"Multifamily office" is perhaps the trendiest term in the advisory field these days. But there's more to this movement than a couple of buzzwords.

For several years now, advisors have been coalescing their services and adopting a multidisciplinary approach to serving the upper tiers of America's wealth. One could argue the trend started roughly a decade ago, when "wealth management" was the catchy term of choice to describe the emerging comprehensive approach to delivering financial advice to the wealthy.

Judging from the flow of dollars, however, more than just semantics is moving the advisory industry. Real changes are afoot, as the financial crisis, the growth and movement of the nation's wealth and an ever more knowledgeable and demanding client base have combined to force shifts in the advisory landscape.

Single family offices-historically cloistered operations focused on handling the financial affairs of one family-have merged and expanded into multifamily offices, or MFOs, to be more efficient. The mass of financial advisors, meanwhile, comprising wealth managers, financial planners, attorneys, accountants, etc., are finding the multifamily office model to be their solution for satisfying the increasing service demands of their high-net-worth clientele. Banks, brokerage houses and other institutions that suffered a massive black eye during the panic of 2008 are also gravitating toward the service model.

Yet with the multifamily office trend still in its infancy, it's a model that is still trying to define itself. What exactly does it mean to be a multifamily office? What opportunities and challenges does the service model face in the years ahead? What are an MFO client's needs and how are they fulfilled?
Private Wealth magazine recently held a discussion with five professionals who either run MFOs or serve as consultants to them to shed some light on the matter.

The participants were:

Stephanie J. Gromek, principal, BBR Partners LLC, New York, N.Y.

Gregory T. Rogers, founder and president, RayLign Advisory LLC, Greenwich, Conn.
Janelle Sallenave, head of Schwab Institutional's family-office custody business.

Ralph D. Sinsheimer, founder and managing director, The Solaris Group LLC, New York, N.Y.

Beth T. Patterson, president, Waypoint Advisors, Norfolk, Va.

PW: Research indicates that more types of firms are adopting the term "Multifamily Office." In your estimation, what are the hallmarks of a true MFO?

GROMEK: I think it comes down to the quality that you're able to deliver to clients-based on the fact that you're working with multiple families. Are you able to access the talent that you need to service those families? Are you able to get access to great managers? And are you able to do that and reinvest in technology to be able to do that in a way that's cost efficient?

Growth for the sake of growing isn't all that interesting, but growing beyond a small base of families to serve multiple families allows you to reinvest back in people, back in technology to really deliver a higher level of service to those families.

ROGERS: My definition of a multifamily office is really integrated wealth management services. There are a lot of specialty areas within the wealth management arena. That's part of why a lot of organizations want to call themselves a multifamily office when in actuality they're not.

It's estate planning. There's philanthropic advisory. There's tax and accounting. There's investment capabilities. There's family dynamic services. The firm that can really integrate the various service capabilities is what I would consider an MFO, which is part of why there's so much confusion.

SALLENAVE: We really think of it as someone who not just only provides wealth management capabilities, but adds on top of that what we call lifestyle management. Whether that lifestyle management is offered in-house or whether that's outsourced, that's not so relevant. It's that the clients of that family office are able to get that service.

Bill paying, the foundation work, helping to educate the next generation of the client's family-all of those things are what we call lifestyle management. Then we add on top of that the recognition that the client base needs to be truly not wealthy individuals, but really multi-generational wealth. We identify that as being a client base of multi-generational families that have at least $20 million in assets under management.

SINSHEIMER: It's really the ability to take a multi-disciplined approach to the wealth and welfare of clients in a way that form-fits over the family and the individual members that are part of that family. And understanding that one member of a family needs something that another one may not and to approach that in a very individualized kind of way. It means being fairly unconflicted and to be very attentive.     

PATTERSON: To add to what everyone else has already defined as a multifamily office, I would say also managing wealth and integrating it with a sense of purpose. And really listening carefully and understanding what the family is intending to do or wants to do with that money because it can go in a variety of ways. A lot of times they don't think in a disciplined way about that.

So, we can help them do that. There are only four choices. They can spend money on their lifestyle. They can leave it to the next generations. They can give it to charity or they can let Uncle Sam have some of it. And so, it's figuring out what strategies will work to accomplish [a family's] goals, and then making sure the values get passed down along with the money.

PW: With such a wide scope of services, you probably often have to make the choice of doing it yourself or going to a third party. How do you make that type of decision?

ROGERS: Those are all classic challenges that all these organizations face.

It's really defining what types of capabilities you want to offer to the markets that you're trying to serve. So if you think that outsourcing your hedge fund research to a fund-of-funds provider will support the types of clients that you want to approach, that's a viable solution and you can go through the cost-benefit tradeoff of internal versus external.

