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| First Person: Industry View |
An Industry in Flux
Henry (Hap) Perry
10/01/2004
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It pays to take the time to do a little research. For families that choose
the wrong firms, there is a high failure rate in addressing multigenerational
dilemmas. Roy Williams, an author who has studied this problem for more than 15
years, cites a study of 3,200 U.S. families: It estimated that 70 percent or
more of the families failed to successfully transfer their wealth to the next
generation.
Multifamily offices need to have sufficient scale to obtain the resources they need to improve these dismal statistics. The size will depend on
the firm’s inclination to invest for the future. A small firm, managing approximately $4 billion or so, can secure the expertise it needs if it is
prepared to sacrifice current profits for future capabilities.
Firms must
also structure themselves in a way that takes advantage of their size while
leaving plenty of latitude for decision-making at the client level. In our own
company, each one of our local family offices is limited to 60 families in order
to preserve our high-touch culture. Even though the firm has grown in the last
three years, our legacy clients tell us that we deliver more now than we did
when we were smaller. We have been able to add significant resources to the firm
as a whole, which has increased our offerings.
Multifamily offices must also
be clearer about the value they provide when discussing the basis for their
compensation with their clients. Most fee schedules are based on assets under
management; the industry needs to get better at demonstrating the value it adds
above and beyond the management of financial capital.
Consolidation in the Cards
Committing to provide solutions for all of a
family’s needs is central to the success of the emerging multifamily office
industry. Those who do commit will invest heavily in research in order to create
integrated and comprehensive solutions for their clients. Small players often
cannot afford to do so, and the old and entrenched paradigm players may not
choose to make the sacrifices to their culture or profitability that are needed
in order to become a true multifamily office.
In our case, our owner,
SunTrust, is dedicated to our long-term efforts. This is rare, as most of the
financial institutions we talked to when we were looking for a partner were not
so inclined.
What is next? Firms that choose to make the commitment and have
the resources will either grow (which is very difficult given the competitive
landscape) or merge into a few dominant industry leaders in the next decade. It
will be a testing period for many, but a new industry will emerge that will be
entirely different from today’s offerings.
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