The oldest dated attribution to the establishment of family offices dates back to the 6th Century royal families, which later raised its head in modern form and credited to the Rockefellers or the family of J.P. Morgan. Since then, some single-family offices (SFOs) have evolved into multi-family offices (MFOs). The first of these that could be considered a ‘modern MFO’ was the Bessemer Trust, which opened its doors to external capital half a century ago.
Subsequently, we have seen the emergence of a multitude of MFO offerings as investment advisors have conceived tax planning; private banks have developed impact and philanthropic initiatives for clients; and wealth managers offer have proposed softer services to lure in the next band of clients. We are often asked whether a SFO or MFO is the right solution for a family; unfortunately, the answer is not that simple. As every family is unique, the best solution for their needs is unique. The diversity of the MFO space means that there will likely be a company offering the services you require but that does not mean it is the right solution. The purpose of this article is to examine some of the reasons for the growth in MFOs, including the consolidation in the industry and what this means for you as a client. Understanding these dynamics should help in the evaluation of your options for managing your family office.
A good starting point came from our first Family Office Solutions session entitled ‘How to review a family office’, where Gordon Pollock identified at least seven distinct areas of focus that could fall under the umbrella of a ‘family office’ ranging from concierge and travel to investment and fiduciary. Many of these areas are becoming ever more complex and expensive, therefore the benefits of an MFO seem obvious; namely, that by sharing the costs you will have access to these services when you need them whilst ensuring that these services are of higher quality as, in theory, an MFO employs the best systems and attracts the best talent. Importantly the MFO structure should also ensure that these professionals remain at the top of their game; it can be all too easy for professionals in the insulated environment of a SFO to ossify.
However, with the MFO you are relinquishing far more control than when using a SFO with you becoming the ‘client’ rather than the ‘boss’. This does not necessarily mean you will not receive the service you need but it can lead to a divergence in incentives. The clearest example of this is those MFOs offering investment management services, the majority of which operate a fee model based on a percentage of assets under management (AUM). In this case the clear incentive of the MFO is to increase their AUM and the huge increase in compliance costs pushes firms towards the ‘consensus middle ground’. As such there is increasing homogenisation of investment offerings, both across the industry as a whole and among individual client portfolios within an individual firm. In theory this should result in reduced investment costs for the client which is often the biggest handbrake to mainstream investment returns. However, some require, and pay for, bespoke investment management but receive nothing of the sort.
It can be assumed that the economies of scale of the MFO should be able to significantly reduce administration costs but the relentless improvement of technology means
that this is not necessarily the case. Building a bespoke operating system, as many MFOs have done, may meet their requirements in the short term but are very expensive and can quickly become obsolete. Our second Family Office Solutions forum showcased a variety of back-office systems which a family office could use to improve the efficiency of the administration and governance of their often-disparate interests. Not only are these very flexible in adapting to different requirements; they are also vastly less expensive than a system built from scratch.
As with so much in life it comes down to the people who are working for you – whether in a SFO or MFO structure. Finding the right talent should therefore be key to the MFO but is not easy. The obvious starting point for hiring is the wealth managers and private banks but deferred compensation packages mean that enticing the most successful of these individuals can be very expensive. As such, those MFO’s looking for asset growth are looking to M&A and this has led to significant consolidation in the space.
Understanding the underlying dynamics and incentives of those working for you, either in a SFO or MFO, is key to getting the right solution for your family. One of the biggest criticisms of the SFO is that they are expensive and miss out on the opportunities from others in the industry as they become insulated. Learning from other family offices, from using back-office systems to exploring co-investment opportunities, can negate a lot of this criticism.
