Multi family offices – the new dominant force in family wealth

“If you have seen one family office, then you have seen only one family office” is a regularly cited adage in the world of wealth that extols the uniqueness of each wealthy family and their needs. And family offices are nothing new – as early as the 6th century majordomos managed the finances of major households, and in 1838 a family office was established to manage the wealth of the House of Morgan, which evolved to become the bank, J.P. Morgan. Rothschild, Rockefeller and Bessemer have similar roots. Just as these houses developed to manage the wealth of multiple families, in more recent years we have seen the rise of multi family offices (MFOs). MFOs – like family offices that manage the wealth of one family, let us call those single family offices (SFOs) – offer unique propositions that distinguish them from conventional private banks and wealth managers. In this guide, we will explore the distinguishing benefits of MFOs for families.

Multi family offices are driving structural change

Over the last 15 years, there have been two major shifts in the way that the wealthy are served. The first is the emergence of investment platforms and robo-advisors serving affluent and even high net worth customers. The second disruption is undoubtedly the increasing dominance of the MFO as an alternative to a family working directly with multiple private banks or wealth managers - we will just refer to private banks from here. The chart illustrates this evolution:

We see how the service model has changed at different wealth levels, with the level of wealth typically seen for establishing an SFO increasing. The traditional role of private banks has also changed – amongst the ultra wealthy, private banks now rarely act as sole, or even joint, advisor and have been increasingly disintermediated by family offices.

As technology has advanced, there has also been a rise in the availability of digital investing platforms.  Although principally the domain of those with lower wealth levels, such platforms have also been harnessed by product providers to serve the family office market, in particular in the areas of alternative investments and private markets – more on this below.

What is the role of a family office?

A family office – whether MFO or SFO – plays a central role in the management of the affairs of wealthy families. Whilst not all family offices play identical roles, there are some common functions:

• Acting as a trusted partner:  Whilst trust tends to build over time, it is a vital ingredient of the relationship between a family and a family office. A family needs to know that its team will act fearlessly and impartially on its behalf, seeking the very best advice, services and solutions. For this to happen, a strong alignment of interests must exist – the family office must sit squarely on the family’s side of the table.

  
  

• Acting as a strategic partner: Here, a family office helps a family to build a long-term strategy for their wealth and – if applicable – their family business. It understands what a family wishes to achieve through dialogue and analysis, looking across everything that a family owns whether liquid or illiquid, and thinking multi-generationally. It then devises and agrees the optimal way to execute on that plan, which often includes establishing the governance for decision-making in the family.

  
  

• Acting as a consolidating partner: A common challenge for families is complexity and we often find that there has never been a single-family balance sheet. Once a family strategy has been established, creating a framework for reporting on family assets and their value / performance is beneficial – extending across different asset pools such as real estate, business interests, liquid and illiquid investments, collectibles and even philanthropy. Management of relationships with third party advisors such as lawyers, accountants, tax advisors and trust companies often leads to more joined-up advice delivered cost-effectively.

  
  

• Acting as a driver of efficiency: A family office can create greater scale for a family and can eliminate overlap or duplication. Critically, a family office can often deliver more successful fee negotiations with third parties – whether banks, investment managers, custodians, or other professional advisors. It has often been observed that much of the cost of a family office can be offset against fee savings with third parties.

These are all common functions of a family office that will be important for any wealthy family. But a reasonable question would be – what roles or tasks does a family office perform? We think these can be divided into four categories: (1) strategic, (2) structural, (3) investment, (4) operational:

Strategic

The leadership theorist Peter Drucker famously advocated that “culture eats strategy for breakfast”. And this can be applied to the role of the family office and its work on a family’s strategy. Establishing a family’s vision or purpose is unlikely to be about grandiose plans for dominance but rather about creating a family culture that allows for strong communication, appropriate decision making and the space to disagree and work through those disagreements. For a larger or growing family, a family charter and family governance protocols are essential. A family office plays a key role in supporting a family in establishing all of this and then executing on it.

