Talent troubles, capital needs, profitability problems and competitive threats loom as the biggest concerns for family offices this year.
"Finding and training talented people who want to work in this industry is the No. 1 problem for family offices," says
Attracting and retaining both junior and senior advisors is critical, top executives say. "This is a talent business," says
Family office executives say competition for talent has been driven in part by last year's strong stock market performance, which unleashed pent-up demand for financial service companies aiming at wealthy families.
"We're under attack," says
Indeed, demand for qualified talent is expected to drive up costs for family offices and widen "gaps in service differentiation" over the next five years, according to a private wealth management forecast by
"The talent war is intensifying as boomers are retiring," says CTC/Harris President
As a result, firms are likely to increasingly hire from nontraditional sources and invest in training programs. But it's not a simple solution.
"There are no specialized courses available, and young people are not patient in learning the practice in-house," Hamilton says. "They think they should be experts in 18 months, and don't respect the time it takes to gain wisdom. They don't want to wait, and firms are not getting deep knowledge."
Many senior-level executives at
"The client-facing transition is working well, and we've asked some of the senior people to stay on as independent contractors to be part of the handoff," Voth says. "But it's taking longer than I thought. It's not something you can do in six months."
Single-family offices also face talent problems, especially when it comes to compensation. "Wealthy families are pinching pennies," says
The irony, Robles says, is that for the most part these families became wealthy in the first place because they invested wisely in their businesses. "Why are families not looking for top talent the way Fortune 500 companies do?" he asks. "There's not a lack of qualified people out there. … Families are going to have to come to their senses, step it up and pay more money."
Capital funding, expenses and profitability are another source of strain. "This is a capital-intensive business," says WE Managing Partner Michael Zeuner.
Technology, regulations and operational and talent needs are driving costs upward, eroding profit margins. "Service creep" – the perceived need to offer high-end clients additional services they aren't billed for – poses another challenge. "If your fees are 100% asset-based, it's very difficult to limit service creep," says
Meanwhile, pressure on fees puts another squeeze on profits. "There is great tension between [family office] business economics and the client experience," says
Single-family offices and small multifamily offices will respond to the pressure by seeking to partner or outsource "all but their end-client relationship service," the CTC/Harris myCFO study predicts, while larger multifamily offices are likely to "expand their willingness" to sub-advise and provide private-label service to multi-client family offices and even rivals. "Margins will continue to be pressured in this business across 2014," Benevides says.
These cost pressures are likely to force multifamily offices with less than
As the bull market and rising economy make the ultrahigh-net-worth market more desirable, multifamily offices can expect even more competition from "big institutional players," Livergood says: "They really want to differentiate themselves from the J.P. Morgans of the world."
Multifamily offices can point to virtues such as not selling proprietary products, objectivity, customization, stability and a boutique-like personal touch, Livergood says. Yet their biggest vulnerability is still long-term sustainability. "The question they have to answer is: 'Who will be here in 50 years?'" he says.
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