Ms. Grove is a respected author, columnist and speaker and a leading authority on the mindset, behavior, concerns, preferences and finances of high-net-worth individuals. She is the executive editor of Private Wealth, the first and only magazine for professionals with ultra-affluent clients, and Cultivating the Affluent, a practice management newsletter for financial professionals.View all articles by Hannah Shaw Grove
Richard J. Flynn is principal of the accounting and business management firm Rothstein Kass and head of the RK family office group.View all articles by Richard J. Flynn
Now family offices and the services they offer are more recognized by the mainstream and increasingly desired by the affluent. There is, however, a "wealth threshold" that must be exceeded to warrant the complexity and expense of a single-family model. As a result, the multifamily office, which spreads the costs of expertise, infrastructure and experience among a larger number of families, has broader appeal.
The multifamily model is an extension of the ubiquitous wealth management model that encourages fewer, deeper and more lasting relationships with affluent clients. It focuses on customized solutions, specialized expertise and responsive service.
A Pertinent Business Strategy
Between 2003 and 2008, client assets at U.S. investment advisory firms rose and fell in conjunction with the markets while interest in the multifamily office business model increased steadily (Figure 1). Given the prevalence of asset-based revenues in the advisory field, it's understandable that business strategies offering a path to more consistent client relationships and income-irrespective of market and investment performance-are being given serious consideration.
The top five reasons cited by advisory firms for their interest in the multifamily office structure are interrelated. Most firms anticipate a broader platform of capabilities and high-touch service allows for greater personalization, leading to stronger client satisfaction, higher profitability, greater competitiveness and more qualified referral prospects (Figure 2).
Journey To The Multifamily Office
The worsening fiscal conditions of the past year have helped to highlight the flaws inherent in the structure and operations at many financial institutions. In addition to weathering harsh scrutiny from regulators, taxpayers and the media, most firms are looking for ways to shore up existing business and expand. The multifamily office has emerged as a suitable evolution for an industry that aspires to serve a wealthier and potentially more profitable clientele.
The following sections explore the changing perspectives and differing practices of professional advisory firms when it comes to the multifamily office business model, including the essential components of a product and service platform, the typical operational and staffing infrastructures, the nature of third-party alliances, and the source and form of revenues and compensation.
About The Research
In January 2009, we conducted a telephone survey of 103 investment advisory firms that identify themselves as multifamily offices. Our sample was roughly split between U.S. and non-U.S. domiciles, with average assets under management near $1 billion and median assets of slightly more than $600 million (Figures 3 and 4).
While considering themselves multifamily offices, all the firms in our survey attribute 80% or more of their revenues to asset-based fees that are calculated on each client's total assets under management. Services that carry other compensation structures, such as commissions or flat fees, account for less than 10% of total revenues or are defined as "cost centers" within the organization. Such services are generally treated as loss leaders, helping to round out an undifferentiated product offering and attract new, affluent clients.
These conditions translate to the following:
Average annual revenue: $8.2M
Average annual cost of administrative/lifestyle services: $1.9M
Average annual profits: $6.3M