Over the last few years, there’s been an boom in the number and variations of multifamily offices. While industry professionals and the wealthy seem to readily embrace the term, its overuse means that there’s no standard for MFOs and it’s increasingly likely that all manner of providers deploy the label with different intents.
In an attempt to shed light on the growing mystery of MFOs, we surveyed 89 self-identified multifamily offices. Each organization we spoke with was represented by a senior executive and partner in the operation, oversaw a minimum of $500 million and offered money management services as a core capability.
Motivating Factors
We first asked each organization about its motivations to function as an MFO and the responses made it clear that commercial viability and growth are key factors. Ninety-one percent of senior executives reported that increased profitability was central in their decision to operate as an MFO versus other business models. While there are always exceptions, delivering a broader cross-section of products and services to extended family units usually results in more sources of revenue and significantly greater overall and per-client profitability.
The ability to source and work with wealthier clients was cited by 88.8% of the respondents. The high-net-worth and ultra-high-net-worth communities and their associated ecosystems have already embraced the family office construct as one that will help them address their financial concerns while delivering responsive, high-touch service. Thus, a financial provider that positions itself as an MFO can develop a powerful narrative that resonates with both target clients and their influencers and yields new, well-heeled clients at a quicker pace than other business models.
At the same time, about 70.8% of those surveyed noted that being an MFO enabled them to build a stronger rapport with clients. The very nature of MFOs requires involvement in a variety of scenarios—some commonplace and straightforward, others unexpected and problematic—on behalf of their clients in order to help these providers understand more about each individual along with his or her personal priorities and concerns. These opportunities create a foundation for more solid and interdependent relationships, which can be especially important if investment performance is substandard for a period of time.
Very clearly, there are solid pecuniary reasons behind the escalating adoption of the MFO model. One of the core tenets of business is to make money and multifamily offices are no exception.
The Menu Of Services
There’s an extensive list of possible services that multifamily offices can deliver to their clients and, if you believe the promotional materials and websites of the firms and professionals competing for the attention and business of the financial elite, nearly all offer a comprehensive menu of services. However, the results of our survey revealed a very different reality. We asked each of the senior executives about the services they and their respective organizations provided in the previous two years—whether it was through in-house expertise or by sourcing and monitoring the results of a third party—and found that very few have actually provided the broad spectrum of possibilities (Figure 1).
Aside from investment management, there were no other services offered by more than 70% of MFOs in the previous 24 months. In fact, a relatively short list of seven related financial services were the only offerings provided consistently by more than half of the MFOs. Beyond portfolio management, the most common types of services were planning related, with an emphasis on estate, charitable, financial and succession. To a lesser degree, MFOs offered retirement plans, alternative investments and life insurance—with considerable variation in the range and sophistication of solutions. It’s worth noting that our long-term research with wealth holders indicates high levels of interest in alternative investments and the benefits associated with life insurance and advanced planning strategies that incorporate life insurance, so those firms that fail to offer these services do so at their own risk.
More telling are the broad variety of services available to wealthy and ultra-wealthy clients, which are offered inconsistently by MFOs. About four out of 10 respondents provided bill-paying services. Slightly fewer have engaged in one-off projects that are often bespoke, rarely replicable assignments. About one-third delivered trust and trustee services, usually in conjunction with a bank, and almost 30% provided philanthropic advisory services that deal with the “who” and “why” of charitable giving as opposed to the legal strategies and techniques, which tend to be the domain of estate planners.
More than 25% of the multifamily offices delivered accounting services, most often dealing with personal, as opposed to corporate work. Somewhat fewer provided asset protection planning. While there is generally a strong connection between estate planning and asset protection planning, the latter is focused solidly on creating a legal barrier between the affluent client and potential litigants and creditors.
Credit was provided by a little more than one-fifth of the MFOs. These organizations are either tied to banks or have made arrangements with funders. Slightly fewer provided currency management—usually for wealthy foreign or transnational clients. The same percentage of MFOs delivered income tax planning and tax preparation, usually with an affiliated accounting firm.
One-fifth of the MFOs delivered educational programs. Increasingly, such programs are in demand by the wealthy on behalf of their children and grandchildren. Such programs regularly cover a number of topics, including financial literacy, money management and process-oriented skills.
Business management was provided by about one-sixth of the respondents. This is a function of their high-stature clientele. The same percentage facilitated the selection and oversight of concierge health-care services. Universally, this service is outsourced, as is family/personal security, which was organized by still fewer MFOs.
Only 12% of surveyed MFOs provided private placement life insurance or private placement variable annuities. The significant tax benefits associated with these products are garnering a lot of attention among the very wealthy, which will draw the interest of more and more multifamily offices.
One in 10 multifamily offices were involved in capital raising for their clients. Less than 10% of all the organizations delivered household management services, property and casualty insurance, deal facilitation, financial oversight of business interests, valuations and business consulting services.
While many clients don’t need a comprehensive array of services at all times, and many unique capabilities are sourced for one-time use and never needed again, it’s likely that many newly formed MFOs are simply not venturing into areas that are outside their comfort zones or fee structure because they believe it could jeopardize their core sources of revenue. If these situations persist, client needs will go unmet or they will engage other professionals to acquire the appropriate solution.
It’s likely that more MFOs will begin to leverage technology and the increasing acceptance of virtual partnerships to expand the services they provide both on an ongoing and an as-needed basis.
Strategic Outsourcing
In an ideal world, the services offered by MFOs would be driven entirely by client need. It’s more likely, however, that the scope of services offered today is also influenced by each firm’s origins, core competencies and ownership structure. There are a number of factors that may force change sooner rather than later, including client demand for holistic advice, a hyper-competitive environment and the growing availability of third-party specialists. We anticipate that most MFOs will be working hard to bring a wider array of expertise to their affluent customers and will opt to do so through strategic outsourcing.
There are two principal reasons MFOs will make considerable use of external experts to supplement their offerings. The first is viability: As these boutique firms seek to deliver high-caliber, state-of-the-art solutions, it’s often unmanageable or impossible to have the full range of best-in-class professionals in-house. The second reason is cost: The very best experts typically have the highest price tags and many specialty services are only needed for certain clients and may not be required for months or years at a time. Strategic outsourcing is a cost-effective and flexible way for an MFO to expand its capabilities.
With viability and cost in mind, intelligent MFOs are assembling and orchestrating the best solutions for their wealthy clients while allowing themselves to quickly add new capabilities as different client needs or new prospects emerge. In effect, they are:
1. Identifying and concentrating on their core capabilities.
2. Strategically outsourcing non-core capabilities.
3. Maintaining diligent oversight on those providers delivering the non-core capabilities.
The following equation can be helpful in determining which services can be outsourced and which should be developed in-house.
(Frequency + Criticality) – (Cost + Exclusivity) = Determination
• Frequency is the expected amount of usage by both clients and employees.
• Criticality is the importance of the expertise to the multifamily office, its relationships and reputation.
• Cost is the expense differential between an internal deliverable and an outsourced solution.
• Exclusivity is the degree of proprietary access required by the MFO and its clients.
Outsourcing must be done carefully and thoughtfully in order to preserve the cornerstone business and relationships while enhancing the offering in a way that appeals to existing and prospective affluent clients. In many circles, the term multifamily office is synonymous with comprehensive, holistic advice and strategic outsourcing is a method that all providers can use to find and assemble the desired combination of services and expertise.