SINSHEIMER: First, you have to understand what your core competency is and you have to build on that. There are certain services that might be outside of that, but you have a fair amount of critical mass of demand among your clientele, in which case you start to think, "Maybe I should build it."
But in some circumstances the message it would send to your clientele might be the wrong one. Because you don't want to get known as the group that does X-bill paying, whatever it might be. There's nothing wrong with that. But in our case, we would much prefer to be the conduit to find the best [outside consultant] whereas there are certain other capabilities that we'd like to build internally once we think we have the critical mass and demand.

SALLENAVE: This is an opportunity that we hear from a lot of MFOs, that this is the time to really figure out what they want to be.
There's, I think, a pretty wide belief that there's a lot of opportunity for growth in the near term and in the coming years. And it's about identifying what you want that reputation to be and what you want to be known for, and identifying what's of value to your client base and the type of clients you want to bring into your firm.

SINSHEIMER: Especially when there's value to it, and the family understands there's value to it, but they wouldn't, in a discrete way, pay for it. For example, in the case of financial education for the second, third, fourth generation or more, somebody who can facilitate a dialogue in terms of the dynamics of wealth. Well, probably everyone around this table does that at least informally. But to do it in a formal manner ... may be something where a third party should best be brought in.

SALLENAVE: I think you're illustrating a theme that we see with the family offices that we work with at Schwab, which is there's no question about whether or not there's opportunity for growth. The question is how to grow in a profitable way.

A common theme that we talk about so much with our advisors is what services does the advisor want to retain control of? And which are services that we need to find the most cost-effective way to deliver? And what's the right way to be pricing it? What's the right technology to be using, etcetera?
It's all of those pieces together that will answer that question that many advisors are struggling with, which is, "How am I going to grow profitably? What strategic decisions am I going to make that are going to allow for that?" There are so many different paths to growing profitably, and the question is, again, the identity of the firm that our advisors want to have two, three, five, 50 years from now.

PW: To what extent is the economic environment influencing those decisions?

SALLENAVE: What we're finding as we're talking with advisors is it has less to do with the economic situation right now because I think multifamily offices have really been very focused in the last two years on helping their clients. And so, their clients see a lot of value in what the advisors do.
We recently surveyed our advisors for one of our annual studies and found that there's no significant change in client attrition rates-even through this incredibly tumultuous period. And I think it's a testament to the model that multifamily offices have, which is a very strong connection to their client base.

Keeping clients is not the problem. There's a lot of value that's been brought to clients, and there are many more potential clients out there. And it's, "How do you scale these services that really do work for that set?"

PATTERSON: I would also add that communicating the value-added that you provide can be challenging because a lot of the families haven't experienced this type of value-added service, and they don't know what it's like to have their advisory teams working together brainstorming solutions for them. And so, until they actually experience having that, they don't know what value to place on it.

PW: Research shows that more high-net-worth individuals moved money to MFOs in the past year than any other type of provider. Why do you think that's the case?

GROMEK: I think two reasons. People are questioning the advice that they've gotten in the past. They are looking for a sophisticated investment solution. The dislocations that happened at the end of 2008 created enormous opportunity. [Families] want someone who can vet those opportunities and really figure out which ones are the right ones to take advantage of, and how to effectively execute on that.

I'd say the second piece is that they want to be educated. They want to understand what's in their portfolio, how it works together, why it's acting the way that it is. And MFOs tend to provide that level of service and education.

SINSHEIMER: For me, the reason why money is flowing apparently into the multifamily office space is two-fold. One is the lack of confidence with the advisor they've had elsewhere.

But secondly, from the other end there are more and more single-family offices that are finding a need. Perhaps it's not a need they wanted to have, but a need nonetheless, to either fold down or trim down the single-family office in some fashion.

So, a family that had $1 billion three years ago, for whatever reason might have $300 [million] today, and can no longer afford the apparatus for the complement of services that that family was getting from the single-family office. And so, we're seeing a little bit of flow from that as well.

PATTERSON: I think there's just more awareness that there are other alternatives out there. And there's also been a lot of change in the wealth management field. The brokerage industry has, you know, fallen apart in some cases.

But more I think it's the awareness that there is another alternative out there. "Multifamily office" might not be a good name. Still, a lot of people don't understand it. If you say you're a multifamily office, they say, "Well, what does that mean?" We're still at the infancy stage of an industry, but we're getting to a level of awareness that some people are turning to us.

PW: What are your clients' greatest concerns, and how have those concerns changed over the last year.

GROMEK: Remarkably, the concerns haven't changed all that drastically. The bulk of our clients are entrepreneurs who built their wealth over time. And many of them are concerned about educating the next generation and really passing on the values that helped them build their wealth and making sure that that is consistent throughout the generations. So, we spend a lot of time educating. Educating the first generation, but also building programs to educate the next generation as well.

ROGERS: The overarching goal for many of these families is perpetuating well-being across the generations.

They're thinking about expanding their definition of wealth into relationships across the family.

But I think their greatest concern is, do we have competent, clear decision-making that's impacting all those various areas in an expanded definition of wealth?

