Multifamily offices provide many services, including estate planning and family security.
There are more than one million families in the world with a net worth exceeding $10 million, and our research tells us that they remain underserved by their financial providers. By establishing a multifamily service model, you can compete with other commercial providers for wealthy clients and deliver much-needed services to these households.
In our October 2004 article, "Family Offices: Assets and Motivations," we discussed the three principal types of family office structures-single family, multifamily and commercial. Until recently, independent practitioners had little to do with the family office concept as they provided expertise and guidance on an as-needed basis, usually on financial planning and investments. As financial advisors have become more knowledgeable about their high-net-worth clients and, in turn, more powerful in those relationships, a greater number of practitioners have chosen to enter the family office arena by establishing a multifamily practice.
Simply put, the multifamily office is one that caters to the needs of several wealthy families with overlapping needs. The business entity allows the families to pool their assets to achieve economies of scale and demand access to institutional products and pricing schedules, among other things. Traditionally, multifamily offices were overseen by the "anchor" family-most likely the family with the largest net worth and the foresight to work collaboratively with other households to pursue similar goals.
In more recent instances, multifamily offices are the work of an independent advisory practice that coordinates the range of services required by the various family members. This works well for a number of reasons. Advisors, especially those with a financial planning orientation, often have the greatest depth of knowledge about a family's financial affairs and can readily spot problems and opportunities. Advisors also are well positioned to bring in outside experts, such as personal/family security professionals and antiquities dealers, to complement their own expertise.
Operating as a multifamily office yields significant benefits for the advisory practice as well. Research shows that families serviced in a multifamily office structure can generate four times the revenue they would in more traditional scenarios. Furthermore, satisfied families will help bring other families into the office, which will increase both assets under management and fees.
Building A Full-Service Office
To varying degrees, all multifamily offices offer four types of services-investment management, administrative support, advanced planning and lifestyle services.
The core service in all family offices is investment management. True to form, in our survey of 234 multifamily offices all of the respondents were providing some form of money management services. The coordination of other professionals is characteristic of multifamily offices, and 84% were selecting and monitoring outside managers on behalf of the families.
Outside hedge fund managers were used at an equally high rate to their long-only brethren, with 82% of offices having worked with external professionals at some point within the past 24 months. Hedge funds and funds of hedge funds continue to interest most family offices, and it is expected that more offices will use them in the next three to five years.
Administration encompasses a wide range of activities, and multifamily offices must be actively involved in coordinating these services in order to stay abreast of all aspects of their client's affairs. (Figure 1). The two most frequently cited administrative services by multifamily offices are recordkeeping, provided by 100% of survey respondents, and assistance with tax returns, provided by 76%.
Advanced planning entails using legal strategies and planning techniques to mitigate taxes, enhance wealth, protect assets and structure charitable gifts. Currently, 70% of multifamily offices provide or coordinate the estate planning process, a significant component of advanced planning. The number of family offices offering estate planning is expected to increase by 12% within three years.
The final group of services offered by some multifamily offices is that supporting lifestyle choices. By and large, lifestyle services are offered for strategic reasons, principally to help the families operate as more cohesive units and to strengthen the bond between the provider and the member families. Lifestyle services are as different as the families themselves and can include a wide variety of things. Some of the services cited most frequently in our research with multifamily offices include:
Formal family education programs.
Business and personal/family security.
Concierge services, including travel and event planning.
Assistance developing and managing collections.
Luxury acquisition services.
Managing residences, air and sea vessels.
Search services for at-home assistance, including chefs, nannies, trainers and personal secretaries.
Health-care services, including trust administration and emergency assistance.
One of the most valued lifestyle services is family security. Understandably, families with considerable assets feel they are a target for opportunistic companies and individuals. In a recent survey with families with a net worth of at least $10 million, security surfaced as the single greatest concern. Additionally, four key components of security were identified. They are:
Physical safety of the respondents and their families.
Confidentially of personal information and data.
Protection of wealth from theft and fraud.
Protection of property and other material assets.
Today, only 30% of multifamily offices are providing family security services. Within three years, that percentage will likely more than double.
If you are evaluating the family office business model, each service must be considered independently to understand the value it provides in building long-term alliances with wealthy families. You can further distinguish yourself by adding those services that are indispensable to your wealthy clients and those services that are not readily accessible from your competitors.
DIY Is DOA
The most successful multifamily offices we have observed are those that build their business around a core offering and selectively utilize outside experts on an as-needed basis. For instance, one office with which we have worked provides equity investment management, such as portfolio construction, security selection and performance measurement, and they evaluate and manage outside managers for the fixed-income and alternative portions of their clients' investable assets. Additionally, this office regularly turns to unaffiliated tax specialists, trusts and estates attorneys and family security consultants to meet the needs of their affluent clients.
Understandably, many multifamily practices want to control all aspects of the service relationship with their clients. As a result, some organizations choose to create staff positions for the specialists they use most frequently, and this almost always is a decision that is costly and detrimental to the practice over the long term. Having a range of specialists on staff is expensive and can blur the lines between the roles of each participant. The up-front cost of owning expertise is high, as is the ongoing compliance and training required to keep the professionals operating at the highest levels of competency. Additionally, there is rarely enough specialized work to keep the experts busy full time, so unless they branch out and assume other responsibilities, diluting their focus of expertise, the specialist usually will not cover their own expense. The business models that work most smoothly and profitably are those that leverage external resources only when they are needed.
One of the most important areas of specialization for a family office is estate planning. We asked multifamily offices how they delivered this expertise and learned that 80% of them believe that bringing the legal talent in-house is prohibitively expensive. A slightly higher number, 82%, feel they can still access state-of-the-art advanced planning strategies with outside counsel and question whether in-house legal resources would be of similar quality.
It is critical to understand your costs and price accordingly when working with outside experts. Some firms opt to charge a single asset-based fee, usually derived from the investment management services, and use it to cover the costs of the administrative, advanced planning and lifestyle services. This is rarely viable, and will quickly eat into your profit margins.
An accepted practice among multifamily offices is an a la carte approach in which a range of services is available and each is priced separately. This method allows for the differences between the services-a close protection professional, for instance, may have a flat daily rate while the cost to find a live-in chef may be a one-time fee calculated as a percentage of the chef's annual compensation-and the inconsistencies of client use.
In conclusion, the number of independent advisory firms operating as multifamily offices is increasing as a way of simultaneously expanding client relationships and business profitability. To compete with the best you must offer a meaningful range of services and create partnerships with professionals who complement your expertise.
Hannah Shaw Grove is the author of five books on private wealth and advisory practice management. Russ Alan Prince is president of the consulting firm Prince & Associates.