Structural

This is about taking the family strategy and vision and ensuring that the family is structurally supported to reach its goals. In the realm of family governance, this might be establishing a family council or regular family meetings and a framework for reporting to the family. The interaction between the family and the corporate governance of any family business is also key, including the role that family members might play in that business.

Then, there are requirements around the legal protection and tax optimisation of the family wealth. Here, wealth structuring becomes important and will involve advice from lawyers, tax experts and fiduciary companies. There may be company, trust, fund or insurance structures established. Estate planning and wills in all relevant jurisdictions are also essential.

Where lending is required across the family’s interests – whether for real estate, investment or business purposes – the family office will identify and arrange the most appropriate facilities and arrangements from banks, funds and in the capital markets. Where family interests are multi-jurisdictional, the management of foreign exchange risk may be necessary.

Philanthropy is often a goal of families. Increasingly, families wish to give in a strategic and disciplined way, with identifiable impact from their philanthropic investments. This will involve working closely with the family to establish their objectives and expectations, implementing appropriate governance and oversight, a due diligence and selection process and ongoing reporting.

Finally, ensuring that the next generation is well prepared for the wealth they will later control is strategically important. This can involve financial education, coaching and intentional professional placements.

We think the role of a family office can be divided into four categories: strategic, structural, investment and operational.

Investment

Investing is at the heart of what a family office does. It is here that the structural difference between working directly with multiple private banks is most pronounced. Regrettably, where this occurs, we have often seen families end up with an incoherent investment strategy when viewed on a consolidated basis with portfolios populated with a series of banks’ (or worse, bankers’) latest “good ideas” which have led to overlap and undue risk concentration.

The starting place is about making a proper assessment around the purpose of investment assets – are assets there simply to deliver capital growth or is there an expectation of regular income, what is the time horizon and what are liquidity needs? Next, an assessment of the risk tolerance of the family is critical – on one level this is numerical, but on another it is behavioural, what level of risk will allow family members to sleep well at night? Armed with this analysis, both a strategic asset allocation and an investment strategy can be established. In addition to liquid equities and bonds, any investment strategy will be multi-asset class, typically extending to private markets (equity, debt, infrastructure, real estate), hedge funds and commodities, using structured products too as needed.

It then becomes about how to execute on that investment strategy – this will involve determining what will be managed in-house and what will be outsourced to third party providers. A rigorous selection process will identify the best external investment managers and product providers, and it is then incumbent on the family office to negotiate the optimal mandate with that third party and negotiate the lowest pricing.

On an ongoing basis, the family office assesses the performance and risk of the whole portfolio, with a consolidated view avoiding duplication and over-concentration of risk. Where managers underperform, they are replaced. Importantly, following regular assessment of the economic and market outlook, tactical asset allocation changes may be made in response.

Separate to where investments are managed is where they are custodied. For some families, a single consolidated custody solution from a global specialist provider may be most efficient, whilst for others accounts with a number of private banks may make more sense. The family office will leverage relationships with these third parties and will deliver them with attractive fee arrangements and will support the account opening process.

Operational

For any wealthy family, there are important operational issues that need to be addressed. We find that a commonly requested service is consolidated reporting of the entire family asset base, across different custodians and structures – a single view that is otherwise hard to come by. Another form of reporting might relate to the impact of philanthropic activities – such reporting might also be used to support the management of the family’s public reputation.

Beyond this, there are many practicalities – for example, ensuring funds are in the right place at the right time in the right currency to support asset purchases, delivering compliant filing of tax returns in relevant jurisdictions or sourcing external expertise on topics as broad as children’s education to the valuation of real estate, and many other activities.

The best family offices offer an all-encompassing service across strategic issues, structural concerns, providing excellence in investment and seamless operational support that is much needed by many wealthy families.

Multi family office or single family office?

The increase in MFOs has made comprehensive family office services available to a broader range of wealthy families. At the same time, some families with SFOs have transferred their assets to MFOs or have even turned themselves into MFOs. There have been two principal drivers of this – cost and expertise.

