Years ago as the Rockefellers, Carnegies, Pitcairns and others created their fortunes, they hired investment, tax, and legal experts to coordinate the financial affairs of their families. In some cases, these experts left their practices to focus exclusively on the unique and specialized needs of the individual family, forming what became known as a family office.
As more people earned their fortunes, this became an increasingly popular method of accessing and coordinating expertise to manage a family’s financial life, while also assisting with numerous more personal needs such as philanthropy, family succession, hiring and managing the household staff and paying bills. Over time, some of these single family offices (SFOs) began offering their services to others, often friends of the family, and the multifamily office (MFO) concept was born.
Today, as banks, brokerage houses, financial planners, and other professional advisors strive to more fully capture the ultra affluent client, the MFO has become the preferred business model. For some, this may seem a natural evolution since many have added financial and estate planning, wealth management, investment consulting, and assorted other personal services to their offerings.
These providers range from large organizations offering most services in-house to one-person “virtual” MFOs acting as a family COO/CFO and outsourcing most everything beyond the overall planning. This can include the setting of specific financial and family goals, the identification and coordination of services and the selection and monitoring of “best of class” advisors.
A common example of outsourcing exists in the life insurance arena. SFOs and MFOs rarely have internal staff to advise on sophisticated life insurance funding strategies. A question commonly asked is, “Why and how do ultra affluent families employ life insurance in their estate plans?” The chart below represents a sampling of insurance uses for families of multi-generational wealth.
From the family’s perspective, the family office model not only provides comprehensive, coordinated, and integrated planning and services, but also a single trusted advisor or entity to whom they can turn. In addition, an MFO can offer economies of scale for pricing of investments and other services.
This scale is critical, as an estimated $200-$300 million in liquid assets is required to qualify for an SFO, while MFOs can make sense for someone with as little as $25 million. An estimated 30,000 households have a net worth ranging from $20 million to $200 million.
The demand for this personalized service seems ripe as assets under management grew by 26% in 2005. According to the 2005 Bloomberg Wealth Manager, MFO studies have shown that this growth has been spurred not just by more clients but by wealthier clients.
Many financial services firms see the MFO model as a way to attract and retain ultra affluent clients over generations, making their assets “stickier” than traditional asset management models. But MFOs must create a service menu customized for the unique needs and desires of specific client families. This intensely personalized approach focuses on both the integration of financial services and the goals and interrelationships within the family itself.
While many organizations are claiming the MFO moniker as a way to attract clients and assets, many fall far short of providing the full range of services some expect from a true MFO. Tom Livergood, founder and CEO of The Family Wealth Alliance (FWA), a consulting firm that acts as a matchmaking service to help families find the best MFOs for their needs, has undertaken a project to create an MFO “standard,” defining the client families and services offered. (A list outlining the study’s findings and the 10 core offerings provided by “best of class” MFOs can be found at .)
In addition, the Family Office Exchange (FOX), which has traditionally focused on single family offices, has also recognized the increased emergence of MFOs. In an attempt to assist families in their due diligence of MFOs offerings, FOX created a list of questions that can be helpful in evaluating the services offered (see ).
Both FWA and FOX stress that the better MFOs provide objective advice, rather than being product driven. And they both agree the MFO is the platform through which ultra affluent families will access financial advice and services in the future.
Both single and multi-family offices offer a wide range of services focused on wealth management. This may include investment management and coordination, integrated financial, tax, and estate planning, record keeping and reporting. The services extend as well to risk identification and mitigation, management of other assets (including multiple homes, aircraft, art, etc.), family philanthropy, and coordination of the family itself (including family continuity and business succession).
Some also manage travel coordination and other personal concierge services ranging from bill paying to walking the dog. But to some high-end clients, the focus on management and education of the family is of greater importance than financial issues.
While some MFOs, particularly those focused primarily on investment management, tend to outsource, minimize, or even overlook the “softer” issues, many families view these as critical. The needs–development of a family mission statement; organizing annual family meetings and multi-generational educational sessions that focus on family values and the family legacy; and development of a family foundation and other activities–are as important to many families as the preservation of their financial wealth.
The coordination and management of both financial and soft issues are important to most families of significant wealth but may be especially useful for families who have sold a closely held business. In many of these situations, the CFO or other person on the corporate payroll may have provided financial services, and the family identity may be closely tied to the business.
The transition from a family with an operating business to that of a financial family can be a hazardous time, as they are bombarded with numerous investment and service providers. While many of these providers may be top-of-line, someone with both expertise and objectivity is needed to provide due diligence and guidance through a cumbersome and confusing process.
While the family members may have been successful in their former careers, many decisions they now face are highly technical. These decisions often require a specialized, trusted advisor who can greatly enhance their chance of a making successful transition, thereby preserving the family’s wealth and legacy.
From a life insurance advisor’s perspective, this can be a lucrative but expensive market to penetrate on a national scale. While developing relationships locally can be achieved through personal or professional contacts, membership and meeting attendance for the various national family office associations can be prohibitively expensive in both money and time.
Experience has shown it can take years to develop these families as clients, as evidenced by the numerous advisors who have attempted to enter this market only to disappear after a couple of years of generating no measurable or tangible results. These families and their key advisors want to see a serious long-term commitment to their market before they are willing to engage in lengthy discussions.
It is incumbent upon the insurance advisor to be as knowledgeable as the other advisors at the table. This requires ongoing education and research in the areas of wealth transfer, business succession and charitable planning, to name a few. Additionally, the insurance product offerings must be comprehensive.
Many SFOs and MFOs understand the difference between retail and institutionally priced life insurance. They are accustomed to purchasing unique products that are typically unavailable to most buyers. The good news is that life insurance is a much needed and used vehicle by many family offices.