Jan van Bueren and Thomas Ming discuss the increasing diversity of multi-family office providers, and the potential pitfalls for wealthy families that come along with it.
Wealthy business owners and families that have sold their businesses are increasingly considering setting up a single-family office (SFO), or using multi-family office (MFO) services. As an SFO is not economically feasible for most families they often end up deciding to opt for MFO services.
As the demand for MFO services increases, it could easily be concluded that the growth of the MFO industry is the result; however, the supply side of this development should not be underestimated. Due to, amongst other things, regulatory developments, the consolidation of the private banking industry, cost pressures and the "hype" of MFO services over the last few years, quite a few providers are entering or have already entered the MFO market with the aim of getting in on the action. So it is not only demand but also supply that is feeding this trend.
Whilst a large number of providers is generally considered a good thing in a free-market economy, given that this generates a variety of benefits, such as decreasing prices and a more competitive choice for consumers, the same does not apply to the MFO industry at the moment.
There is no industry standard for what range of services an MFO should offer, and most MFOs tend to operate discreetly without giving an insight into their activities and what they actually offer clients. Moreover, the use of the term "family office" is, in most jurisdictions, neither regulated nor supervised, and even if it is, only lightly. Lastly, MFOs originate from very diverse backgrounds and tend to offer completely different ranges of services as a result. For these reasons, the MFO industry is very opaque, which is especially problematic for families looking to use MFO services. Or, as it is also sometimes put, "if you've seen one family office, you've only seen one family office".
It is therefore important for families who are considering using an MFO to compare providers carefully. An important starting point in this process is the origin of the MFO and its founders. Although this does not apply to all MFOs, the majority of them tend only to focus on one or a limited number of services, which are often closely related to the background of the founders. When the needs of the family are as closely related as possible to the main competencies of the MFO's founders, the chances of a successful relationship are highest.
In this respect, several main types of providers can be defined:
- Former wealth managers. This type of MFO focuses primarily on asset management, asset allocation, consolidated reporting, risk management and managing relationships with banks. These are often established by a small number of former bankers, and more recently, there have even been smaller private banks repositioning themselves as MFOs.
- Law firms/lawyers. Generally, these focus on estate planning, succession planning, family governance and legal issues. Their services are often also related to the family business structure. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is provided in-house.
- Tax consultants/tax lawyers/accountancy firms. These focus on tax-efficient structuring, establishing and managing international structures for family businesses and real estate, international relocation, estate and succession planning, and audit and administration. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is provided in-house.
- Private banks or MFOs owned by private banks. These have a strong focus on asset allocation and asset management.
- Trust providers/trustees. These focus primarily on setting up and administering structures such as trusts, foundations and holding companies, audit and administrative services; some of these MFOs also focus on issues related to yachts and aircraft. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is provided in-house.
- An SFO opening up for other clients. This is a difficult category to define, as the services offered are often closely related to the original needs of the founder family. Most of them have a focus on asset management, consolidated reporting and risk management, combined with a limited number of other activities, such as real-estate or private equity investments.
- Others. A small but broad category, and includes MFOs founded by real-estate or private equity experts, former investment bankers, or by people with a focus on lifestyle management.
As every wealthy family has distinct needs, families should carry out proper due diligence on the providers they visit and ask the right questions to get the necessary insight into what they are offering. Otherwise, there is a significant chance that, further down the line, they will not be satisfied with the services their chosen MFO is providing to them.
A version of this article was originally published in the November '14 edition of the STEP Journal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.