Family Office
Is The MFO Market Worth The Effort?
The world of multi-family offices is not always well understood. Schwab recently issued a white paper examining the space and the forces driving it. We talk to a number of figures about the market, including those involved with the UHNW Institute.
Advisory firms eyeing the competitive but enticing multi-family office market face a dilemma: is the effort worth the gain?
Schwab Advisor Family Office’s recently-released white paper The Multi-Family Office of Tomorrow lays out a sober look at the multi-faceted and often mysterious market.
As discussed in part one of this story, the MFO market is asset-rich and fast-growing. The 101,000 ultra-high net worth US households clients with over $30 million in net worth are expected to control approximately $1.4 trillion in assets by 2025, an impressive 43 per cent jump from 2021.
RIAs providing multi-family office services had just under 7 per cent of this market, leaving these advisors with “a tremendous opportunity” to increase their share, according to Paul Ferguson, managing director for Schwab Advisor Family Office.
But the MFO market isn’t for everyone. “Having ultra-high net worth clients should not be seen as the ultimate goal for an RIA,” Ferguson cautioned. “Offering multi-family office services is a differentiated strategy and a differentiated business model.”
Successful RIAs should look hard before leaping into the UHNW market, warned consultant Jamie McLaughlin, a board member of the UHNW Institute. “The costs of entry are prohibitive and pricing is already hard,” McLaughlin said. “Why dilute your core business? The challenges of serving UHNW clients far outweigh the perceived opportunity.”
For those firms willing to take the plunge, these are four essential building blocks for an MFO business model:
• Construct an “Ideal Family Profile”
“MFOs are most successful when they create a service model and
experience that meet the needs of specific target families in a
way that maximizes the use of resources and is flexible enough to
meet their families’ needs as they evolve over time,” according
to the Schwab report.
An ideal family profile allows an MFO to create a value proposition and optimize resources around the type of family that best fits the firm. It serves as a strategic management tool that helps firms explore client asset size, demographic and psychographic characteristics of client families and the unique capabilities required to serve those families profitably.
Families with multiple business entities and legal structures can require extensive reporting capabilities, for example. Families with multiple decision-makers can pose a challenge for relationship management, requiring more time to be spent on family governance. And a multi-generational client family can require extensive customization across family units.
“In order for a multi-family office to grow, evolve and reach their full potential, defining an ideal family profile is a critical first step,” said Steve Prostano, partner at PKF O’Connor Davies Family Office and chair of the UHNW Institute. “It starts with a deep understanding of the family’s needs and the development of a unique offering, delivery model and client experience that exceeds their expectations.”
• Determine the best way to provide
services: in-house or outsource?
The broad and growing number of services an MFO must provide may
present a major hurdle for RIAs entering the market who need
additional talent, capital or scale. Consequently, advisory firms
may outsource or refer out non-core services to offer services
they do not have the talent or resources to provide, such as bill
pay or tax return preparation.
“Referring out,” the Schwab report notes, is the equivalent of
giving a client the names of several providers and letting the
client interview, hire, and engage without the MFO’s involvement.
“Outsourcing” refers to an arrangement where the MFO has hired an
external specialty provider on the client’s behalf, manages the
experience for the client, and communicates directly with the
external provider on an ongoing basis.
MFOs usually provide asset allocation, an investment policy statement and portfolio risk analysis in-house, while outsourcing or referring out access to direct investing opportunities and due diligence. Similarly, MFOs provide basic estate planning and succession planning in-house while drafting legal documents, preparing income tax returns and estate administration and settlement are usually outsourced or referred out.
Firms who do choose to outsource or refer out must “find the right external providers, establish effective working relationships with those providers and do so without negatively impacting profit margins,” said Wally Head, principal of Personal Fiduciary Advisors and a UHNW Institute board member.
• Have a strong ‘family dynamics’
offering
What’s now being called ‘family dynamics’ is one of the
fastest-growing services offered by MFOs, encompassing family
governance, communication and NextGen education.
“It’s one of the top two or three questions we get [asked] about family offices,” said Eddie Brown, national managing director and head of Schwab Advisor Family Office. “There’s real interest in preparing the next generation and we’re seeing a lot more education around this and more providers becoming involved.”
As UHNW clients seek to mitigate intra-family conflicts and preserve family wealth, “family dynamics has become increasingly important and an area that has evolved the most over the last 10 years,” the Schwab report states. MFOs are increasingly hiring internal family dynamics' specialists such as organizational psychologists or executive coaches, and are tapping into the growing pool of consultants focused on this topic.
• Make sure the price is
right
“Service creep” is alive and well. According to the 2020 Fees
& Pricing Study from Family Wealth Alliance and Schwab,
pricing has remained steady for MFOs while the number of
value-added services offered continues to increase. “Even as most
firms report feeling margin pressure, fee levels [are not]
changing overall,” the study states.
While the AUM fee-based model is still the predominant method MFOs use to charge, the fastest-growing pricing methodology is a hybrid model where firms charge an asset-based fee for investments and a flat annual retainer-based fee for other services, according to the Schwab MFO study.
Some MFOs, however, have been hesitant to implement the retainer-based model because they fear backlash from clients accustomed to paying an AUM fee. That’s because the distinction between investment management and wealth management is still poorly understood, McLaughlin said.
“Historically, the industry socialized clients that their presumptive value proposition was investment-related and client expectations or demand followed accordingly,” he noted. “The industry needs to re-socialize clients [to know] where their true value lies and get off the asset-based fee model treadmill which is misaligned with their cost structure and value proposition. This will take painstaking discipline.”
The firms that have successfully implemented a retainer-based model – or even a hybrid model – have, according to the Schwab report, found that educating their clients on the services provided and their value, along with transparency in how clients are being charged, helped alleviate concerns and built trust in both the pricing model and the overall relationship between families and the firm.