Multi-family offices and wealth advisors are registering solid revenue growth, according to a new report from Chicago-based Family Office Exchange. But they also face “operational challenges” going forward.
At the median multi-family office, revenues grew by 13% from 2010 to 2011 and by 6% in 2012, according to FOX’s MFO and Wealth Advisor Benchmarking Study, released Wednesday. "Firms are experiencing really good growth, which we expect will continue,” said David Lincoln, managing director of research for FOX.
Profit margins were also better than expected, averaging around 22%, Lincoln added.
But two perennial problems continue to haunt the industry: the high price and scarcity of top client-facing talent and escalating competition on the pricing front.
“The continued reliance on exceptionally talented, yet hard-to-find client-facing personnel makes improving productivity a paramount goal for most firms,” Lincoln said.
According to the FOX survey, approximately eight out of 10 multi-family offices are hiring -- something Lincoln described as reflecting “a strong vote of confidence in the industry.” Yet the scarcity of top talent has created a sellers’ market that is driving up the cost of labor, Lincoln said: Firms report that it's taking up to a year to fill client-facing and sales positions.
The talent shortage has caused many firms to rely on a “substantial” number of “less-experienced” personnel to meet client needs, according to the FOX report.
Industry consultant Lisa Gray, principal of Richmond, Va.-based Gray Matter Strategies, called that development “disappointing, especially when there are excellent consulting resources that specialize in these important service functions.”
BRUTAL PRICE WARS
Another challenge: Pricing remains brutally competitive. Many firms are battling to sign up clients for as little as 30 basis points on assets under management, say industry sources.
While an asset-based fee for most services remains the most common business model, the FOX study reports that some firms are adopting other approaches, most notably a "basis points plus retainer" model.
Wealth advisory firms also appear to be gaining a better handle on how to use pricing to offset high service delivery costs, with 86% of firms participating in the survey charging higher fees for more complex clients.
Pricing based on assets under management will “continue to prove insufficient,” said Gray. “Project and retainer fees are much more attractive for both the client and the firm. They provide a more consistent stream of revenue for firms whereas asset-based fees undermine the excellent work performed for clients during difficult market and economic environments.”
Multi-family offices have traditionally struggled with having profit margins eroded by providing more and more client services as part of an inclusive fee -- a trend popularly known as “service creep.” But Lincoln said firms are becoming “more sophisticated about pricing,” and are beginning to “charge clients who have high service costs an appropriate fee.”