How likely are more multi-family office merger tie-ups and do marriages of such entities make sense for the clients? Can deals come up against problems such as whether clients' advice remains independent and unconflicted?

The end of another week gives this publication and the industry pause for breath to digest a run of M&A deals in wealth management. And two deals are standouts: Tiedemann’s merger with UK-based Alvarium – boosting the former’s non-US footprint – and Cresset’s acquisition of Berman, building a group now holding more than $20 billion in AuM.

The Tiedemann/Alvarium tie-up is notable in that it suggests that after a period when multi-family offices weren’t center-stage in the M&A story, matters may be hotting up. So far, much of the action has been taken by RIAs (although of course multi-family offices are typically RIAs as well). Merger activity has tended to concentrate on businesses catering to high net worth individuals; those looking after ultra-HNW persons haven’t seen as many deals, although this area is narrower anyway. There have been a few other deals in the space, such as Pathstone (Federal Street, Convergent, Cornerstone) and Fiduciary Trust International (Athena Capital Advisors). Outside the US, examples include UK-listed investment and private wealth house Schroders purchase of Sandaire, a UK-based MFO.

So what’s going on? Well, to some extent, the need for scale in handling rising regulatory costs, client expectations and geographical reach are making themselves felt, at least for those firms earning considerable sums from the more scalable side, such as asset management. An issue, however, is that people who join an MFO do so because they hope for un-conflicted advice, for independence. Is that achievable if a firm has its eyes on revenues and scale? What’s the limit?

As an aside, another aspect of the deals that is a break with the past is that the Tiedemann/Alvarium combo involves raising capital via a special purpose acquisition company, or SPAC. Ironically, the Securities and Exchange Commission, concerned about potential overheating and potential abuses, has sought to cool the SPAC market down.

Balance of interests
Michael Zeuner, Managing Partner, WE Family Offices, said, told this publication that the focus on scalability and financial value creation is most often accompanied by a focus on product manufacturing (asset management) or distribution. And these can corrupt the advisory value proposition of helping families buy and assemble the right suite of financial products and services for them, the figure said. “The true advisory firms are likely not good candidates for capital infusions to do rollups. It’s antithetical to their value proposition and role with the families they serve,” Zeuner said.

"UHNW families often want both roles – advisors and manufacturers, but they also understand the conflict and look to unbundle the roles – advisor in form of a family office; manufacturer in form of an asset manager. I don’t have any data on this but I suspect if one looked carefully at firms that have raised capital to do acquisitions, you might see a preponderance of their economics and fees coming from asset management activities, even if they wrap themselves in the language of family office/advisor. The true advisory firms are likely not good candidates for capital infusions to do rollups. It’s antithetical to their value proposition and role with the families they serve," he added.

Jamie McLaughlin, a well-known figure in the North American wealth management space and a consultant, told this news service in an interview earlier this year why he thinks MFOs haven’t – until recently – set the world alight with deals. He pointed out a number of explanations: 

-- As partnerships they [MFOs] have no capital per se other than their free cash flow. Partners can choose to compensate themselves or reinvest their annual distributions in the business; 
-- Few have achieved “scale” as measured simply by operating leverage; 
-- The aging of key principals and their clients, who tend to be their contemporaries, implies a further diminution of firm valuations; 
-- Due to the idiosyncratic nature of their clients’ needs, it has proven very hard to replicate work processes and/or leverage technology; and 
-- Organic growth has also proven to be longer-cycle so firms' cost-of-acquisition tends to be higher.  

To some extent, the debate over how far multi-family offices can go for scale is of a piece with what people think “independence” in wealth management means. For some, it means having no product to sell; others might focus more on alignment of incentives between advisor and client; others might look at ownership models (is a firm listed, or a partnership, or owned by a private equity fund, etc?). 

Speaking again to FWR this week, McLaughlin (also a member of this news service's editorial advisory board) said the way families use advisors is evolving; UHNW families, who were traditionally choosing to do-it-themselves or work with multiple advisors, are increasingly choosing a primary advisor who can serve their combined investment, planning, and administrative needs. “Many of these family offices are `sub-scale’ but some are large and simply are choosing to delegate,” he said.

McLaughlin noted that demand is supported by a “strong tailwind” where the velocity of wealth creation is at and projected to stay at outsize growth numbers for the UHNW segments, most notably the $20 to $100 million segment where the number of households are projected to grow at a 9.6 per cent compound annual growth rate. (He cited a Boston Consulting Group report of 2019 on the subject.)

He continued: “But the demand is uneven and increasingly supports the MFOs’ value propositions as being primarily non-investment services (advanced planning) and administrative support (accounting and book-keeping often called `family office services’) where pricing discipline is required to avoid margin erosion.” 

It is unclear whether leading MFO’s have a distinctive investment offering or, if they do, they run up against an agency dilemma where they’re acting as principals in the distribution of product, he said.