Building and cultivating a wealthy customer base is an important initiative for many types of professionals, especially those that specialize in addressing the unique needs of the affluent.
Whether you’re a provider of luxury goods, a hedge fund manager or an international tax specialist, you’ve no doubt felt the competition from other specialists and experts. In a recent survey with advisory practitioners, we learned that the pressure is particularly acute for the majority of these professionals. Out of 466 advisors surveyed, 90.1% said that it’s more difficult to find high quality clients and 67.4% cited more intense competition as contributing to a worsening business climate.
Anecdotal evidence indicates that these dynamics become more pronounced the higher you move up the wealth ladder, meaning that the more exclusive and focused your practice is around the ultra-affluent, the harder it will likely be to sustain and grow your business.
The difficulties associated with servicing the high-net-worth markets are well known and well documented, but the rewards are sufficiently attractive to keep attention focused tightly on the wealthiest individuals and families. As a result, advisors continue to have a strong interest in adopting business models that will enable long-term, profitable relationships with a wealthy clientele.
One powerful solution is to become a multifamily office. Not surprisingly, our research shows that a larger percentage of advisors are already describing themselves as MFOs and even greater numbers want to learn more about the model to determine whether it’s appropriate for them and their clients.
Comparing separate surveys in 2009 and 2014 (the numbers of advisors surveyed were 226 and 466, respectively), the percentage of advisors operating as multifamily office providers grew from 4.9% to nearly 19.1% while the interest in becoming an MFO increased from 15.9% to 33.5%.
Despite the growth in adoption and interest, 47.4% of advisors said they are not interested in the MFO model in 2014, down from 79.2%.
It’s helpful to understand the logic behind these perspectives in order to weigh your own decision in the context of the current business environment.
Understanding The Rationale
Above all else, choosing to operate a multifamily office is a business decision. The model may not be viable for your skills and expertise, bandwidth, current clientele, budget, infrastructure, interest or goals.
Of the 47.4% of advisors who said they are not interested in pursuing the MFO platform, 71% cited the incompatibility of the business model with their existing practice.
Broadening the services of an advisory business can sometimes fuel expansion and growth, but it can also be counterproductive. In particular, if your core business is built on a niche capability, such as investing in municipals or writing P&C insurance coverage, expanding adequately to support a multifamily office platform and client experience can be an arduous, costly and time-consuming proposition.
In the survey, 62.9% of those not interested in an MFO said operational barriers dissuaded them from becoming multifamily offices, and these barriers can take a number of forms. It’s not uncommon, for instance, for an advisor to face restrictions due to broker-dealer policies and regulations. Internal organizational conflicts, both legal and ideological, about the use and remuneration of third-party experts can also be a deterrent.
Then there are the costs of delivering MFO services, which were cited as an obstacle by 36.2% of advisors. It’s no secret that affluent clients expect a high-touch and highly responsive relationship, especially from their financial and lifestyle providers. This expectation can be one of the drivers behind high delivery costs. However, much of the industry is moving toward outsourcing arrangements that allow MFOs to maintain coordination and oversight of the client experience via a more scalable and adaptable business model while reducing long-term overhead. Thus, this concern is the one most easily mitigated.
The perspectives of the 245 financial advisors currently pursuing or seriously interested in the multifamily office model were similar in the way they attracted new wealthy clients, increased profitability and enhanced client relationships. It’s worth noting, however, that the advisors who are already operating as MFOs were more likely to agree with the positive attributes of the model on growth, profitability and expansion potential, presumably a reflection of their own experiences and results.
About 85% of advisors surveyed are motivated by an MFO’s ability to help them source wealthier customers. This is key for several reasons. High-net-worth individuals have demonstrated a high degree of interest in the qualities associated with family offices, such as product neutrality, a holistic approach, customization and dedicated service. While this appeal can certainly be exploited, it’s important to realize that the platform itself is not sufficient to attract new business without full-scale marketing and business development.
For eight in 10 advisors, an MFO’s ability to enhance profitability over and above a more traditional advisory model is attractive. This perspective is significantly more pronounced among current multifamily offices, showing their ability to maximize the value of wealthy client relationships, especially when providing a range of services. It’s possible to further boost profitability with judicious management of the cost structure for offerings and operations.
The ability to improve client relationships is an important consideration for about 70% of the surveyed advisors. Delivering a number of diverse but frequently interrelated services to a wealthy client can increase rapport, which can generate loyalty between the client and the advisor, pave the way for more business and referrals and help smooth over difficulties or underperformance in other product areas.
As more private wealth is generated and margins continue to face downward pressure, it’s likely that advisors and other high-end specialty providers will remain focused on ways to increase their appeal to affluent and ultra-affluent consumers. The multifamily office construct is one such way to engage with wealthy individuals and families over the long term in a profitable and holistic way.
Fostering Success
To create a multifamily office and execute it effectively requires a number of foundational elements that will work together to support a successful outcome:
A Practical Platform – By their nature, multifamily offices are able to deliver an array of services to wealthy clients. The exact combination of offerings tends to vary from MFO to MFO and is often a function of the current and prospective clients and their anticipated preferences.
A multifamily office’s platform needs to be practical; in effect, it must be financially viable. This often translates into a combination of capabilities that are both housed internally and sourced from external providers. A corollary to practicality is the pricing model. Offering a broad array of services to your clients is pointless if you cannot do it profitably. This entails having a solid understanding of the value-chain for each service area and pricing (or negotiating) them accordingly.
Holistic Profiling Methodology – Wealthy clients will often ask for certain services, such as investment management or an estate planning, while failing to ask for others, such as concierge medicine or trust services. It behooves the MFO’s leadership to understand its clients in a way that enables it to provide exceptional value. An approach to holistic profiling called the “Whole Client Model” is a proven method for intimately evaluating client needs, wants, performance, obstacles, circumstances and, of course, opportunities. Whether it’s the Whole Client Model or another similar system, comprehensive holistic profiling is an essential factor in the ongoing success of a multifamily office.
Business Development Framework – There are many ways to source high-net-worth business, including advertising, thought leadership, seminars and workshops, public relations and other traditional marketing activities. But the single most reliable way to reach wealthy individuals, proved again and again through quantitative research and observed best practices, is through the influencers and professionals who already have their trust.
As with client profiling, there are a number of methodologies that can be employed to cultivate mutually rewarding arrangements with centers of influence. Street-smart networking is one such framework, derived from the networking practices of self-made millionaires and the business development practices of ultra-successful professionals. It’s a goal-oriented, results-driven, highly operational networking methodology geared toward identifying and maximizing the influencer relationships that can be the growth engine for your practice.
Starting a multifamily office is not for the faint of heart or the semi-committed, but if it is done for the right reasons and with the appropriate expectations, and if it is backed with the necessary resources and processes, it can be an excellent way to transition your advisory practice up the market pyramid and appeal to a new cohort of wealthy prospects.
