With the number of ultra-wealthy families on the rise, so too are their expectations and the options for managing their wealth. A family office may be the best solution for these families, but important choices must be made. Is a single-family office the right solution? Or is the family better served by hiring a multi-family office? Or is getting the best of both possible?
For advisors serving these families, there is a significant opportunity to provide value-added, unbiased advice that can help families shape their family wealth management strategy for decades to come.
Family Offices Continue To Grow
Families of significant wealth want to preserve and grow their wealth, manage and reduce risk, and free up time for the things important to them and their families. There is a clear trend that more families are seeking an alternative to traditional wealth management firms and private banks.
Wealth-X, a wealth information and research firm, has forecast that the global ultra-high-net-worth population (defined as individuals with over $30 million) will rise to 360,390 people by 2022 and control $44.3 trillion, an increase of $12.8 trillion over the next five years.
As global wealth has increased, the number of family offices serving those families has also increased, both in numbers and in importance. According to the family office research and data firm FINTRX, there are as many as 5,000 family offices worldwide, including both single and multi-family offices. Meanwhile, according to Cerulli Associates, multi-family offices are the fastest-growing high-net-worth channel in the investment management space, expected to influence $1.23 trillion in assets by 2022.
For families considering establishing their own family office or engaging a multi-family office, there are several considerations for making a decision.
Key Differences
Although there is no officially established functional definition of “family office” (aside from a definition in the Investment Advisers Act of 1940 saying when a family office is exempt from SEC registration) most agree about the two main types: single-family and multi-family. Each can serve important and similar functions, but there are key differences, including legal and regulatory considerations, for each.
A single-family office, which as its name implies, generally serves only one family, provides a range of services depending on the needs of the family, but it is usually centered on investing or accounting. These offices are generally not registered with the SEC as an investment advisor.
Multi-family offices, on the other hand, are generally organized as registered investment advisors or trust companies, or sometimes structured as accounting or law firms serving multiple families. A general definition of this type of office is an RIA with a dedicated focus on serving ultra-wealthy clients with a minimum of $25 million in investable assets. Such an office provides family office services in addition to asset management.
There is also one inherent difference between single and multi-family offices that often goes unstated and overlooked: the profit motive.
Single-family offices 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 a multi-family office to perform—for instance, concierge services, travel services and household employee management. The role of the single-family office is to provide value through its complete alignment with the family on their mission, values and goals.
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.
But even though this has been a role provided traditionally by single-family offices, there is an opportunity for MFOs as well. If the latter can become a trusted advisor and act as a client’s gatekeeper, it can be tremendously valuable, not only by taking meetings with potential providers, but by conducting due diligence and vendor management. It helps make the families very loyal clients.
Service Needs
How the family intends to invest their wealth is also key to determining which type of family office is appropriate. There are dozens of services that can be performed by a single-family office, a multi-family office or both: aggregated reporting, general ledger accounting, bill paying, philanthropic planning, household management, household employee management, tax accounting, tax planning, estate planning, estate document drafting, alternative investment due diligence, private investment due diligence, family dynamics planning, family education, risk management, property and casualty insurance, lending, life insurance planning, and more.
Guiding families through myriad options is important and must be made in the context of the individual family’s needs.
For example, a family may decide that a single-family office structure is the most appropriate model if they make only private investments. These types of families may not have any investable assets, and multi-family offices may not have the ability to make them profitable. (Note, however, that some multi-family offices, including CPA firms, offer services not based on AUM.) Single-family offices created by private investing families usually hire an experienced “deal” professional as a CEO or CIO to head the family office. They, in turn, hire due diligence professionals to evaluate the private investments, accountants and other professionals to serve the family’s needs.
On the other hand, if the family has sold a family business or experienced some other type of liquidity event, they are in a much different position. They need to invest their assets. In this situation, a multi-family office could be a great choice, acting as the family’s outsourced CIO. Multi-family offices can more likely attract the talent to manage the portfolio of assets and will have the additional services important to managing this wealth over generations.
Every family is different, as are their needs, as are their family offices, which should be customized to the needs of each. Every family is encouraged to take the time to educate themselves and define what success looks like before making such an important decision.
Eddie Brown is the National Managing Director and Head of the Schwab Advisor Family Office. Paul Ferguson is the Managing Director of the Schwab Advisor Family Office.
