New tools narrow the service gap for the “mid-tier wealth band”. “Mid-tier” millionaires with complex and sometimes far-flung holdings are sick of having to manage their wealth managers. As a result they’re starting to demand coordinated wealth-management services traditionally associated with dedicated family offices. The challenge for wealth managers is to cull out technology platforms and service paradigms to help them meet that demand without squeezing their margins.

There are about 745,000 individuals worldwide with between $5 million and $30 million in investable assets – what the authors of the Merrill Lynch and Capgemini 2005 World Wealth Report call the “mid-tier wealth band.” Most of them are corporate executives or small- and medium-size business owners who have made their own fortunes. There are about 10 times as many people in the $1-million-to-$5-million category, and about 78,000 in the $30-million-plus bracket. The mid-tier population grew 7.9% last year versus growth rates of 7.2% for the lower band and 8.9% for the top tier.

Left out

The problem for the mid tier is that it’s caught between service models. People with between $1 million and $5 million face considerable challenges in managing their wealth, but “they have not achieved the level of wealth that triggers a geometric increase in the complexity of managing their assets and liabilities,” Petrina Dolby of Capgemini’s wealth management practice, says in a press release heralding this year’s Wealth Report. “At the other end of the spectrum, the ultra-high-net-worth set has access to, and can afford, the cost of running a family or private office to which they can comfortably delegate nearly all of their wealth management activities.”

Leslie Voth, director of wealth management services at Pitcairn Financial Group, a multi-family office based in Jenkintown, Pa., says the Wealth Report is right to emphasize the mid tier’s plight. “They’re needs aren’t being met,” she says. “A lot of the prospects we talk to in that category want they total package; they want advice and access to the services that ultra-high-net-worth clients enjoy.”

And their needs are real. An individual with a liquid net worth of, say, $20 million may face all the challenges of someone with twice or ten times as much. Those challenges include scattered investments, multiple trust accounts and insurance policies, as well as tax, philanthropic, business-succession and family-governance considerations. “[Although mid-tier millionaires] need products and services that often are as complex as those of much wealthier individuals, they lack the financial resources needed to access a family office,” write the authors of the Wealth Report. “As a result, [they] often turn to a fragmented group of specialist advisors instead of a single source, which presents significant challenges in managing their wealth.”

Mid-tier millionaires are in fact miles from being able to afford dedicated family offices, says Maarten van Hengel, a partner in New York and Boston-based multi-family office Highmount Capital. He figures it costs between $1.5 million and $2 million a year to run a “really good” single-family office. That makes it tough for a family with much less than $200 million to make a go of it, he says. “People used to say you need $100 million or $150 million, but the costs keep going up.”

A 2004 study by the Family Office Exchange (FOX), a Chicago-based consultancy to ultra-high-net-worth families, seems to bear that out. FOX’s 2004 Compensation and Benefits Report shows that base salaries for family-office professionals were 6.7% higher in 2003 and 2004 than in 2001 and 2002. Bonuses and other perquisites to family-office personnel are getting fatter too, as some families respond to uncertain markets by attempting to reel in high-priced strategists from the financial-service mainstream.

Fortunately, say Merrill and Capgemini, the gap between mid-tier millionaires’ service expectations and the market’s ability to meet those expectations is narrowing. “We believe that a new model of service will emerge over the next three to five years that will enable [mid-tier millionaires] to better manage their multiple provider relationships and better orchestrate multi-generational wealth strategies,” says the Wealth Report. “This new model will bring the simplicity and convenience of the family office to [mid-tier millionaires] at a price point more appropriate to their wealth level.”

Virtual service

The trick to that “is the adoption of a ‘virtual service network’ model which enables [mid-tier millionaires] to be served more cost efficiently and effectively by combining the benefits of an online advisory environment with standardized processes, allowing geographically disbursed service providers to connect and collaborate to serve a [mid-tier millionaire's] interests,” says Capgemini v.p. Donie Lochan.

A virtual service network boils down to technologies around account data aggregation, online collaboration and “workflow-based” wealth management, according to the Wealth Report. Lochan adds that Merrill and other firms are “investing in the kind of flexible online technology that is required,” but “there is still a way to go to tie all the components together.”

Tony Greene, a founder of Atlanta-based multi-family office StillPoint Advisors, begs to differ. “We’re already doing that,” he says. And he doubts that the family-office offerings of big-name financial institutions like Merrill are suited to the mid tier. “They’re just responding to firms like us,” says Greene. “But all they’re really trying to do is get a better total look at their clients’ assets to do a grab.”

Merrill didn’t respond to FWR’s request for an interview. “Through our highly qualified teams of private wealth advisors, we are uniquely focused on becoming the primary advisor to our ultra-high net worth clients,” James Hays, managing director of Merrill’s private banking and investment group, says in a press release from Capgemini and Merrill. “Innovative uses of technology will continue to be critical to winning market share.”

JT Scully, a director of Rockville, Md.-based Lydian Wealth Management, thinks Merrill has a point. “They’ve clearly identified the key elements” of a virtual service network, he says. But he adds that not all those elements – data aggregation, online collaboration and workflow – are equal. “Account aggregation" – something he says Lydian is well up on – "is the big one” .

Philadelphia-based Ashbridge Investment Management is another multi-family office that emphasizes its ability to aggregate client account data. “We provide [our clients with] a relatively seamless overview, even when the situation gets more complicated with [limited liability companies] and hedge funds,” says managing director Barbara Gohns. “We’ve been doing it for a long time.”

Highmount’s Van Hangel also says his firm has account data aggregation well in hand. “We’ve actually built a piece of software that aggregates client assets wherever they’re held,” he says. Highmount developed the software, which is marketed by Woburn, Mass.-based financial data compiler ByAllAccounts, to link ByAllAccounts' WebPortfolio aggregation engine to Advent's Axys portfolio management system. “This means you can follow every trade, every day and manage your managers on a daily basis; you can take the information and work with it any way you like.”

Yes and no

But Scully agrees with Capgemini: some of the technical elements of a virtual service network remain elusive. He points to an illustration in the Wealth Report of a virtual service network in action. “In the hypothetical example of the sale of an investment property, a geographically dispersed set of bankers, investment managers, accountants and lawyers can work together via a [virtual service network] website set up by a [mid-tier millionaire’s] primary advisor,” the report’s authors write. “After logging-in, each service provider is prompted through a discrete set of tasks, tailored to each one’s respective role in the transaction. Next, the proceeds of the sale are transferred for investment in three separate portfolios – all without anyone, including the client, having to leave the comfort of [his] own office.”

Scully says he’s not aware of anyone having the technology needed to pull off such sophisticated online collaboration and real-time workflow. “We do video conferencing between our offices, but there’s a whole lot more to bringing multiple advisors in multiple locations together in an actual work environment than meets the eye,” he says.

Besides the technical limitations, van Hengel says that many clients, mid-tier or not, worry about the security of online collaboration. “Not everyone wants everything on the Internet,” he says. “There just isn’t a lot of demand for it from our clients.” Their preferred mode of online collaboration, he says, is secure email.

At root, van Hengel adds, high-net-worth clients are looking for “a trusted advisor to help them administer their wealth” more than they crave purely technological solutions.

Pitcairn’s Voth agrees. “We definitely collaborate with our clients’ other advisors – accountants, estate planners and asset managers as well as family governance consultants – that’s an extremely important part of what we do; but it’s hard to accomplish that just with technology,” she says. “This is really about forming and maintaining relationships, and acting as a project manager on the client’s behalf to make sure things get done.”

Click here to download a copy of the latest World Wealth Report (sign-in required). –FWR

Purchase a reprint of this story.