While multi-family offices struggle with making some of the single-family office services profitable to their business, they can provide a broad range of additional services that the single-family office may find challenging to source in-house: including aggregated reporting, accounting and bookkeeping, bill paying, tax return preparation, estate and financial planning, philanthropic planning and risk management.
But, importantly, the two office setups are not mutually exclusive. Both offices can serve many purposes to achieve the goals for their clients. There is a convergence of the two business models where they are working together.
An example would be where the single-family office outsources certain functions to the multi-family office or an investment advisor that serves multiple families.
With the increased complexity of family wealth, families will continue to explore the best combination to serve the needs of their family for generations to come.
Decision Factors
Whether you are a member of a wealthy family considering creating a family office or an RIA considering offering multi-family office services, understanding the family office business structures, advantages and disadvantages is important to making an informed decision. Which type of organization is right for a particular family depends on a number of factors, including the costs, the access to talent, privacy and services needed.
Cost
The financial advice industry has long used the amount of a family’s wealth to steer decisions about which type of office it should use. One rule of thumb is that a single-family office is not justified unless the family has at least $100 million to $500 million in net worth. Another is that unless you are a billionaire, the SFO is too expensive.
While a certain amount of wealth is certainly needed to justify the cost of creating a single-family office, blanket statements don’t demonstrate much thought or provide any insight or understanding about the family office marketplace.
Conversations should be grounded in what the family desires, how they want to spend their resources and the level of complexity of the family assets. From that vantage point, cost can be considered and weighed more strategically. For example, it will certainly cost more to hire a full team of in-house professionals than to outsource certain functions to external advisors or hire an MFO, but if the single-family option fits the family’s needs, it might be the right solution anyway.
Access to Talent
Finding talent is a challenge for both offices. But generally, it is more challenging for single-family teams to attract and retain top talent.
Multi-family operations have the advantage of being for-profit businesses that can offer equity opportunities, and this can be a significant lure for talent and a way to hold onto it. Entrepreneurial, driven professionals would often prefer to own a multi-family office rather than be employed by one family.
That said, single-family offices have been creative in compensating their key professionals with high salaries, opportunities to co-invest with the family and carried interest structures based on the growth in the family’s assets. Such pay structures have helped single-family offices retain talent.
Privacy
The role of a family office in protecting the privacy and saving the time of the family cannot be understated. Wealthy families are bombarded with requests, whether it is to invest in a private company, hire a vendor for services, or support a charitable cause.
The “gatekeeper” role of protecting the family from service providers and solicitations is often one of the main reasons families create single-family offices. The amount of time it takes to handle these incoming requests is tremendous, and the wealthy may want their family office to screen everything first.