More than 70 percent of advisors are investigating the possibility of setting up the multifamily office (MFO) model as a better way of expanding their ultra-affluent business during this rocky economic climate, according to a recent research study.
In 2004, only 48 percent of advisors were considering such a move, as reported by Rothstein Kass Family Office Group in their 2009 study entitled, "The Multifamily Office Solution."
The findings suggest that the multifamily office concept, growing in prominence and profitability, represents both exceptional value for wealth management firms and clients alike. These firms are discovering that the MFO structure provides an extraordinary platform for client service, better positioning these firms to attract assets from ultra-wealthy families. More than 3,500 financial firms nationally call themselves family offices at present, according to the Family Office Exchange.
From the time of John D. Rockefeller, who set up the first one, family offices have always been client-driven. The current economic situation in many instances has created a disconnect between high-net-worth clients and wealth management professionals. The chaos in the financial services marketplace has ignited an array of dissatisfied clients looking for a better way to manage huge assets and their legacy of family fortunes.
As proof, more than 100 very affluent investors who moved their assets from one financial provider to another in the previous four months cited the multifamily office as the provider of choice (40 percent) over an independent advisor (26 percent), a bank (30 percent), a wire house advisor (10 percent) and clients managing wealth themselves (9.1 percent) in a Rothstein Kass study in January 2009.
This study made the point that all advisors should heed the fact that multifamily offices offer investors stability, service and solutions that were lacking in their previous financial relationships. In short, high-net-worth clients are leaving big firms (i.e., large banks and brokerages houses) for more service-orientated objective "boutique" firms, such as family offices.
Of course, the asset management portion of the family office remains the most lucrative for wealth management firms, but multifamily offices tend to be involved extensively in many aspects of their clients' lives -- from estate planning to lifestyle concerns.
This is one of the main reasons the very affluent are not only seeking successful management of their assets, but attempting to get comfortable with a firm and its principles that offer multiple ways of dealing with their wealth, such as administrative and lifestyle services.
What follows is a few of the services offered by an established family office, even though a definition of the concept is yet to be clearly defined and no full blueprint is adaptable for all wealth management firms. Most services offered by the family office fall into three categories: financial, administrative and lifestyle.
Typical services offered:
Asset management. For all wealthy families, Job No. 1 for a multi-family office is to manage the wealth effectively; Managing wealth on a large scale and over the course of many decades of an ultra-wealthy client is probably the most challenging issue a family office will face.
Direct investing. Many families made their money through operating a business, real estate development, or venture investing. The family office uses it skills to increase the family's wealth through direct investments in similar enterprises.
Accounting and reporting. If family members are to have any confidence in the management of the family's wealth, the family office will have to provide timely and accurate accounting, tax reporting and performance reporting.
Coordinated estate, tax, trust and insurance planning. Given the complex nature of the U.S. tax code, the confiscatory level of estate and gift taxation, the fiduciary responsibilities associated with complex trust planning, and the litigious nature of American society, families who neglect to coordinate their activities in these areas will find their wealth rapidly hemorrhaging.
Philanthropy. Philanthropy plays an important role in the lives of most members of wealthy families. But if charitable giving is to prove fulfilling and a method of binding the family together across generations, it will have to be pursued professionally, proactively and with a focus on issues that resonate with family members.
Management of a closely held business. Many families not only possess great liquid wealth, but also control an operating business. A family office can provide an ideal forum for discussing how such a business will be managed and governed, for dealing with issues posed by the fact that some family members work in the business and some don't, thinking about capitalizing and recapitalizing the business, and so on.
Intergenerational conflict. It is a rare family, wealthy or otherwise, that doesn't experience intergenerational conflict at some point. For wealthy families, such conflicts can lead at best to unwanted publicity, and at worst to deep emotional trauma and dissipation of the asset base.
Education of younger generations. A great challenge for wealthy families is raising children to be productive adults, fully capable of stewarding the family's wealth in their turn. A family office can play a highly positive role in helping educate younger generations about their future responsibilities, and in offering opportunities to gain hands-on experience in dealing with those responsibilities.
"Concierge" services. This phrase refers to a variety of services typically needed by wealthy families, and may include bill-paying, making travel arrangements property management, oversight of aircraft operations, and so on.
No doubt, a wealth management firm considering the building of the family office concept would have to make a good judgment call to be able to provide these types of services within its business model. Of course, the multifamily office offers economics of scale not found in the single family office (i.e., Rockefeller), in which an individual family would have to have upwards of $250 million in investable assets to make it cost effective for the firm to maintain such an array of services.
The multifamily office, on the other hand, reduces the maintenance costs across a wide spectrum, increasing the market for such services in the $25 million to $50 million per family assets. This would increase the opportunities for a wealth management firm to capture assets from a larger pool of candidates.
In addition, the significance of outsourcing increases the opportunity for wealth management firms to expand the multifamily office concept. Services such as bill paying, tax services even concierge services are low margin, and a number of multifamily offices partition these out to a third-party provider.
Even though participants in the Rothstein Kass survey of multifamily offices responded that their main emphasis of importance was "doing a better job for families" (94.2 percent), all wealth management firms are in the business of making a profit. So being "more profitable" ranked second as the motivation factor to create a MFO (85.9 percent).
The MFO is profitable. The average annual revenue of the 103 investment advisory firms that identified themselves in the Rothstein Kass research study as multifamily offices was $8.2 million. The annual cost of administrative/lifestyle services borne by these firms was $1.9 million, leaving average annual profits of $6.3 million.
While that seems substantial, remember that at least 80 percent of revenues are asset-based fees, calculated as clients' assets under management. At least 10 percent of total revenues are "cost centers" treated as loss leaders in order to offer the client a full smorgasbord of services to retain and attract new business. Thus, the promise of high profitability has led many firms to expand their services to attract high-net-worth segments.
Considering the establishment of an MFO within your present business model is a difficult decision, and should be debated at length among principals. However, by keeping in mind what ultra-wealthy clients are asking for -- no, demanding -- in today's climate of economic instability should make such a weighty decision easier.
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