The danger for a SFO is that the operational costs become disproportionately high. Campden Wealth’s report on Family Office Operational Excellence notes that for small to medium sized SFOs with on average 4 – 7 staff and up to $500m under management, total costs can be as high as 0.7% p.a. of assets, a significant cost level before third party management costs are added. In contrast, the average large SFO with $4bn under management sees costs at 0.2% p.a., a much more palatable level only achieved by economies of scale.

If 0.2% p.a. is the benchmark for an SFO operating at scale, the additional cost for families with lower levels of wealth engaging an MFO to access a family office approach is often no more than this 0.2% p.a. – especially after savings in underlying costs for investing are considered. This presents an opportunity for a broader range of families to benefit from family office services or for those with a smaller SFO to reduce costs.

For those that already have or are considering an SFO, it is worth noting that the expertise and experience in an MFO generally exceeds what can be achieved in a small to medium sized SFO. You are likely to find deeper and broader professional experience in an MFO.

That said, we would always acknowledge that each family situation is different – and it is about building a structure and team that works for your family. We can support you in thinking about this question.

Multi family office or private bank?

With the rise of MFOs, the role of private banks has changed – they have become the strategic partners of MFOs providing custody, execution, product and research to support MFO in serving wealthy families, working in tandem. MFOs typically have relationships with several private banks, across key jurisdictions (e.g. UK, Switzerland, Channel Islands, Singapore). This provides maximum flexibility for families to hold assets in the optimal jurisdiction from a tax and legal perspective.

There will be families that continue to deal directly with private banks and there is nothing inherently wrong with this. That said, we would highlight some items to bear in mind if doing so:

• The longevity / turnover / quality of your relationship manager

• Whether you know just an individual or a team?

• The alignment of your relationship manager with your interests – does s/he sit on your side of the table?

• Access to tailored high-quality investment solutions from across the market rather than standardised templates

• Absolute levels of fees

• Access to broader services such as family governance and philanthropy support

• And whether a true multi-generational approach is being adopted

  
  

It could be said 10 – 15 years ago that a true differentiator of a large global private bank was access to top tier private markets or hedge fund opportunities, unavailable to other firms in the market. Today, there has been a near reversal of this. To start with, all significant private markets firms and hedge funds have recognised the potential of the family office market and built teams to serve them with access to high-quality funds, supported operationally by advances in technology platforms. Large global private banks via their centralised product teams tend to focus on accessing funds that can be scaled across their client base and may not make available high-quality funds with smaller size or availability. Finally, opportunities for co-investment tend to be reserved for only the largest clients of global private banks. In an MFO, in many instances, there will be access to a more expansive offering.

Similarly, when it comes to structured products, MFOs are able to price and structure scalably across many different issuers – through well designed technology platforms. As a result, they often have broader access to issuers than private banks who may have a more natural tie to their own investment bank or a more limited panel of providers. We think it is fair to say that there has been a democratisation of access to alternative investment opportunities and structured product issuers, which has reduced the competitive advantage that private banks might have once enjoyed.

Conclusion

Over the last 15 years, we have seen structural changes in wealth management with the rise of MFOs offering a broad range of services and support to wealthy families with clear alignment of interests. Like SFOs, they address the complexity that many wealthy families face and act as trusted strategic partners. MFOs offer the opportunity for greater expertise and significant economies of scale – opening up family office services to a greater number of families. MFOs have also been successful at managing the cost of third-party services that a family might access.

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Bibliography

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Kenyon-Rouvinez, D., & Park, J. E. (2019). Family office research review. Journal of Wealth Management, 22(4), 8-20.

Rivo-López, E., Villanueva-Villar, M., Vaquero-García, A., & Lago-Peñas, S. (2017). Family Offices: What, why and what for. Organizational Dynamics, 46(4), 262-270.

Rivo-López, E., Villanueva-Villar, M., Suárez-Blázquez, G., & Reyes-Santías, F. (2021). How does a business family manage its wealth? A family office perspective. Journal of Family Business Management, 11(4), 496-511.

Rosplock, K. (2020). The Complete Family Office Handbook: A guide for affluent families and the advisors who serve them. John Wiley & Sons.