to Credit Suisse in 2001.

Maintaining this level of service is becoming extremely difficult. While a single-family family office may be willing to bear these costs, multifamily offices, which are often run more like businesses than extensions of a family, may not. Perry says, "To me the difference between a single-family office and multi is [that] a multi is a business and a single-family office is an extension of an individual." As a multifamily office becomes a business, it competes with the old-line private banks, such as JP Morgan or Harris Trust. And banks and brokers entering the private banking and wealth management businesses are adding estate-planning and assorted personal services to their asset-management offerings, introducing another group of competitors to the field. All these developments increase competition and put pressure on budgets.

Meyer, like Perry, believes many family offices will have to confront these issues, and those with assets of less than $500 million, he believes, will be unable to continue operating. "They’re going to be better off serving their clients by affiliating with an AMA or working through a major institution," Meyer says.

Their viability depends on how many people the firm serves. "If you’ve got a couple and two kids and $500 million, you can do it on your own," Meyer explains. "But if you’ve got 50 households and 200 people and hundreds of trusts, it gets very complicated, because this is not just about the management of the assets."

Perry wriggled AMA free of the jaws of death in March 2001, when he negotiated the sale of AMA (originally established to manage the Perry family money) to Atlanta-based SunTrust, a major Sunbelt bank with $121 billion in assets. AMA is now the vehicle for serving SunTrust clients with assets more than $25 million. Perry insists the arrangement works well for him, both as an executive and as a member of a family whose wealth is being managed by AMA.

Meyer’s first reaction to news of AMA’s acquisition was dismay, because he had considered AMA an attractive merger partner for Eagle. "We had dealings with the principals for many years, and the chemistry had always been there," he remarks. "When we heard they merged with SunTrust, we said, OK, forget it—they’re now a major financial institution. Our most important criterion was that we didn’t want to get involved with a major financial institution."

Eagle had hired Family Office Exchange (FOX), a professional association and advisory group, to advise it in its search for a merger partner. When Meyer expressed his disappointment over SunTrust’s acquisition of AMA to Sara Hamilton, founder and CEO of FOX, she told him not to jump to any conclusions about how the marriage would turn out. "FOX took us kicking and screaming down to Florida," Meyer recalls, "where it took us a few months to realize the merger SunTrust did with AMA really was different. In most of those cases, the company takes on the character of the acquirer and its old character is lost." Yet AMA’s character remained intact: Meyer discovered, to his surprise, that Perry—always, in Meyer’s view, far too much the entrepreneur to survive long under a corporate regime—was pleased with SunTrust’s stewardship. Recognizing that AMA was exactly the type of platform it needed to reach family-office clients, SunTrust did not simply tie AMA into an existing platform. The fact that SunTrust actually transferred its existing high net-worth clients to AMA, rather than the reverse, as usually happens when a financial conglomerate is seeking to build up its assets, cemented Meyer’s positive perception of the deal.

"We took that as evidence that the entrepreneurial culture would be left alone," Meyer says. "We respected that very much." And so, in February 2003, Eagle agreed to an acquisition by AMA. The newly renamed AMA Eagle Capital Management now functions as the Greenwich outpost for AMA, joining AMA offices in Orlando, Atlanta, Jackson Hole, and Washington, D.C.

Eagle is not alone in valuing its independence, which (importantly) centers on the right to choose the best products for its clients—a privilege many family offices surrender when they are purchased, making for very unhappy clients. "If [a family office] becomes a standard financial services company pushing its own products," Perry says, "chances are the family is not going to be happy. But if the parent company is committed to the family office model, and continues to support it, then you’ve got a better model."

A key element of that model, he notes, is "open architecture," the ability to seek out the best hedge funds, private equity funds, and other investments, regardless of whether they come from the parent company.

According to Stanley Pantowich, CEO of TAG Associates in New York, "The typical family office is a hub, and the spokes are different investment brokers and investment managers. They can play one off against another and have total independence and objectivity." He believes that if TAG had sold to a big bank or broker, "We would have lost that."

Instead, in January 2002, TAG sold a 50 percent interest to a small group of investment bankers. "I have four new partners to help me run the business," Pantowich says. "I gained some skills that we didn’t have before. We got real estate expertise. We got private equity expertise, and there’s more talent in the firm as a whole." There is also more young talent that will ensure the continued vitality of the firm, he says. The deal allows the 62-year old Pantowich to follow the advice he would give his clients—get some cash out of the business and prepare for generational transition.

Some insist independence can be maintained, despite an acquisition by a big bank or asset manager; it just has to be negotiated in advance. "We are not steered at all to any Credit Suisse products," Peter Frye insists. "We are allowed to choose best of breed."

Since Eagle joined forces with AMA and SunTrust, Meyer, now executive vice president of AMA, says, "The same team is here, but there are much deeper resources." The additional scale provided by the merger also reduces the cost per family. Similarly, at Frye Louis, Frye says, "As a result of our partnership with Credit Suisse, we have expanded growth channels, and we’ve got a global network of resources."

Financial management is a very scalable business, and the bigger the pool of assets, the less cost there is per client. The concern is that the family-office style of personal services may be the opposite of scalable—the bigger the shop, the more distant the services. In any case, clients have to ask themselves what price they are willing and able to pay for keeping it all in the family.

From Your Side of the Table
Five essential questions to ask when your family office is sold.

• Does the buyer mainly want to increase its assets under management, or does it want your office’s expertise and franchise?

• How many of the original clients of the family offices it has purchased remained with the firm?

• Will you still have access to your favorite advisers?

• What additional products or services will become available?

• Are you willing to find a new family office if need be?

Additional Information
 A Decade of Deals