The biggest concern right now, is what's falling through the cracks, and what should I be worrying about in the future that I wasn't thinking about coming into 2008?

SALLENAVE: At Schwab, we only deal with advisors. So, we can't speak to the end client. But what I think is interesting, what our multifamily office advisors are asking us for that they weren't two or three years ago, is specifically on the topic of family governance. They're looking to understand the standards and best practices about when advisors are asked to run family meetings.

SINSHEIMER: I'm finding the same thing that Greg mentioned. To me, that's really a concern about a loss of control in some fashion. And that is what has come to the fore after the latter part of [2008]. The sense that, whether it be in their investments, or in their family, or how they relate to their advisors, they're very critically concerned now with having some level of control.

They're also concerned that they may not be focusing on the right issues. And every client is quite different, so I can't tell you what those are. But I sense that more and more today after the past nine months or so, or 12 months, than ever before.

PATTERSON: I think people are still frightened. I mean, our financial underpinnings were threatened with the collapse of Lehman Brothers and various things that happened. And that fear hasn't gone away. And now we've got the stimulus coming in but they're still worried about what the long-term effects of the stimulus are going to be and what our country and our economy are going to look like ten years from now.

PW: What kind of expectations and concerns do people have about their money in light of recent events? Are they looking to recoup their assets or are they more risk averse?

GROMEK: Again, concerns haven't changed that drastically. People are concerned about inflation and when that's going to come, how it's going to affect their well being and their lifestyle. I'd say that's probably the biggest concern. Finding ways to protect people's wealth is what we've focused on.

We've been really focused on finding innovative, tax efficient ways to build an inflation hedge around a municipal bond portfolio and some interesting things in that regard.

ROGERS: I do think there are families that prioritize the broadest definition of wealth and may or may not care as much about the best-in-class investment capabilities, and may believe that investments are kind of a commodity. You get your asset class, your asset categories into place and you set it for the long term, and you adjust over time. And I think there are other families that really believe that trying to find the next greatest investment for the long-term to compound wealth is a high priority.

PATTERSON: I have clients on both extremes. You know, they have enough money and they say, I don't need to take anymore risk. It's not going to change my lifestyle. It's not going to change how my goals are achieved at this point. I don't want to take risks. I want to have a consistent return for my portfolio.

And on the other hand, I have clients that say, well, I have enough money. If I lose some it's not going to change my lifestyle. I'm willing to take prudent risk to take advantage of opportunities in the marketplace because where there are problems, there are also opportunities. And so, there's some people out there taking advantage of this. And now is the right time for that.

SINSHEIMER: It really does matter who you're talking about, not just that they have X dollars. So, on the real estate side, somebody who is a real estate person and is largely wealthy because of their real estate understands that they look and think of the world differently because it's a mark-to-market issue there. They're not looking daily at the value of the real estate. This is a market where they're gleeful because they're getting ready to pounce. But those same people can't stand the idea of looking at a report every week, or month, or quarterly that shows equities.

Therefore, you've got to think about that when you confer with them on what their other assets are going look like. The other issue is, what is this wealth? Is this somebody who's going to start another business? How much of the wealth is required for distribution for the lifestyle?

I mean, it's very different between a junior who may have tons of money but not be particularly productive versus his brother who is a serial entrepreneur and has already done two successful businesses. You allocate money very differently for the two.

PW: In an increasingly crowded space, what's required of MFOs to be competitive and successful?

GROMEK: I think by far the biggest issue is attracting and retaining high-quality talent and combining their interests with a client's interests. We think that's the key to success going forward. You know, this is a service business at the end of the day, and what you've got are people to put in front of your clients. And so, you need to make sure that those people are the best at their game and that we're able to keep them for the long-term.

ROGERS: The challenge due to competition is that a lot of these organizations are going to do whatever it takes to make these clients happy. So, then, the ultimate goal is to make happy clients who are providing great references. There's an implication on profitability in that regard.

Stephanie's point is right on the money. If you can build a great culture, recruit the right people and have competent and differentiated investments on the one hand-to really be able to look across all the various service capabilities and integrate those on behalf of the client.

SALLENAVE: What we see happening over and over again in our conversations with multifamily offices is this recognition that there needs to be a tremendous amount of focus on what it takes to serve these clients and understanding the true cost to serve these clients. There's a growing focus on understanding that so that they can then think about what's the right pricing and the right client.

It's about having a great clarity of purpose to what the multifamily office is about so that there is the right talent.

SINSHEIMER: If we can continue to be proactive on behalf of our clients, number one, and to foster and facilitate a sense of intimacy between the client and whoever the advisor might be, then I think we'll be fine.

PATTERSON: I think that sense of intimacy is really important. It might be kind of a strong word, but when you help clients in the way that we do you become part of their family, and you care about them like they are family. And finding people that have the intellectual curiosity to get into the complexities of family offices and also care enough to keep going and be diligent is the challenge. And it's finding the right people and just continuing to do a good job. Because it's the word of mouth that sells in our business.