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Evaluating a Multi-Family Office

Multi-Family Offices are more and more common. Are they right for you?

The family office, a product of the early twentieth century, is rapidly evolving in response to a number of factors: the turmoil from the recent consolidation and personnel changes in financial services firms, a heightened sense of the need for improved risk management and objectiv­ity and the high cost of attracting and retaining the professional talent needed today to advise and serve family members on a wide range of issues.

Just a couple of decades ago a fortune of $50 million was more than sufficient to justify directly employing a staff of accountants and in­vestment managers to keep track of the family finances, including the holdings of various trusts and foundations. Today, the “break even” point is closer to $250 million and climbing. Hence, many former single-family offices have grown into multi-family offices (“MFOs”), offering unrelated families the ability to share a CFO, CIO, tax professionals, and experienced administrative staff as well as valuable intellectual and technology resources.

In many ways it has parallels to the emergence of fractional jet ownership as high net worth individuals ask, “Given my needs, would I rather own all of a single engine plane or a share of a private jet? And, would I like to pay someone else to worry about hiring the peo­ple to fly it and care for it, handle security, do the safety checks, update the insurance and all the other hassles of maintaining a group of personal employees?” Similarly, contracting for a “share” of the staff at an established MFO often can securely provide access to talent, processes, intellectual capital and sys­tems that simply cannot be justified at lower asset levels.

Defining the Multifamily Office

Currently, there is no agreed upon definition for an MFO. Recent surveys of the field have listed some typical characteris­tics:

  • A broad range of services
  • A high level of personal attention
  • The ability to put today’s decisions in the context of their impact on the next generation rather than on the next quarter.

Services can include those of a typical wealth management firm – financial, estate and tax planning, investment consult­ing and manager selection – along with those of the traditional family office – bill paying, financial reporting, tax compliance, trust monitoring, charitable consulting, family counseling, and concierge services. Editor’s note: you can see a good video interview on Family Wealth and the Role of Family Offices here.

Meeting Client Needs

Clients may consider using some or all of the services of an MFO when there is a change in their lives or in the lives of their key advisors and they:

  • Need to manage their cash more effectively
  • Need to be sure funds are available even in difficult times
  • Want to avoid wading through the often confusing and conflicting information provided by bankers, brokers and other advisors
  • Want the financial information they receive consol­idated and organized differently to better manage investment decisions, or
  • Need objective, professional advice to decide what will best fit into their current asset allocations or estate plans.

Whatever their needs, clients want it done securely, compe­tently and conveniently with people they trust.

The Financial Management Component of MFOs

In order to effectively handle finances, clients will be en­trusting all their personal data to an organization they don’t know well. In addition, they will be asked to sign a number of complex forms giving the MFO they choose various levels of authority over the movement of their money and securi­ties. “Trust me” will not usually be enough to assuage their discomfort under these circumstances. Critical inquiry, care­fully verified is a necessary first step. In our experience, that inquiry falls into five broad areas:

  • What services will the MFO provide?
  • Who are the entities and/or people who will provide those services?
  • Does the firm have clients whose profiles and issues match my clients’?
  • How does the firm protect its clients’ privacy?
  • What are the conflicts of interest in its advice?

The scope of services available can range from simple cash management and bill paying to intensive family counseling on values and mission statements. Clearly outlining all the services to be provided, in writing, will avoid confusion later in the engagement. Full disclosure of any services to be provided by third parties should be part of that written initial communi­cation.

The people providing these services are often the most criti­cal factor in client satisfaction. Meeting the people who are marketing the MFO is not enough – you want to know the people who will be involved in the day-to-day handling of your finances, their experience and how much capacity they have to take on additional clients. For those services that are outsourced, you should understand the reasons for outsourc­ing and what criteria were used in selecting those third party providers. You also need to inquire about the firm itself. Its ethics, size, longevity and financial strength are prerequisites to attracting and retaining the kind of talent that will meet clients’ growing needs over time.

Even if people are talented and motivated, if they are work­ing on an unfamiliar issue they may be less cost-efficient. That is one reason clients want to know that their MFO is working for “people like us”. For example, if the efficient use of a family limited partnership is an option they want to consider, it would be important to know that the firm has already been through that analysis with at least one other client. Beyond that, clients want to know that they are neither the firm’s wealthiest nor its poorest client. If they are too big, they worry they will not be able to have all their issues addressed competently; if too small, that they will not be important enough to command attention.

A critical measure of an MFO is the passion with which it guards its clients’ privacy. This can be reflected in the back­ground checks that are part of its hiring process, confidentiality agreements required of employees, the lengths to which it goes in limiting access to personal data among its staff, the security it has employed on computer networks including encryp­tion of all personal data on servers, its policies on disposal of information and the procedures it has in place for storing data electronically rather than on paper. It is also reflected in the confidentiality agreements it has with third parties to whom it outsources and the due diligence it performed in selecting those providers.

Finally, to the extent an MFO is providing advice, clients want it to be objective. Full disclosure of all the MFO’s sources of revenue is a starting point. You need to know how that may result in potential conflicts of interest and how those conflicts are disclosed and managed. Also, to the extent the MFO will be privy to a client’s planned securities transactions; you should examine the procedures it uses to monitor its employees’ trades to avoid even the appear­ance of potential profit from that information.

The Investment Component

In addition to keeping track of finances, many of today’s MFOs will provide investment ad­vice often coupled with an “open architecture” involving access to unaffiliated managers. If investments are among your concerns, you will want to understand the MFO’s investment process, manager selection resources, and potential conflicts of interest. The firm’s Investment Adviser Registration Form ADV usually ad­dresses these issues in rather broad terms. Issues you should explore more deeply include:

  • Is there a written investment process? Is it consis­tently applied to all clients?
  • What does a typical Investment Policy Statement look like?
  • Who are the individuals responsible for personalized strategic asset allocation and risk evaluation? What are their credentials and experience? What resourc­es are available to support their work?
  • How do they help choose managers and/or evaluate outside consultants for this role?
  • What role do alternative investments play in their process? What access does the firm have to private equity, hedge funds, etc.?
  • How is investment performance monitored and communicated? What does a typical statement look like?
  • Can you receive independent confirmation of transactions and balances? Will the firm work with custodians you choose? Are any client funds co-mingled?
  • What is the fee structure and how does it impact the firm’s objectivity? For example, if fees are based on a percent of assets under management, would you be advised to pay off a mortgage or use passive investments for a portion of the portfolio, thereby reducing its fee?
  • Does the firm endorse the Prudent Investment Practice Standards published by the Foundation for Fiduciary Studies?

Looking Forward

Beginning a relationship with an MFO (or changing one) represents a significant expenditure of time and emotional commitment, along with a not insignificant monetary cost. It is important to get it right. Increasing your confidence in your choice through objective standards can supplement your sense that the “chemistry” of the people with whom you will be working will last a long time.

For additional information on this topic, Geller Family Office Services has been kind enough to make Susan Sofronas available for questions at 212-583-6001 or ssofronas@gellerco.com.

 

 

About Geller & Company

Geller & Company serves two distinct types of clients; individuals and families who are private wealth owners, and business owners and senior management who are responsible for the financial affairs of a company.

For wealth owners, we provide integrated wealth management services that help turn your financial success into enduring personal wealth. We focus on a wide range of needs that wealth owners have in the areas of investments, tax, philanthropy, estate planning and cash management. For business owners and senior management, we are an outsourced partner for all financial strategies, planning, accounting and reporting functions of the organization. We help increase shareholder value and manage the complexity of running the financial operations that support large companies.

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