By Paul and Wes Karger
In 2018, high-net-worth (HNW) and ultra-high-net-worth (UHNW) wealth spiked 10.6 percent to surpass the $70 trillion threshold for the first time. As exceptional wealth is created by ultra-wealthy families and individuals, their balance sheets and personal financial situations increase in complexity, which necessitates a new approach to the management and stewardship of this wealth, as well as the oversight of the family office.
To ensure that every asset is managed in a way that considers the complete picture, family offices must take a total family balance sheet approach to effectively oversee and structure all assets, including private business interests, traditional investments, hedge funds, real estate, tangible/intangible assets and more. As families start to think about how they want their wealth preserved, managed and distributed over time and across generations in this complex environment—and especially how they navigate tax issues with these goals in mind—they need a bespoke solution, tailored and administered in a highly structured manner.
The Birth and Migration of the SFO
Back in the 1800s, the Rockefeller family pioneered the first single-family office (SFO) to centralize, organize and control the management of the family fortune. This model was highly successful and has been embraced and adapted by other ultra-wealthy families for decades. Among the many benefits of the SFO, it enables matriarchs and patriarchs to customize their solution as they see fit. They have complete control over who is staffed to deliver the solution, their areas of expertise, what they’re working on, the business processes in place, what technical infrastructure is used and more.
However, running your own family office comes with many costs, both in terms of time and money invested, and may introduce an unnecessary area of stress and burden and in many instances, is not a sustainable business. Most ultra-wealthy individuals, especially entrepreneurs with self-made wealth, are already extremely busy, and running their own family office entails challenges and headaches like running another business.
From hiring and firing decisions, to building and designing technical infrastructure, a significant time commitment is required that busy entrepreneurs and investment professionals simply don’t have, not to mention the financial costs associated with maintaining a highly skilled and highly paid team of professionals with diverse multi-disciplinary backgrounds, who are necessary to the functioning of a highly successful SFO.
One other challenge often encountered with large SFOs occurs at the death of the first-generation patriarch and matriarch. As family wealth divides across multiple generations and beneficiaries, the probability of disagreements as to how wealth should be invested and spent increases exponentially. This can often lead to the breakup of large SFO structures into smaller, independent SFOs whose fate then becomes even more uncertain for the reasons suggested herein. And while institutional protections and safeguards can be added to prevent and/or ameliorate breakups caused by familial strife, such as multigenerational trusts, co-investment vehicles and other legal barriers, a breakup can often become inevitable over time.
Among all these challenges, another phenomenon has emerged among the larger SFOs, creating even stronger headwinds and setting the foundation for the evolution of perhaps a different organizational model. We have seen that the more successful SFOs have assembled incredible broad investment teams powered by institutional support systems— i.e., software and other intellectual property facilitating reporting, monitoring, tracking and implementing at faster speeds and lower costs.
When you combine incredible (and very scalable) investment talent with access to inherently scalable technology in a gilded “2 and 20” model, the natural tendency has been to capitalize on the existing infrastructure by attracting outside capital to compound rich fees and carried interests using other people’s money (OPM), while not jeopardizing the integrity of the overall SFO service level. Witness the behind-the-scenes Darwinian forces at play slowly migrating the SFO into more “multi-family” ecosystems. We have seen this even with the much larger, multi-billion-dollar SFOs, such as Soros, that have followed this path.
A perfect storm—i.e., costs (and complexities) of maintaining an SFO have been increasing, creating incentives for generating other sources of revenue to take advantage of the scale inherent in an institutionally designed SFO architecture. Ironically, the ingredients that have created successful SFOs have eventually become powerful catalysts for their demise and metamorphoses.
MFOs—More Scale But Simply Not Enough
The multi-family office (MFO) originated as the investment management and family office solution for UHNW families, who amassed enough wealth requiring a much more expansive roster of investment choices and wealth management services than simply liquid investments offered by wealth advisory firms but were not big enough to justify their own, fully integrated teams of investment and planning professionals.
Within that context, the MFO model facilitates the sharing of resources between multiple wealthy families and alleviates many of the challenges faced by the SFO. By engaging an MFO, wealthy families can benefit from infrastructure that’s already in place, so there’s no need to build or maintain their own. Additionally, families that partner with MFOs can also expect more direct and honest advice. As independent advisors that are employed by the MFO (versus being employed by a single family), a team (member) can feel more empowered to provide unbiased opinions and advice without the potential “career risk” associated with agitating the person who directly signs their paycheck.
However, over time, the needs for UHNW families have changed, becoming more complex and demanding a much more robust suite of services, above and beyond investment management. For instance, UHNW families that have a focus on multigenerational wealth creation and tax efficient transfer need much more than simply identification of disparate investment choices—i.e., they need to know when and in what proportion to use various legal vehicles to solve these multigenerational objectives. These new demands require a much more expansive set of ongoing skills and expertise.
As such, MFOs now find themselves in a situation where, to compete effectively, they must employ a larger team of professionals with a broader range of expertise, making them inherently more scalable and attractive to the UHNW. Therefore, as a family’s needs and the regulatory environment change, the MFO must quickly adapt as well. However, once MFOs migrate away from purely investment management services, expansion of other services comes at the cost of scalability.
Further, as an MFO expands, its ability to put every client’s best interest first and deliver a personalized and bespoke experience may suffer. When this happens, MFOs frequently misrepresent the service they provide by spreading their offerings too thin and focusing primarily on investment solutions, engineering products at the cost of other services that are essential for managing wealth in today’s complex environment. To maintain margins, they become quasi big bank solution providers who lose objectivity and focus on pushing product—a clear conflict. Firms that adopt this mentality move far away from the original intent of the family office that dates all the way back to the Rockefeller days—providing personal services designed to meet the needs of UHNW families, while always putting the family’s best interest first.
The Multi-Single-Family Office—Le Chatelier’s Dynamic Equilibrium at the Crossroads
In today’s complex world, UHNW families need an option that combines these two models, offering the customizability and personal service of SFOs, and the vast and deep resources of MFOs.
The concept of a multi-single-family office (MSFO) is exactly as it sounds. It’s an office that’s structured in a way that offers the scalability associated with a multidisciplinary MFO, with the hands-on bespoke approach, with no engineered product offerings, as well as the depth and breadth of customized offerings of an SFO. As family needs change, an MSFO’s comprehensive approach to wealth management—with investment, tax, real estate, estate planning, philanthropic and other expertise under one roof—means that it’s always ready to offer the most comprehensive, conflict-free advice.
There are many options for UHNW families looking to enhance and preserve their wealth. But in today’s complex environment, that requires a bespoke solution that can change and adapt quickly to meet evolving needs. So, the multi-single-family-office will define the future of wealth management for the UHNW family. As the tectonic forces influencing MFO and SFO models continue to develop, we believe a dynamic equilibrium will be reached at their crossroads: the MSFO.
Paul and Wes Karger are co-founders and managing partners of TwinFocus.