By Paul Karger and Wes Karger
The Rockefellers pioneered the Single-Family Office in the late 19th century as a way to centralize management of the family wealth and related affairs. These SFOs operated back then as they still do today, handling all aspects of a single family’s wealth management operations. This includes everything from day-to-day accounting and payroll activities, to property management, management of tax and legal affairs, philanthropy coordination, investment management, succession planning and more.
An alternative to the SFO model is the pooling of resources and costs which is often categorized under the Multi-Family Office solution. These investment groups function similar to a SFO—the main differentiator being that they oversee the wealth of multiple families, as opposed to just one, to capitalize on inherent economies of scale, deal flow and to provide a more robust and often uninterrupted service offering.
The role of family offices has changed in the last 20 years, driven by the proliferation of wealth and dramatic increase in the number of millionaires, centimillionaires and billionaires around the world. This new breed of ultra-high-net-worth families and their objectives differs from the “old money” of the past.
As this money begins to shift from one generation to the next, the preferences of the second and third generations are starting to look toward the MFO model when making the transition, particularly as family fortunes are divided into multiple, smaller pools of funds or fractional interests. The younger generations simply don’t have the same zeal and interest to oversee their family’s fortunes.
The cost to run and maintain a SFO is astronomical vis-à-vis the cost associated with retaining a MFO and investing alongside other affluent families—i.e., operating costs of running a fully integrated family office could reach a certain percent of the family’s net worth per annum, making it increasingly harder to justify maintaining such an infrastructure in a low-return environment.
Today, with all the advances in technology, qualified professionals looking for challenging clientele in which to service and fast-moving developments in the industry, it’s much more cost-effective to retain an MFO. MFOs can afford to allocate larger sums to develop, create the very best research and deal teams, technological solutions and infrastructure, given that the costs will be scaled over multiple clients.
Another natural barrier or challenge facing SFOs is the access to top talent in the industry. Employees in MFOs play a truer consultative role, servicing multiple families which allows them to more easily provide objective and conflict-free advice, even when such advice may not be popular among family members. Within the SFO setting, employees are likely to be more influenced by family biases and legacy issues even when not in their best interest.
Additional benefits to working with a MFO include the ability to invest alongside other families who are within the same firm. MFOs have direct oversight into each family’s entire balance sheet, allowing a more holistic approach, while fully understanding each family’s appetite for risk and helping them co-invest together on opportunities which might otherwise not be attainable on their own. In a MFO setting, these families have the opportunity not only to pool financial resources for these types of investments, but share their experiences in various business ventures, utilize each other’s networks and gain greater insight as to the latest secular themes.
While a bullish case for the growth in MFOs can be made, we don’t believe the discussion stops there. In fact, one theme that will become increasingly popular going forward for the larger SFO is a hybrid model, or the Multi-Single Family Office, a consortium of single family offices. It’s also becoming increasingly more cost-efficient for some SFOs to hire a MFO to backfill the capabilities and certain functions that the SFO needs but prefers to outsource. Accretive synergies can be realized, as each SFO will select from a variety of menu options offered by the MSFO to satisfy its particular needs.
Moreover, we believe this trend will also be fueled by the tectonic shifts that we are experiencing in the regulatory environment, which should not be discounted. We just witnessed a historic change in federal tax legislation by which ripple effects across different industries are just starting to be felt. When we couple this with a just-released favorable tax court decision, Lender Management LLC vs. Commissioner, T.C. Memo. 2017-246, we believe that all of the ingredients are now present to rethink how SFOs and MFOs can benefit by working together in ways that were not economically present just a few months ago.
Some families will prefer to have a SFO dedicated to their needs, and if they have the means and time to have such an exclusive service, then they should certainly pursue such an approach. Other families, however, who understand these key differences and who are attuned to the macroeconomic and regulatory environment, may decide on a different path, one that provides unique benefits not available to SFOs.
Paul and Wes Karger are co-founders of TwinFocus Capital, a Boston-based multi-family office for global ultra-high-net-worth families, entrepreneurs and professional investors.