Family offices and private banks play follow-the-leader

As interest in the development of the European family office sector continues to grow, there are a number of signs that in the US the multi-family office (MFO) model is starting to challenge mainstream private banks for market share. Yet who is following whom? Recent studies analysing the business model of the MFOs in the US have given detailed grounds for comparison of the two business models for the first time in terms of strategic focus, growth plans and charging structures. Interestingly, this analysis shows considerable overlap between the two.

Last month Family Office Manage-ment (FOM) published the first detail-ed analysis of the size of the US MFO market in Bloomberg’s Wealth Man-ager Magazine. It showed that assets under management increased 17 per cent to $169bn (e138bn) in 2003. The number of families served by the MFOs grew by 9 per cent to 5996. This compares to the 14.4 per cent increase in assets under management recorded by Scorpio Partnership for the global private banking industry in 2003.

Of the 64 firms surveyed for the FOM study, 77 per cent were registered investment advisers, 20 per cent were banks and trust companies and the remainder were accountancy and law firms and other closely-held businesses. As well as offering a broad range of family office services, the MFOs surveyed had to have a minimum account size of $4m for multi-generational client relationships and to derive at least 25 per cent of their revenue from these relationships.

Top three challenges

The strategic analysis of the MFO business model shows considerable parallels with the mainstream US private banking market. For example, MFOs were asked to identify and rank the top three challenges that they face today. By a clear margin, the three greatest worries were how to recruit, develop and retain professional staff, followed by how to manage growth and build awareness of the MFO’s business model. (See Chart 1.)

Shifted focus

While these business issues are in line with the historic preoccupations of the private banking sector, arguably the strategic priorities of the MFOs in the study are behind the industry curve. More recent studies have suggested that private banks have shifted focus to issues of brand, differentiation and service quality, illustrated in Chart 2, from Pricewater�houseCoopers 2003 Global Private Banking/Wealth Management Survey.

Other areas where MFOs and private banks look to be playing follow-the-leader are outsourcing and fees. While this entire scenario may look like a game of “Simon Says”, in fact that other playground favourite “Leap Frog” may offer a better analogy. Today’s MFOs may well become tomorrow’s private banks.

Sebastian Dovey is managing partner at wealth management strategy think-tank Scorpio Partnership

‘Private banks have shifted focus to issues of brand’
Sebastian Dovey, Scorpio