What to outsource depends on your business goal.
Whether you are a multi-client family office (MFO), an existing single-family office or a comprehensive wealth management firm thinking of offering services to other families, one of the most crucial decisions you will face is which services to offer through in-house resources and which to offer through a combination of alliances, vendors or other third-party arrangements, better known as outsourcing. Most provide services to clients utilizing a combination of internal and outsourced resources.
Traditionally, cost has been the predominant factor in determining the mix of in-house and outsourced services MFOs offer. Although cost remains an important consideration, the decision to outsource or maintain resources in-house has evolved into more than just a "build or buy" decision. Qualitative factors have a major impact on the decision you will make.
The emergence of new technologies as well as the desire by clients to receive completely objective advice have changed the landscape on which to base the outsource decision. Therefore, what your business goals are, what type of client service experience you want to create and the independence you wish to exhibit in your business model all need to be considered when deciding what to outsource.
Qualitative Factors To Consider
The chart shows the various functions of an MFO, and is broken into basic business functions, core investment services and other services that many firms need to consider when servicing their clients. Your combination of in-house and outsourced resources defines your business model and has a distinct impact on your firm's position in the market as well as internal factors such as corporate culture. The various business models in the marketplace run the gamut from full in-house models to models where virtually all services are outsourced (See sidebar, What to Outsource? - One MFOs Choice). In each case, the client experience differs substantially.
One key factor to consider is whether your firm will be a one-stop shop, which provides all the services a family requires such as investment management, tax services, estate planning, philanthropy etc., under one roof or whether your firm will choose to be a specialist, focusing on one of these areas and outsourcing or coordinating the other services as required.
While being a one-stop shop clearly requires more financial resources than being a specialist, there are other less tangible factors to consider. Your firm likely already has a core capability in which it could specialize. Maybe building around this capability, augmenting it with a combination of other resources, some in-house, some outsourced, makes sense. If you choose this route, it may allow you to market your firm to a certain niche that is not being serviced properly by more generalist firms. Often, firms choose to specialize in an investment service because those services are at the center of the many business models. Specializing in one investment area puts you in a position to quarterback other services you can outsource.
Tied closely with the generalist-versus-specialist decision is grappling with gaining and maintaining access to expertise in specialized areas. Choosing to be a generalist requires you to maintain a variety of specialized resources internally. These include certified public accountants, attorneys, financial planners, chartered financial analysts or other specialized professionals. Attracting and retaining top talent in all these areas can be a challenge for firms, especially smaller ones. The ability to retain and attract talent must be factored in when deciding what to outsource and what to maintain in-house. It may be a better use of capital to invest in your core competency while leaving other required business services or skill sets to be outsourced.
Of course when outsourcing, you may lose a certain measure of control. Control of information, control of computer systems and control of the client can all be jeopardized if the appropriate combination of outsourced and in-house services is not crafted. As a business, you must decide how much control you must maintain in the various business functions and which areas may be candidates for outsourcing. When the decision to outsource is made, be sure to use extremely stringent due diligence procedures in finding the eventual vendor. Once a function has been outsourced, appropriate procedures need to be put in place to ensure that the service is delivered with the same consistency and quality of your in-house services.
Control is highly correlated to another factor: level of customization. When determining your business model, you must also take a close look at your client base and determine how customized a service offering you will deliver. In general, outsourced services, particularly in technology solutions, are more boilerplate and less customized. How can one get access to outside expertise and still deliver customized service? A hybrid solution may be appropriate.
In the MFO world, portfolio reporting technology provides a good example of this hybrid strategy. You can go to market and purchase a portfolio reporting solution that is a baseline for you. This baseline would do the heavy lifting of providing electronic access to client data, tracking of tax lots and the calculation of statistical information. Then taking into account the nuances of the reporting you wish to deliver to clients, you can customize its presentation in-house. In this way you can have access to the best of both worlds: outside expertise and customized service for your clients.
The last and perhaps most important factor to evaluate is objectivity and how important providing services free of conflicts of interest are to you and your potential client base. Perhaps your core competency is picking stocks or money managers. If you wish to build around this core competency, you might consider building a money manager model that essentially sells product. This does not put you in a position to provide objective advice on all investment matters, but may end up being your most viable business model from a profitability standpoint. Some single-family offices have grown in this manner. If instead you wish to be a valued advisor to clients on all matters related to their financial affairs, then a more stringent business model that eliminates or dampens conflicts of interest is recommended. In the current environment where Wall Street is being held to task on the issues of conflicts of interest, eliminating conflicts is vital for all advisors.
Avoiding Conflicts Of Interest
With all the attention Wall Street's woes have gotten in the press, investors have become more educated on the types of conflicts that exist. As they interview firms, they are looking for conflicts as part of their own due diligence process. Therefore, businesses need to take the state of the public consciousness into mind when developing their business model. To this end it is important to not just avoid conflicts of interest but to clear up any possible perceived conflicts-something that on the surface appears to be a conflict but with proper explanation to the client is not. Actual conflicts of interest are damaging, but the appearance of conflicts can be just as damaging to your firm.
Let's start with actual conflicts. How does one avoid actual conflicts of interest? To keep my answers simple, I will focus on investment services, because this area is receiving the most public scrutiny currently. But conflicts need to be scrutinized and eliminated in other aspects of your business model as well.