The single family office is the gold standard in the wealth management industry. It was invented by the wealthiest families in America beginning with prominent names like Rockefeller and Morgan. It continues to be the most sought-after structure as each family has ultimate control over who they hire, what services they provide, where they are located, and how it is run. Many family offices include family members within the leadership teams to ensure their interests are represented directly. Although most wealthy families would like to have a dedicated group of advisors serving their family exclusively, the cost of execution is too high. Costs can easily exceed $2-3 million on an annual basis when running a full-service single family office. This has led to a movement toward a multi-family office, which operates similarly to a single family office but has extended to a select number of additional families in order to share some of the costs. In deciding which type of family office is best suited to one’s needs, there’s more to be considered than just costs and processes.
The Origin of Multi-Family Offices
Given the increase in client demand, there has been an influx of new multi-family offices, particularly over the last 10-15 years. But not all multi-family offices are created equal. One underappreciated point of consideration in selecting a multi-family office is its origin. Most multi-family offices began as either a single family office or as an advisor team within a larger financial institution. Clients are likely to have a different experience with multi-family offices in each of these groups. Accordingly, before signing on with a multi-family office, clients may benefit from taking an in-depth look at the areas where the multi-family office is still growing or that were not part of its original foundation/core strengths. Particularly if these firms have only operated as a multi-family office within the last 5 years.
From Single Family Office to Multi-Family Office
Multi-family offices that started as a single family offices are largely shaped by the needs of one family. As the firms broaden out their offering to entertain new families they need to address areas that were not previously relevant like client pricing, business development, client onboarding, and scale. So what might you experience or where should you potentially direct questions?
Let’s start with the recruiting or sales process when meeting a former single family office. The original single family office would have hand-selected their key employees based on what they valued most. These employees never had to consider competing with other firms for their business. Therefore, they often don’t have polished sales materials or a well-defined client onboarding process. For that matter, they likely would not have had a member of their original team with any significant sales background. Most firms pivoting from a single family office to a multi-family office will begin by hiring a new team member to spearhead the business development process. This person would take ownership of building out sales materials/pitch decks, building out an onboarding process, and establishing a preliminary level of client pricing that is easy to understand.
Finally, these firms may not be quite as far along with technology for client communication. This may be referred to as scale as there would have been no expectation of adding multiple families to the structure over time, which likely caused them to add on new technologies related to the expansion. They need to find ways to produce and distribute client reports, send and receive communications within a secure client portal, and execute capital calls, amongst other activities across multiple families. Proper execution of these tasks, by using technology instead of headcount, will help them maintain competitive costs and allow for more consistent client fees.
The financial advisor turned family office professional
On the other side of the spectrum, multi-family offices that originated inside a large financial institution typically have different strengths and weaknesses. Rather than struggling with scaling to meet the needs of various families, they are working to consolidate their client relationships and build out boutique services. Traditionally these advisors started out in a sales-oriented environment that rewards growth both of client assets, and the number of client relationships. Because of this, these teams are very well equipped at the sales part of the business and have structured their team to provide ample scale within the business. They should have a very well-defined fee structure for clients to understand as well as a streamlined client onboarding process. The largest challenge for these firms is reducing the number of families they serve. Within the larger financial institutions, there is a widely held belief that 80% of revenue generated by advisors only comes from 20% of their clients. Advisors are incentivised, in a lot of cases, to keep smaller clients and they are supported by the institution in that there is a menu of products and services they can deploy in mass. The advisor team would not necessarily need to have an expert on their team for all client issues as they are able to leverage the broader resources of the firm.
With this in mind, the advisors are migrating to a multi-family office structure where they will focus exclusively on the 20% of their clients and begin investing in boutique services related to the needs of those families. These investments may include new staff, investment research, and new technologies, amongst others. They have likely never had the distinct choice to control their own P&L, have full hiring control, and consider products or services that were available outside of their previous organisation. Therefore, it is important to understand where recent investments in the firm were directed, learn about recently added team members, and what services are provided in-house Vs 3rd party, amongst others.
Understanding the origin of a multi-family office will provide a lot of insights into what to expect. As the multi-family office world continues to gain momentum, firms will accelerate their evolution toward a fully mature office capable of delivering a unique set of services to a small set of clients. As newer entrants to the multi-family office space continue to increase, clients are well served by having a better understanding of where they started.