When I was young I thought that money was the most important thing in life; now that I am old I know that it is. — Oscar Wilde

An exceptional, highly successful family office client and I were discussing the differences in generations a while back and he characterized the divergences this way.

“Charles, my brothers and I slept two to a room in a tract home and sat at the family table each night for dinner.  We grew up with a common set of values and beliefs.  We have worked together all our adult lives, and I can’t remember the last time we had an argument.  But our kids grew up rich, in separate households, with different friends and a diverse mix of views.  We got an allowance, our kids have trust accounts.”

Next-gen heir-do-wells

We’ve all heard by now that the next several decades will see the “greatest transfer of wealth in history with $84 trillion expected to pass down to younger generations.”  But what are the implications for asset and wealth managers?  How are these next-gen heir-do-wells any different than prior generations?

Estimated Wealth to be Inherited

The UHNWs

At the heart of the wealth management mother lode runs the ultra-high-net-worth seam, households with net assets over $30 million.  These denizens of El Dorado may represent just a sliver of the population – one half to one percent – but they control almost a third of the investable assets.

Altrata/Wealth-X estimates that about ninety percent of the current North American UHNW contingent are entrepreneurs and hands-on operators, mostly self-made men and women who are accustomed to being in control.

These wildly successful entrepreneurs have a hard time understanding what institutional CIOs do or why anyone would waste their time investing that way.  Most would side with Andrew Carnegie, who once advised the students of Curry Commercial College in Pittsburgh, Pennsylvania to “put all your eggs in one basket, and then watch that basket.”

Different ages, different apps

Capgemini’s latest wealth report 2024, highlights the challenges of servicing this wealth tsunami, describing these next-geners as principled, passionate, and looking for more than just cents on the dollar.  They are also comfortable with technology.

These digital immigrants, natives, and nomads want their assets globally accessible, kept safe, and managed well, but unlike prior generations they don’t always need or want human contact.

The London-based KnightFrank Group notes that “we’re talking about a cohort that is seeking a wealth manager who is on their wavelength, if indeed they want to deal with a human at all.”

As an aside, an executive at a major west-coast software company told me recently that technology is moving so fast that age groups (and the firm’s employees) just a few years apart use completely different apps to connect and interact. From text to TikTok in the blink of an eye.

Mission-based, promise driven

Americans by nature are a generous people giving almost half a trillion dollars to charity in 2022.  UHNWs topped the list, contributing almost five percent to total individual donations of $319 billion.  But that’s not all.

The UHNW cohort cares deeply about their causes and they drive foundation formation which, in turn, gave an additional $105.21bn in 2022. There are well over 100,000 private foundations in the U.S with AUM totaling about $1.4 trillion, 3,300 of these have AUM over $50 million.

The next generation of philanthropists will want help from their advisors as they align their investments with their philanthropy.

Suzanne Brenner, partner and former chief investment officer at Brown Brothers Harriman, puts it this way “research shows millennials are twice as likely to invest in companies that make a positive impact.  It’s important that we understand not only what they want to do, but that we all understand what defines success.”

Jon Hirtle, executive chairman of Hirtle Callaghan, describes the commitment to mission-based wealth management as promise driven.

“We promise our families that we will continue to live in a certain way, we promise to support the causes we care for and often we promise to help provide for our children and grandchildren.”

Here’s a breakdown of those promises in the two charts below.  Data from the Lilly Family School of Philanthropy, Indiana University.

US Charitable Giving in 2022 by Donors/Recipients

Final thoughts

The outlook wasn’t brilliant for the Mudville nine that day: The score stood four to two, with but one inning more to play … Casey at the Bat, Ernest Lawrence Thayer

Hope springs eternal in the OCIO space. Each year confident investment officers and ardent marketeers announce their brand-new best-in-class discretionary outsourced solution. But for most of these eager rookies, few customers will come or care.

Looking back over the last four decades, the best time to pitch an outsourced chief investment officer (OCIO) proposition was probably about thirty years ago when prospects were plentiful, competitors few, and margins were healthy.

In today’s hyper-competitive wealth management arena, fielding a full-service institutional grade asset management team is expensive and costs are soaring for compensation, cyber-security, audits, and compliance, to say nothing of rampant regulatory hurdles and those nasty unknown unknowns.

(See our charts below for detailed office cost breakdowns.)

We recently completed an OCIO search and selection engagement for a sizable east coast nonprofit and found all the responding providers to be consummate professionals and serious competitors.

Firms such as Hirtle Callaghan, Blackrock, J.P. Morgan, and Brown Brothers Harriman, among the stalwarts in our directory, have had years to hone their systems, service, succession, and investment capabilities. But it’s never easy.

In an interview with Jon Hirtle for our 2020 OCIO review he reminisced on the firm’s early efforts to win clients.

Debby [Jon’s wife] and I often talk about the financial low point when our checking account had dropped to $17. What kept us going was that everyone loved the OCIO concept. The idea of powerful, informed, energetic advocacy without the conflicts of interest that define the traditional investment industry.

This Cold Cruel World

It’s tough for newbies and niche players to keep up with the veterans. This year kicked off with Edgehill calling it quits, Agility selling to Cerity Partners, and Vanguard’s OCIO team decamping en masse for Mercer.

They’re in good company. The past few years have seen a steady stream of outsourcing hopefuls merge with better-resourced patrons including Truvvo, Ellwood Associates, New Providence, CornerStone, PFM, and Permit Capital. There will certainly be more.

Boston Consulting Group, in their Global Asset Management 2023 review, estimates that – due to rising costs – the industry’s compound annual growth rate in profits “will be approximately half the average of recent years (5% versus 10%).”

Most nonprofits and family offices, basically anyone under $500 million in investable assets, don’t have the time or resources to build competitive and secure internal investment capabilities. 

Investment Office Costs: you pay to play

Strategic Investment Group published an investment office cost study recently, Building Blocks and Costs of an Internal Investment Office, that’s worth a read. 

Mellon’s John Hull Tops Non-Profit CIO Pay Rankings

Institutional Investor – March 15, 2012  •  Frances Denmark

Charles Skorina had a problem. As an executive search consultant specializing in filling investment officer holes at pension funds and endowments, he was often asked by boards of trustees to produce metrics to aid in candidate comparisons. But in his 30 years in the search business, such data had proved hard to come by ­— that is, until late January. That’s when Skorina’s “CIO Performance-for-Pay” ranking (see chart below) hit the institutional investor zeitgeist.

Bloomberg: Help Wanted on Campus

By Gillian Wee – Aug 18, 2010

Bloomberg Markets Magazine

Top U.S. universities are looking for a new breed of investment manager who can be nimble in tough times.