Multi-family office

A multi-family office (MFO) is usually an independent organization that supports multiple families to manage their entire wealth.

Definition

Multi-family offices typically provide a variety of services including tax and estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, coordination of professionals, investment advice, and foundation management. Some multi-family offices are also known to offer personal services such as managing household staff and making travel arrangements. Because the customized services offered by a multi-family office can be costly, clients of a multi-family office typically have a net worth in excess of $50 million.^[1]

A multi-family office (MFO) is a commercial enterprise established to meet the investment, estate planning and, in some cases, the lifestyle and tax service needs of affluent families.

MFOs can be created in one of three ways:

• a single family office opens its doors to additional clients or merges with another single family office
• as a start up by a team of advisors (typically with some combination of investment, tax and or legal professional credentials)
• an existing financial institution (most often a bank or brokerage firm) creates an MFO subsidiary or division.

In the United States, many MFOs are registered investment advisors, some are trust companies and a handful are accounting or law firms.

History

The family office concept has its roots back in the 6th century. Then a majordomo was a person who would speak, make arrangements, or take charge for the affairs of the royal family and its wealth. Later in the 6th century, the upper nobility started to use these services of the majordomo as well. Hence, the concept of administrator ship was invented and has prevailed until today.

The modern concept and understanding of family offices was developed in the 19th century. In 1838, the family of J.P. Morgan founded the House of Morgan, which managed the families’ assets and in 1882, the Rockefellers founded their family office, which prevailed until today.

Many family offices have started their business as so called single family offices, where the family owns the family office and serves only the owner family. Instead of covering the entire operative costs, many owners of single family offices decided to offer its services to other families as well. This concept is called multi-family office or multi-client family office. Only a few multi-family offices have founded their business independently, without a large family backing it.^[2]

In addition, the development of the multi-family office came as a result of the growing number of wealthy families, as well as the rapid developments in technology within the financial markets which required greater sophistication and skill in financial advisors in the 1980s and 1990s. The difficulty in attracting and retaining such talented employees became more difficult. These changes, combined with the consolidation of the financial services industry, significantly diminished the role of the bank trust departments that traditionally served the wealthy families. These trends resulted in an increased need and cost for family office-type services. To defray such costs many families opened their family offices to non-family members, resulting in multi-family offices.^[3]

Characteristics

MFOs tend to have the following characteristics:

Independence: MFOs typically do not sell (traditional products that a family might typically encounter from a brokerage firm) and generally are not compensated for the products utilized by clients. MFOs usually follow a “service delivery model” holding themselves out as an objective provider of advice that places the interests of their clients first.^[4]

Breadth and Integration of Services: MFOs provide a wide array of services and typically oversee their clients’ entire financial universe. MFOs will have full information about their clients investments, tax situation, estate plan and family dynamics. With this information the MFO can assist in structuring and administering the clients’ financial universe in an optimal fashion.

Professionals with Diverse Skills and Deep Specialties: MFO professionals provide a wide array of advice and assistance to their clients. MFOs also have to be able to provide specialty knowledge on certain topics such as: income taxation, estate planning, and investments.

High Touch Services: MFOs have high average account sizes (usually in the tens of millions) and low client to employee ratios (around 3 to 1 range). Large account sizes combined with low client-to-employee ratios allows a great deal of focus and attention on each client family. Meetings with clients often occur many times a year.

Multi-Generational Planning: MFOs typically work with an entire family – the patriarch/matriarch, their children and grandchildren. Planning encompasses the family’s goals which typically includes passing wealth down to lower generations in a tax efficient manner. Children and grandchildren are clients and are counseled on investments, taxes, estate planning, and philanthropy from an early age. MFOs often coordinate and moderate family meetings for their client families.

Outsourcing: MFOs do not typically provide all services in-house. It is common for some of the investment management to be outsourced to independent money managers. Custody and tax return preparation are also commonly outsourced.

Focus on Taxable Investor: Most MFOs have a myopic focus on taxable investors as the bulk of their client's assets are subject to short and long term capital gains. This is unique to very high-net-worth families. Most investment research (academic and financial service industry) is geared toward the institutional investor and foundations (with very different tax concerns than individuals and families). The bulk of the research done for the individual investor relates to 401ks and IRAs.

