A Simple guide to multi-family offices
OperationsUpdated on May 2, 2023
Table of Contents
Super-affluent families naturally look to a family office to manage the complex task of intergenerational wealth preservation. Traditionally, single-family offices have been the most popular option because of the autonomy, privacy and personal attention that they provide. However, multi-family offices are becoming an increasingly attractive option to family owners. With superior levels of professionalism, expertise and specialisation, multi-family offices are offering far more than just a cost-saving.
In this guide, we’re taking a high-level view of the different types of family offices, and then drilling a bit deeper into the multi-family office space and providing some food for thought when assessing the attractiveness of this option.
The progression from family business to family office
Over time, families and businesses grow together. Family structures become more complex and multi-layered and new generations come into the mix. Established business structures and resources are then leveraged to support the administration and management of diverse family interests outside of the business. Inevitably, an embedded family office is formed in the process and the resource balancing act between business and family becomes an increasingly tricky challenge.
While it may be extremely cost-effective to leverage the current skills and expertise residing within the core business operation, the complexity of managing significant wealth and the personal demands of a growing family can become a liability to the business. This is usually when family owners start to look for alternative options to manage the ever-increasing demands of the family itself. The formation of a family office is the logical next step.
The different types of family offices
The decision on family office format is an important one from a cost and functionality perspective. Wealthy families need to consider the services required, their wealth status, the complexity of the family structure and the key rationale behind establishing a family office in the first place. Typically, the choice is between creating a single-family office or joining a multi-family office. However, in recent times, the virtual family office has also become more popular.
A single-family office (SFO) is a private entity created to exclusively serve the needs of a single family. The financial capital managed by the single-family office is the family’s own wealth. The single-family office is normally responsible for financial management services including investments, fiduciary trusts and estate management. More often than not, it offers a range of additional services which may include legal and tax support, property and household management, travel services and event management. Whilst this set-up provides a high level of privacy, confidentiality as well as customised and personalised services, it is the most costly family office option.
A multi-family office (MFO) is a good option for affluent families with less complex requirements and who are looking for a more cost-effective alternative to an SFO. An MFO is a business that primarily provides wealth management services to a group of affluent families. Many of these family offices were originally founded by a single family and have since opened their doors to other affluent families in order to share operating expenses and expand buying power and influence. However, private banks and investment firms have also become increasingly active in this space, now offering dedicated in-house family office teams. Most MFOs are commercial entities, selling their services to families and earning management fees in the process. With this structure, a family loses the personal touch—and with all assets under one umbrella—also loses the control and independence that they would enjoy with an SFO set-up. However, cost efficiency is usually a key deciding factor when choosing this format. There are also many other factors to consider when assessing the MFO route which will be further expanded upon in this guide.
The virtual family office (VFO) has become increasingly popular for families that are spread across geographies and require a less complex array of services. With family office technologies becoming more advanced and secure, VFOs represent a cost-effective option for receiving remote on-demand services.
Emerging trends impacting the multi-family office space
It is expected that the MFO concept will become more popular with time. Already we are seeing signs of a wealth shift into this space, driven mainly by the emergence of new wealth and the increased levels of specialisation offered by MFOs.
Private wealth has boomed over the last decade driven mainly by the fortunes made in the tech industry. Successful tech entrepreneurs are turning to family offices to manage and invest their newfound wealth. These modern entrepreneurs tend to have an innovative and global mindset when it comes to investing, often requiring the services of an MFO that is geared towards managing complex investments across multiple geographies.
To cater for the unique needs of the modern wealth owner, MFOs are becoming increasingly niche in their focus, offering custom services and specialised knowledge in very specific areas. As such, they are differentiating themselves by becoming industry experts and trusted advisors for investors with a specific wealth agenda.
The rise of the multi-family office
SFOs remain the most popular family office vehicle for ultra-affluent families. This is mainly due to the autonomy, control and personalised attention that an SFO provides. However, MFOs are significantly cheaper to run and normally have superior systems and structures in place to ensure good governance and continuity. With the emergence of new wealth, MFOs are expected to ride a wave of growth into the future.
