Multi-Family Offices: The Crown Jewels of the Planning World

The mammoth 2,300-page financial reform bill that President Obama signed into law last month brought into focus a segment of the advisory world to which life insurance and financial service professionals catering to the well-to-do increasingly aspire: multi-family offices (MFOs).

For the uninitiated, multi-family offices are essentially one-stop shops for the ultra-affluent. Serving typically high net worth families boasting a net worth of $50 million and up, MFOs provide a range of services, the core of which are financial and advanced planning, including investment advising, asset protection, plus insurance and estate planning. The offerings extend also to administrative services (bill-paying, tax return preparation, bookkeeping and data aggregation) and lifestyle services (philanthropic advising, family education and governance, luxury acquisition, concierge services, property management, healthcare planning, and so on).

Often an MFO will start as a single family office (SFO) and merge with another SFO. In other cases, a wealth management team will add non-financial services to its portfolio and rebrand itself as an MFO. Or a large financial institution, such as a bank or brokerage house, will set up an MFO division or subsidiary.

In the U.S., many MFOs are registered investment advisors (RIAs), but some are trust companies, accounting firms or law firms.

The wide-ranging solutions that MFOs provide–and the fees to be garnered from them–are fueling rising interest among advisors in this market niche. The percentage of investment advisory firms wanting to become an MFO grew to 71.3% in 2008 from 48.1% in 2004, according to a 2009 survey by the professional services firm Rothstein Kass, New York.

The four top motivations cited by the surveyed firms for becoming an MFO included “do a better job for families” (94.2%), “be more profitable” (85.9%), “be more competitive” (78.7%) and “attract wealthier clients” (69.1%). (See charts.)

The now-passed Dodd-Frank Wall Street Reform and Consumer Protection Act is likely to contribute to the growth of MFOs, sources suggest. The reason: New Securities and Exchange Commission (SEC) rules mandated by the legislation may force some SFOs that previously were exempt from federal oversight to register with the SEC as investment advisors. That would drive up SFOs’ compliance costs, prompting some to merge with other SFOs to generate the economies of scale needed to operate efficiently and competitively.

But MFOs that are already SEC-registered will also see their compliance costs go up, say experts. The financial reform legislation imposes substantial record-keeping and reporting requirements on managers of private client funds, such as hedge funds. The new law also will subject MFOs, like other RIAs, to enhanced SEC scrutiny and audits.

A report on the Dodd-Frank Act published last month by the law firm Davis Polk and Wardell LLP, New York, predicts the changes effected by the act will lead certain investments advisors to decline to manage assets of U.S. clients. Others that retain investment advice as a core service may need to revisit workflow procedures affected by the law.

“If you’re an MFO, then you’re held to a fiduciary standard of care, and you probably have custody of client money, all of which points to more disclosure,” says Jon Persson, a certified financial planner and principal of Geller Family Office Services, New York. “This is costly. Beyond the added expense, MFOs will need to address potential conflicts, which will not be easy for a lot of people.”

The more client assets the MFO controls, the greater potential for conflict in the relationship, adds Persson. Generally, MFOs charge a fee for investment advice, the fee constituting a percentage (measured in basis points) of assets under management or under advisement (if managed by an outside firm). But depending on its fee structure, a firm may be tempted to direct a client to give it greater control of assets, shift investments from cash or fixed income vehicles to equities or share assets-under-management (AUM) fees with an outside money manager–all for no other than reason than to boost revenue.

The potential for conflicts of interest is all the greater if the MFO also secures a commission on sales, such as for life, disability income or long term care products, observers say. That’s why many MFOs restrict their revenue to fees for services and outsource sales to an affiliated broker.

“MFOs should serve as independent advocates for families and not sell products,” insists Bill Richards, a certified financial planner and founding principal of BNR Partners L.L.C., Chicago, Ill. “If you’re selling product, clients won’t see you as completely independent and acting in their best interest. If a family is paying you to do something and you’re also getting paid by an insurer, this is a conflict.”

Leslie Voth, president of Pitcairn Financial Group, Philadelphia, Pa., echoes Richards’s comments, adding that life insurance and financial service professionals who are considering setting up or joining an MFO need to determine whether their existing compensation–be it commission alone or commission plus fees–is well-suited to an MFO model.