Benefits

MFOs may have one or more of the following benefits:

• Objective financial advice ^[5]
• Creative solutions to financial issues ^[5]
• Clearinghouse for financial, investment, tax and estate planning ideas
• Cross-fertilization of ideas resulting from solving issues for multiple families
• Services are typically “all you can eat” for asset based fee or flat retainer fee
• Advice from professional team with diverse backgrounds
• Coordination of other advisers
• Proactive advice – a function of low client to employee ratio and frequency of meetings
• Delivery of “best of breed” money managers, custody, insurance, loans, etc.
• Negotiated cost savings with other financial providers (e.g. investment management, custody, trading costs)
• Integration of client’s estate planning, income taxes, investments, philanthropic goals and family situation

Modern family offices

Modern family offices are typically separated into three classes:^[6]

Class A Family Offices are operated by an independent company that receives direct oversight from a family trustee or administrator. A typical Class A family office:

• Offers comprehensive financial oversight of all liquid financial assets.
• Offers daily management of all illiquid assets, such as real estate.
• Can administer and manage the entire estate with little to no supervision.
• Charges a flat monthly fee for all family office services.
• Offers advice free from conflicts of interest and will not sell products.
• Offers a comprehensive monthly report of all estate activity for no additional fee.

Class B Family Offices are operated by a bank, law firm, or accountant firm. A typical Class B family office:

• Offers investment advice for a fee.
• Can offer products and services outside the scope of a family office.
• Does not directly manage or administer illiquid assets in the estate.

Class C Family Offices are operated by the family with the assistance of a small support staff. A typical Class C family office:

• Has a staff that will monitor the estate and report into the family trustee with any irregularities.
• Provides basic administrative functions, such as bookkeeping and mail sorting.
• May have an office inside a family member's home.

Origin of Multi-Family Offices

Most MFOs tend to focus on only one or a limited number of services, which are often closely related to the background of the founders:^[7]

• Former wealth managers. This type of MFO focuses primarily on asset management, asset allocation, consolidated reporting, risk management and managing relationships with banks. These MFOs are often established by a small number of former bankers. Recently, smaller private banks have been repositioning themselves as MFOs.
• Law firms or lawyers. Generally, these MFOs focus on estate planning, succession planning, family governance and legal issues. Their services are often also related to the family business structure. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is handled in-house.
• Tax consultants, tax lawyers or accountancy firms. These MFOs focus on tax-efficient structuring; establishing and managing international structures for family businesses and real estate; international relocation; estate and succession planning; and audit and administration. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is handled in-house.
• Private banks or MFOs owned by private banks. These MFOs focus on asset allocation and asset management.
• Trust providers or trustees. These MFOs focus primarily on setting up and administering structures such as trusts, foundations and holding companies; and audit and administrative services. Some of these MFOs also focus on issues related to yachts and aircraft. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is handled in-house.
• An SFO opening up to other clients. This is a difficult category to define, as the services offered are often closely related to the original needs of the founder family. Most have a focus on asset management, consolidated reporting and risk management, combined with a limited number of other activities, such as real estate or private equity investments.
• Others. This small but broad category includes MFOs founded by real estate or private equity experts, former investment bankers, or people with a focus on lifestyle management.

Typical services provided

Chart of family office services

• Trustee Services
• Coordination of Professionals
• Cash Management
• Global Asset Allocation and Investment Strategy Consulting
• Comprehensive Performance Reporting
• Investment Manager Selection and Monitoring
• Portfolio Management
• Estate Planning
• Philanthropic Planning
• Life Insurance Analysis
• Debt Structure and Analysis – Bank Financing
• Tax Return Preparation
• Foundation Management
• Entity Administration (FLPs, CLTs, CRTs, Installment Sales, etc.)
• Aircraft Consulting
• Risk Management & Asset Protection Consulting
• Fraud Detection/Accountability
• Real Estate Management
• Family Business Advisory
• Family Counseling/Family Meetings^[8]
• Sufficiency and Retirement Planning
• Document Management and Recordkeeping
• Bill Payment Services
• Personal Financial Statement Preparation

Miscellaneous

• The industry grew to $170 billion of assets under management in 2003, a 17% increase over the prior year; in 2004, the increase was 26.6%.^[9]

Notable family offices

Stonehage Fleming, $43bn in assets under administration, including $11bn in assets under management and total revenues of about $160m, serving over 250 wealthy families (2014).^[10]

See also

• Family office
• Private foundation
• Investment management

References

• Sara Hamilton, “The Multi-Family Office Mania”, Trusts & Estates, November 2002^[11]
• WebCPA, "Family Offices Come Downtown", March 2002^[1]
• Further explanations about services offered by family offices, July 2012^[12]

Notes