First Person: Industry View
An Industry in Flux
Henry (Hap) Perry
10/01/2004

Hap Perry is the founder, chairman and a client of Asset Management Advisors, a multifamily office purchased by Atlanta-based SunTrust in 2001. It has locations in Palm Beach, Orlando, Miami, Atlanta, Washington, Greenwich, Conn., and Charlotte, N.C. A graduate of the Wharton School, Perry managed his family’s and his own businesses before founding AMA in 1989.

I see the family office as the right platform for wealthy families seeking to cope with multigenerational dilemmas and problems that, if not properly attended to, can result in the syndrome summed up in the saying: “Rags to riches to rags in three generations.” The best way for families to avoid this fate is to leverage their financial capital (what they own) with their human capital (who they are) and their intellectual capital (what they know), while creating a lasting partnership that involves all their members. I began Asset Management Advisors as a multifamily office for families who, like my own, had this vision.

(Photograph by Diane Bradford.)
Most of a family’s advisors, while very competent, have their own unique perspectives on the world and do not address the complexities of the interrelated issues. As an example, much of the financial services business, while competent at looking after a family’s investment performance for the next quarter, is not equipped to look after it for the next generation, nor does it consider this its mission. Other types of advisors focus on their own areas of expertise, and consequently cannot help the family resolve the dilemmas that arise from the interrelationship of all three forms of capital.

Most financial institutions still focus on building their capability to grow the financial capital, rather than the human capital.
As an example, the head of a family can go to some very competent legal advisors who may do a wonderful job structuring a plan to minimize his estate taxes, but they may also inadvertently create a battleground for his heirs. Only a firm that has invested in understanding the family’s human capital needs can mentor it and its advisors appropriately to make that tax-saving structure work from the perspective of more than one generation. Meanwhile, most financial institutions still focus on building their capability to grow the financial capital, rather than the human capital.

Integrating all of a family’s forms of capital is a challenge. It draws on expertise in a number of disciplines, including finance, law,accounting, psychiatry, education and governance. Only those families with vast resources can afford to field a team of experts and devote the time necessary to develop their own processes. Single-family offices, or even small multifamily offices, can only succeed at this, typically, for a limited number of generations, until the family’s original “sparkplugs” give way to age and retire. Typically, without a good deal of luck, the resources (and challenges) are not sufficient to attract the top talent required to keep the operation going in subsequent generations.

A New Paradigm
This situation cries out for an institutional solution that can bring both a measure of continuity and appropriate resources to bear on the problem. Many of the institutional solutions currently available are not comprehensive, nor are they “high touch” enough for affluent families. Even so, many firms that now claim to be in the family office business do not have the necessary capabilities. It is often difficult for a client to decide which firms are able to provide the comprehensive suite of services they need, and which are simply claiming to have that capability for marketing purposes. There are, however, several questions a client can ask in order to discriminate among firms.

1. Can the firm clearly define and explain the processes it will employ to help its clients with their human and intellectual capital? Everyone can provide anecdotes, but can the firm point to specific expertise and programs in credible detail? 
2. How much of the firm’s resources are dedicated to the nonfinancial services, and what are the firm’s plans to expand those offerings?
3. Is the firm interested in cross-selling products or finding unique client solutions? Are its advisors compensated for selling the firm’s own products?

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.