While SFOs are created by one family with the purpose of serving that family, they are not focused on driving revenue or adding new clients as a business. They mostly operate as a cost center for the family providing services that may not be economically reasonable for an MFO to perform, such as concierge services, travel and household employee management. The role of the SFO is to provide value through complete alignment with the family on their mission, values and goals.  

MFOs often serve as registered investment advisors for multiple families. While MFOs struggle with making some of the SFO-provided services profitable to their business, they can provide a broad range of additional services that the SFO may find challenging to source in-house, such as aggregated reporting, accounting and bookkeeping, bill pay, tax return preparation, estate and financial planning, philanthropic planning, and risk management.

Importantly, the two types of family offices are not mutually exclusive. A family office, whether it is an SFO or MFO can serve many purposes to achieve the goals for the family. There is a convergence of the two business models where they are working together. An example would be where the SFO outsources certain functions to an MFO or an investment advisor that serves multiple families.   

With the increased complexity of family wealth, families will continue to explore the best combination to service 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 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 cost, access to talent, privacy and services needed.

Cost

The financial advice industry has long used the amount of family wealth to steer decision-making about family office services. For example a common rule of thumb may state: “an SFO is not justified unless the family has at least $100 million or $500 million in net worth”; or “unless you are a billionaire, a SFO is too expensive.”

While a certain amount of wealth is certainly needed to justify the cost of creating an SFO, blanket statements don’t demonstrate much thought or provide any insight or understanding of 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, the cost of hiring a full team of in-house professionals will certainly cost more than outsourcing certain functions to external advisors or hiring an MFO, but based on the family’s needs, it might be the right solution.