These days, many accounting services are considered commodities. More competitors are vying for the same business with no discernible difference between offerings and consistent downward pressure on fees as players try to attract new revenue.
Simultaneously, many clients, especially those with significant personal wealth, are demanding a higher level of service. These trends mean the accounting field is facing critical dilemmas that can impact the long-term sustainability and profitability of its core relationships and business lines.
However, there are specialty practices that accounting firms can use to change these dynamics. A family office practice is one such specialty area, one that can strengthen relationships, deliver high-value services and cross-sell other capabilities of the firm. While this practice area has proved invaluable for a number of leading firms, it must be developed and operated in a way that complements the culture, expertise and business protocols of an organization to ensure success and increase revenues and profits.
Selecting A Business Model
Generally speaking, accounting firms adopt one of two business models when delivering family office services: product-neutral or product-inclusive.
A product-neutral business model is built around the delivery of services in exchange for a retainer or a project or hourly fee. The typical services offered via a product-neutral model tend to be administrative, advanced planning or lifestyle in nature and might include things like accounting and tax work, estate and succession planning and concierge support.
A product-inclusive business model is similar to the product-neutral framework, with the addition of financial products such as investment management and life insurance. An affiliated organization or a third party can provide the products, but the relationship and treatment of fees between the accounting firm and the product issuer must be clear and disclosed to the client at the outset. In addition to the fee-based revenue associated with the product-neutral model, the product-inclusive model allows for asset-based fees and commissions, depending on the products sold.
When selecting a business model for a family office, an accounting firm should consider its overarching objectives, its operating culture and environment, the range of in-house capabilities and the risk-reward differential of each model. For instance, the margins of a product-inclusive model are typically 10% to 35% higher than those of a product-neutral model due to the risks and potential for conflict that can arise when assuming fiduciary and similar responsibilities. Figure 1 outlines and compares the key considerations for selecting a family office practice model.
Adopting Best Practices
Both the product-neutral and the product-inclusive business models can deliver tremendous upside for accounting firms. Success (and the ability to hit the high end of the margin ranges discussed previously) is typically contingent on thoughtful business design and meticulous implementation, and further supported by the use of best practices that can optimize staffing, infrastructure, internal processes and new client acquisition efforts.
Best Practice No. 1: High-Caliber Personnel
The very wealthy are often demanding clients, which means that significant care must be taken when selecting and developing employees. For the long-term success of a family office practice, it’s important to be able to access and manage high-caliber candidates that possess the requisite skills to work effectively with ultra-affluent clients. Two areas in particular contribute to the overall effectiveness of an operation: technical proficiency and interpersonal behaviors. All new staff members should be thoroughly screened for the knowledge and ability needed to oversee everything from individual services (that can range from the mundane, say bill paying, to the highly specialized, such as portfolio construction) to the complete suite of family office deliverables, backed by the demeanor and communications skills to engage effectively and productively with wealthy customers. A family office practice must also have an ongoing personnel development plan that includes the training, education, mentoring and supervision needed to excel.
Best Practice No. 2: Ongoing Client Profiling
Family offices must be able to address the immediate concerns and issues facing clients, while maintaining the holistic perspective that allows for long-term planning and achievement of goals. Thus, it’s essential that the family office staff understands the priorities and preferences of their clients on a real-time basis. One method for acquiring this level of understanding is the use of profiling mechanisms that can be used to develop a comprehensive assessment of each family unit or member and be easily translated into actionable and customized solutions. As client assets increase in size and complexity, it’s even more important that family offices utilize a profiling process or methodology on a regular basis to keep up with milestones, external factors and other material changes that can impact the effectiveness of its approach.
Best Practice No. 3: Internal Cross-Selling
The majority of new private wealth is created through the ownership of privately held assets, such as operating companies and intellectual property. In these cases, a family office practice can frequently expand the scope of its relationships to address both the personal needs and the business needs of its client base. Many services—such as accounting, tax work and consulting—are required in both scenarios and can boost the practice area’s margins by increasing revenue without the associated costs of acquiring a new client. Accurate and ongoing profiling of clients is key to identifying cross-selling opportunities and must be paired with the internal processes, support and incentives to facilitate follow-through. The extended capabilities of an accounting firm will have the greatest impact on how well it can capitalize on this practice.
Best Practice No. 4: Adaptable Infrastructure And Operations
The infrastructure an accounting firm needs to support a family office practice is a function of the nature and range of services it will deliver to its high-net-worth clients, and the more products and services are on the platform, the greater the infrastructure requirements will be. There are numerous options—including internal, outsourced and hybrid models—that should be carefully evaluated against the human and capital resources of the accounting firm and its overarching goals for the practice area. Closely related to the infrastructure are the operational processes and procedures that employees will follow for seamless implementation and compliant results. It’s important to realize that certain client situations may necessitate modifications to existing protocols, which can seem counterintuitive to process-oriented and risk-averse professionals, but which are a critical part of creating a viable and client-focused family office practice.
Best Practice No. 5: Effective Business Development
One of the most valuable skills in the rapidly expanding and increasingly competitive multifamily office arena is the ability to source new affluent clients. As with the majority of high-end services, the most reliable and productive approach is working through centers of influence, the professionals who have the network, authority and respect to make pointed recommendations and meaningful introductions that prompt action and follow-through on the part of the affluent client or family. Accounting firms should have a clear understanding of how they cultivate new business from the high-net-worth markets and whether those methods are compatible with, and transferable to, a family office practice.
A well-run family office practice can be seriously accretive to an accounting firm as a source of new revenues, cross-sell opportunities and reputational enhancement within the industry and among desirable high-net-worth constituencies. As a result, many accounting firms are evaluating the possibility of introducing such a practice area to their existing business, while other firms are working to refine and enhance their family office operations to become more competitive. The natural synergies between accounting services and family office capabilities create significant, long-term opportunities for growth, profitability and stronger client relationships that cannot be overlooked or overstated.
