People running multifamily and single-family offices for the wealthy are facing some unpleasant choices these days. Such offices are facing a period of economic uncertainty. Internal costs are rising while assets and revenues plunge. Single-family offices in particular are squeezed: Their primary costs are rising owing to the economics of their business model, but assets have dramatically declined. That forces them to face the prospect of cutting staff.

And with such a fussy, demanding clientele-people who sometimes need every kind of expert from a money manager to a dog walker-family offices have been forced to take on unusual jobs.

The environment is such that it's put increasing pressure on offices to do something they've always disliked-outsource. It's a difficult choice in this culture. Family offices have traditionally kept most of their services and products in-house, using big wealth managers only when they want to custody assets. But the current trying economic environment has forced some of them to go outside their own walls and palm off many services to other organizations. These range from personal client services to the professional training of office personnel.

"It's a trend we're seeing with single-family offices," says Marty Sullivan, senior vice president with State Street Wealth Manager Services. "They're asking more questions about their custodians and how much things cost to run internally."

"We believe the largest challenges today are the costs of operating a family office practice in the current environment," says Ed Orazem, president of Fidelity Family Office Services, which works primarily with single-family offices. "Outsourcing is probably the best way for family offices to avoid cutbacks in their operations."

But these are not the kinds of businesses that can simply outsource functions just to make them cheaper or more effective. Emotions also come into play. Wealth managers say that delegating too many functions or handing over clients to the wrong providers can poison a relationship with the wealthy.

Family offices were built internally, after all, Orazem says. And that's why many of them resist the idea of farming out functions to others. It's a heated debate in this industry, where the idea of outsourcing is often as popular as the idea of outsourcing American jobs to foreign countries.

Still, despite this initial resistance, in the last year everything has changed, notes Orazem. Declining asset values have put the family office executives under pressure to find ways to reduce costs.

The arguments for outsourcing are going beyond the need for savings. Outsourcing advocates have also pushed for what amounts to basic changes in the family office model. These changes, they contend, will save family office executives time and money, allowing them to focus on advisory services.

Outside firms can take on many types of services-they can select money managers, for instance, or find dog walkers for a client or even just help the family office become more productive. The latter is a critical factor because the typical family office's first concern in a bear market is its ability to survive, according to a recent poll (see sidebar, page 53).

The short list of services wanted by single family and multifamily offices are estate planning, high-level tax work, high-end insurance and credit/cash management, says Julie Harrington, director at Pershing Advisor Solutions. She adds that family offices also want lending services, such as bill payment and international wires. Family executives also turn to firms such as Pershing for research on money managers, Harrington explains. Increasingly, family offices are subcontracting these services to the wealth management units of big national firms such as Pershing, Fidelity, Charles Schwab & Co. and State Street, among others.

It's often difficult for family offices to retain staff knowledgeable about all the products and services that the well-heeled want, which is another reason to outsource. But beyond keeping clients happy, they also want to expand the services they can offer, and that gives them more incentive to look outside.

The multifamily office usually starts out as a single-family office. After garnering a fair amount of success, it will stretch its focus, say financial advisors. Besides managing money for the immediate family, the office will start handling the financial and personal affairs of aunts and uncles, too. Then family friends may be included. After that, friends of friends will get service. Finally, the firm reaches a tipping point. The business, like its clients, will have unique needs.

"These offices now need help with business development and marketing," says Janelle Sallenave, vice president in advisor services for Charles Schwab & Co. "They will need help with referrals or what we call 'quiet business development.'"

Sallenave agrees that family offices also need more professional help because the revenues they generate and the assets they manage are shrinking.

"Family offices now want their people trained in expense management," she notes. "They also are looking for seminars in productivity, which we are offering our advisor clients."

Obviously, one problem is that it can be expensive and time consuming to have every kind of expert on the payroll to handle the wide range of requests that family office heads receive. The wealthy often seek personal services that many advisors either have no inclination to deliver or are incapable of providing.

These services might be reservations at the best restaurant in Paris, hard-to-get tickets to Broadway shows or celebrity access. Keeping clients happy with these types of services sometimes means family offices need the help of more than a wealth manager. They might need the help of a boutique firm.

Kathy Reilly, chief executive officer of Luxury Attache, a New York-based global personal concierge service that works with big wealth managers servicing family offices, says her business is booming. And even a sour market hasn't slowed down the demand for what her company offers.

"We increasingly see a demand for these personal services," she says. "We recently had a client who worked on the Darfur relief project. The client wanted a personal letter from a big celebrity thanking the client for working on it. We were able to get that letter for the client."

Generally, a big wealth manager won't be able to solve this kind of personal request. So the wealth management firm will subcontract with Luxury Attache, allowing both the firm and the family office to spend more time handling important activities rather than dickering with celebrities. Many wealth managers maintain a list of preferred provider personal services. Fidelity, for example, has access to a network of third parties that provide some of these personal services, though the company won't discuss them specifically.

Schwab, meanwhile, doesn't do anything personal like dog walking or arranging trips to sporting events, Sallenave says. Instead, she says the company's family office clients, who usually establish a relationship by using its custody services, are primarily interested in fundamental operational support as well as the professional development of office personnel.

Although family offices increasingly look to the wealth management divisions of big national full-service firms to help satisfy clients, there are a few core activities these offices tend to want to keep to themselves, says Harrington.

"They will usually keep the tax piece in-house," she says, "because many of the people who work in family offices and multi-family offices have a tax background."

Sullivan believes outsourcing can lead to greater productivity at family offices by letting them focus on what they're good at-investment management, financial planning, estate planning and tax planning. These core services are vital for the family office, say wealth management experts. Tax planning is so important, Harrington notes, that if a family office lacks the expertise, it will often find CPAs to put on staff.

Though the costs of running a family office are a big factor in outsourcing, Sullivan believes technology also has had an influence on the trend. Better technology allows new advisors to set up their offices quickly. They can then, he says, concentrate on core competencies while farming out functions such as portfolio measurement, trust accounting and Web site creation.

So how does one decide what can be outsourced and what must be kept in house?

Orazem says the key to finding the right balance for a family office isn't one function or service. It is the quality of the relationship. Numerous services can be outsourced, he believes, but the family office must always "remain the primary financial advisor."

Sidebar:

Family Offices Focus On Services, Survival
Family offices, trying to survive in difficult times, are increasingly receiving requests for new services, according to a recent survey.

Indeed, 48% of those family officials participating in a recent poll conducted by the Family Wealth Alliance said they have received new or additional requests for services from family members in the past two years.

"Most of the services were not investment related and included family meetings, more secure family e-mail, improved client reporting, aircraft services and asset protection," according to the survey by the Wheaton, Ill.-based group.

But besides catering to clients who want new services, family office executives say survival is their biggest concern.

"When simply asked to list their three biggest challenges, concern for the family office's sustainability came out on top," said Thomas R. Livergood, chief executive of the Family Wealth Alliance.

"We note with some significance that this outpaced concern for financial markets by a good margin," he added.
The survey polled 32 firms with collective clients of some 900 households, representing some 2,000 family members. The average office had assets under supervision of $562 million, ranging from $19 million to $1.7 billion.