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Family Offices More Reliant on Commercial Advisers
Super-rich families are more likely to use multi-family offices to manage their investments than they used to be.

Half of single-family offices now use outside investment experts, up from 25% in 2005, according to the Institute for Private Investors. The shift probably began in 2008, when, according to a report by Spectrem Group, U.S. millionaires lost 30% of their wealth.

"A lot of families looked at performance coming out of 2008 and concluded that, unless you have best-of-breed in-house asset management, it's more effective to use top outside managers," says Mindy Rosenthal, managing director of Campden Media, IPI's parent company.

Traditional financial-service providers — banks and brokerages--are hungry for high-wealth assets. But commercial multi-family offices seem to be the partners of choice for families with existing offices.

In part, that's because family offices were laying the groundwork for collaboration before the downturn--a process aided by networking groups for ultra-wealthy families like the IPI and the Family Office Exchange.

Pre-crisis, private family offices talked about joining forces to save money, says John Benevides, head of Harris myCFO's family-office group and a former president of the Family Office Exchange. But after the crisis, family offices came to see that peer-to-peer hookups mean wrangling and compromise without addressing the need for smarter and more risk-aware investment management. By using multi-family offices, family offices could fill the investment void in the context of a comparatively clean hire-or-fire relationship.

At the same time, the ultra-rich want to work with investment managers who are close to their business, said Ed Lazar, president of Threshold Group, a multifamily office in Gig Harbor, Wash., that manages about $2.5 billion. "It's the sub-text of every family office's conversation with us, even if all they want is the investment function: 'Do you understand the world we live in?'"

The trend is strongest among "smaller" family offices. About 75% of those with less than $500 million to manage outsource.

This makes sense to Steve Aucamp, head of the ultra-high-net-worth group at Convergent Wealth Advisors, a Rockville, Md.-based investment adviser firm with around $10 billion under management. "

Before the crisis, "a lot of family offices were taking performance for granted," he says. "Afterwards some of the smaller ones saw they didn't have the scale to take advantage of opportunities and the staff to perform proper due diligence."

Family offices with a few hundred million dollars also found they couldn't afford the caliber of talent they needed, Aucamp said — certainly not in competition with billion-dollar suitors.

On average, family-office investment officers make about $340,000 a year, according to the Family Office Exchange. But insiders say a family with a few hundred million is going to pay a lot less than one with several billion — where annual compensation can be in the millions.

Meanwhile, rich families tend to find new jobs for in-house investment personnel who get displaced by outsiders. "There's not a lot of downsizing going on," says Aucamp. "Existing staff tends to get repositioned."