How to choose the right type of family office
Traditionally, the choice of family office format has been determined by assets under management versus the cost involved in running a family office. Therefore, the implication is that an SFO is the superior option – but only feasible if you can afford it. This may be true in many cases, but there are many variables to consider when stacking up the pros and cons of an MFO. Also, certain trends reshaping the global wealth and business landscape are expected to influence the popularity of MFOs going forward.
Below are some key considerations that could assist in making a more objective and informed decision:
Continuity and talent management
MFOs generally take a long-term view when it comes to the management of their internal teams. This may be a byproduct of managing multiple clients or having a more established structure, but the point is that they are more likely to have the systems and protocols in place to ensure continuity when there are personnel or business disruptions. SFOs often experience significant impacts when key personnel become unavailable or redundant. On the topic of personnel, having the right skills and experience is crucial for a successful family office. Larger organisations that offer diverse career opportunities, personal development and greater visibility can sometimes have an advantage over SFOs when it comes to attracting the right people.
Internal controls and governance
Diligence and governance processes are essential to safeguard family wealth and ensure sound decision-making, transparency and continuity. MFOs often enjoy a distinct advantage here as they are more likely to have strong internal controls in place to avoid misappropriation of funds. The familiarity between the staff of an SFO and the general close connection between these members and the family itself can often raise the risk of compromising certain controls and governance processes. However, it would not be wise to assume that all MFOs are superior in governance, which is why thorough due diligence is always required when selecting the right MFO.
Confidentiality and data security
One of the biggest reasons families opt for an SFO is the priority placed on privacy. While it is logical to assume that SFOs have the advantage in this area—especially when run by a competent and trusted team of professionals—often insufficient operational and data security and oversight can result in security breaches. An MFO generally boasts superior systems and infrastructure that help to safeguard sensitive information. When it comes to confidentiality, both a single and multi-family office should sign the appropriate agreements to protect family information.
Without a doubt, a multi-family office does not offer the same level of independence as a single-family office. However, the flip side of this is often a lack of objectivity, as investment decisions are more likely to be influenced by family members and associates who are not necessarily qualified to do so. This can negatively impact performance and conflicts can arise. However, not all MFOs are completely objective. There are often cases of a core family wielding too much influence over decisions made on behalf of many families.
Increased buying power and experience
By combining the wealth and experience of multiple families, an MFO enjoys greater negotiation power and a greater capacity to secure investment deals that would not otherwise be possible without pooled resources. This diversity of experience and exposure to broader internal and external business ecosystems enables MFOs to keep up with current trends and best practices and encourages innovation.
An MFO provides superior economies of scale and is far more cost-effective. A family office is costly to set up and the administrative overheads are high. However, when these overheads are shared across multiple families, these costs are significantly reduced.
Autonomy and control
MFOs cannot compete with the autonomy, control and freedoms which SFOs provide families. Not being constrained by regulatory controls, having the freedom to dictate who is hired and determine how the family office operates and invests are some of the reasons very affluent families choose to go the SFO route. However, with autonomy comes responsibility and families must be prepared to take a more hands-on approach to oversee another entity on top of their core business operations.
Alignment of purpose
Many families see the establishment of a family office as a vehicle to preserve the identity and values of the family across generations. If this is a core priority, then an MFO may not be the best solution as it cannot be expected to align all decisions and actions to the agreed mission and constitution of a single family.
What is a multi-family office?
A multi-family office is a business that provides wealth management services to a group of families. Often, they were originally founded by a single family but expanded to other affluent families in order to share operating expenses and expand buying power and influence.
What is the difference between a family owned multi-family office and commercial multi-family office?
Both are companies that manage the financial interests of a group of wealthy families. The former is owned by one or more of the founding families and the latter is an investment firm owned by a third party.
What are the types of family offices?
There are three types of family offices. Single family offices manage the personal and financial affairs of one family. Multi-family offices serve a group of affluent families. Lastly, virtual family offices work remotely with families with less complex needs.
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