Many advisors strive for the family office model, even if they don’t have the client base to support it.
Yet advisors of all stripes can take lessons from the multifamily office model and use them to increase profitability.
This was among the key points covered at the Creating An Exceptional Family Office conference in Boston, which drew almost 200 attendees.
Here are 10 pieces of insight shared by conference speakers:
See The Trends
The lower end of the advisor industry will see mounting pressure from “robo-advisors.” There will also be more fee compression at the top end.
“If something happened to you, you can be replaced,” warned Russ Alan Prince, president of R.A. Prince & Associates. “If you are looking at the high end of the industry, they want solutions, not products. The family office model does that.”
Hannah Shaw Grove, author of Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy and The Family Office: Advising the Financial Elite, noted that she is seeing more accounting firms getting into the family office space—a way for them to add services and increase margins. In other words, the ultra-wealthy client market is getting more competitive.
Richard Flynn, managing partner of Flynn Family Office, advised reading survey analysis and networking with others in the industry to stay on top of the trends. Even small trends can sometimes lead to more clients, he said.
Flynn noted one trend: Rich clients are lifting the veil of secrecy a bit on their investments for the sake of benchmarking. “They want to know what other families are doing,” he said.
Become A Lifestyle CFO
Advisors should try to deepen the value they have in client’s lives, Flynn said. Becoming a lifestyle manager means more than buying clients tickets to a show, he added. It means helping clients deal with the burdens that come with money, he said.
Put The Eggs In Multiple Baskets
Not managing investments can be a good idea when working with ultra-high-net-worth families. It allows the multifamily office to have objectivity to oversee the investment managers.
On the downside, not doing investment management comes at the cost of a steady stream of revenue. But one of the benefits of this strategy can be leads from investment managers.
Other types of services can also boost revenues, speakers said.
“I am not trying to pitch money management,” Prince said. “Everyone is. If I do all the other things, the odds tend to be really good that I can get the money management.”
One of the benefits of serving rich families is that they have a need for a deeper level of financial services than just investment management, Flynn said.
“We added project management. That has really helped our margins,” said Flynn, adding that the projects include helping clients lease a car, book a reservation, create a budget and conduct due diligence. “It is a lot of personal service work.”
Build An Extended Team
Multifamily office should rely on a hub-and-spoke services model, with the realization that they can’t be all things to all clients, speakers said.
Gemma Leddy, partner and director of wealth services for O'Connor Davies, said clients should be introduced to professionals who have been vetted by the multifamily office.
“It is about providing a client the best service, not about giving clients back and forth,” Flynn said, adding that the key trait to look for in professionals is reliability.
Flynn cited as an example the wealthy athletes who are clients of his firm.
“We work with their managers, agents, entourage, family,” said Flynn. “We have one rule—we have to have a direct relationship with the client. It is just too much of a risk not to.”
Leddy said her organization’s extended team includes valuation, forensic, audit and information technology experts.
Regarding whether to share revenue with professional referrals, Flynn said, “Ninety eight to one hundred percent of the time the client has the direct relationship [with the outside specialist].”
Fee transparency is also important when working with professionals, and multifamily offices should set a cap on project fees, speakers said.
Know Where The Money Goes
“Bill pay is the key. It gives you the granularity. We do a lot of liquidity management. We are also problem solvers,” said Flynn.
Leddy spoke about helping the family set up internal controls. For example, controls are set so that only authorized staff can conduct money transfers. The firm monitors transactions daily, with an eye toward improving operations whenever necessary, she said. “We make sure wires are going to all the right places and money isn’t going outside the family,” said Leddy.
Regarding how much involvement families should have in financial transactions, she said, “They don’t want to do all the bits and pieces, but they want to be in control. They want to push the button to release the money. You have to develop a system of communication and tailor it to their needs.”
Help Clients Ethically Avoid Paying Taxes
“All of our clients want to mitigate their taxes. You have to have a confidence that you can compete. Tax is very important,” said Flynn.
“It’s not what I get, but it is what I keep that is important,” added Prince.
In a show of hands, a majority of the room thought tax mediation was more important than investment returns. Grove said her national surveys shows the same thing.
Several of the presentations pointed out that a multifamily office can help clients more before a business is sold than after. “Most people do nothing before they sell their business. Everyone is going to get in line to say we manage money better [after the sale],” said Prince.
Watch Out For Scope Creep
By providing the best service to ultra-high-net-worth clients, it is possible to cut into profit margins by giving away services for free. “Sometimes it is not in the engagement letter and sometimes we don’t make any money,” said Flynn.
To help make sure this does not happen, it is important to have a clear description of what you are going to do for your clients, advised Leddy.
Prince said to be aware of “realization rates,” the difference between what you charge and what you make. “Set the pricing of what works for your business model,” he said.
Factor In The Risk Of Divorce
Michelle Smith, founder and the CEO of Source Financial Advisors, noted that the nation’s divorce rate is over 50 percent on the first mortgage, and that divorce is a $50 billion industry.
“It is a model that is very broken,” stated Smith. She focuses on being a settlement agent and then she usually takes on mainly the females as clients after the divorce is final.
“It is a 40- to a 60-year old that becomes a millionaire,” she said. “A divorce settlement is the earliest retirement plan and it needs to last an extra 20 years.”
Most family businesses are not adequately prepared for a divorces that affect owners and, ultimately, the business, speakers said.
Make It Simple
“You can only focus on the critical concerns. What matters now. It is what they want. That is what the critical concern is,” stated Prince. “Build a strategy of how to approach people. What is critical to them? [It’s not about] what is important to you.”
Break thing downs to their simplest level, Flynn said.
“We believe in pictures. We diagram things schematically, as much as we can on one page,” shared Flynn. By breaking it down granularly, it will be easier to see, for example, what would happen to a client’s assets if he or she died today.
Increase Revenue From Existing Clients
“The entire family model issue is that you know everything [you have] to do for the client,” said Prince.
One attendee said she had 100 clients and Prince noted it would be hard to know all of those clients really well.
“If you can understand these clients amazingly well, you will uncover the opportunities,” declared Prince, indicating that the more you know clients, the more problems you will be asked to solve. “There is a whole bunch of opportunities,” he said.
“How many people come from dysfunctional families? Do you think the wealthy people are not dysfunctional? They focus in it,” joked Prince.
Advisors should be knowledgeable of many aspects of their clients’ lives, such as who their business partners are and what charities they are involved in.
“You need a process,” Prince said. “You’re not going to get a lot of time, especially if they have a lot of money. Let’s assume you have 50 clients? How many do you know really well? Start with 10.”
After doing the research on the best clients, don’t overwhelm them with 20 things to work on or nothing will happen, he said. “Pick the two that matter the most to them. If I solve a problem for them, over time you will be able to hit each one of them,” Prince said. “You are going to have a relationship with them that is going to be hard to dislodge.”
Mike Byrnes is a national speaker and owner of Byrnes Consulting, LLC. His firm provides consulting services to help advisors become even more successful. Need help with business planning, marketing strategy, business development, client service and management effectiveness? Read more at ByrnesConsulting.com and follow @ByrnesConsultin.
