True Wealth: Working for the family

(October 2004) As wealth grows, so does complexity. This is especially true of those who have crossed the threshold from high net worth ($1 million or more) to ultra high net worth ($10 million or more).

One way for ultra-high-net-worth (UHNW) families to manage this increasing complexity is to build a private investment firm or “family office” to manage their financial affairs full time. However, with annual costs ranging anywhere from $500,000 to $1 million (and sometimes more), only the wealthiest of the wealthy can afford one.

That may be changing. Industry innovations and a renewed understanding of what UHNW families are actually looking for from their wealth advisors have made the family office practice model a lot more attractive. Whether you work within a large firm or a smaller, independent shop, this practice model stands to change the way you work with your wealthy clients.

The multi-family office (MFO)

The (MFO) is in many ways a response to consolidation in the Canadian financial services industry. As institutions have become larger, staff turnover has increased and service has become somewhat less personal. This is exactly the opposite of what most UHNW families want from their wealth advisors.

The MFO’s personalized and highly attentive structure is common among European private banks that for generations have served the UHNW population. It’s basically a more cost-effective variation of the family office, comprised of a multidisciplinary team of experienced financial professionals (investment officer, accountant, estate lawyer, etc.) and administration staff.

This team works to perform a wide range of financial services for the family — anything from managing investment portfolios to paying bills. Yet, instead of serving a single family worth $250 million or more, the MFO serves a few dozen families, each with a minimum net worth of $10 million. This allows for much the same level of service a family office provides, but at a greatly reduced cost.

The MFO is typically structured as a fee-based advisory practice. Most MFOs charge fees based on a percentage of the client’s assets under management. However, because the services rendered by MFOs don’t always relate to investments (estate planning, tax planning, etc.), many MFOs add a supplemental charge for advanced planning services, either by direct billing or by adding an advanced planning premium on top of the basic investment management fee.

In our practice, we offer a simple fee-based service for clients who want pure investment management, and a premium fee for those clients looking for fully integrated, comprehensive wealth management. We also work as an independent consultant for some clients, charging a flat fee to become their financial co-ordinators — formulating big-picture strategy, overseeing investment managers, producing consolidated financial reports etc. — without actually managing their assets.

Advantages of the MFO

The exclusive nature of the MFO structure ensures UHNW families receive best-in-class services, access to top-notch investment managers and customized wealth management solutions (stock monetization, customized principal-protected notes, advanced hedges, private equity, etc.). More important, it offers UHNW families the stability of working with people who know the family and its financial affairs inside and out.

The MFO structure also offers significant advantages for the advisor. It encourages long-term client retention, and provides an opportunity to work on a range of wealth challenges. By offering services to multiple generations, the MFO replenishes its client base from within, giving advisors the opportunity to forge lifelong relationships with client families that are as much personal as they are professional.

The MFO culture is distinct from that of the traditional wealth management firms. I suspect it will become the preferred model for UHNW families who in the future will be seeking more personalized service and will gravitate toward advisors who offer holistic, multi-generational wealth services in either a private or a bank-owned firm.

Common features of a successful MFO are listed below. You don’t have to establish your own firm to implement these ideas into your practice. Having a basic knowledge of these features should make it easier to explain to your UHNW clients how you are different from the competition.

Focused client base

The MFO usually serves between 25 and 60 families. However, more important than the number of families served (or their net worth) is the type of families served. Successful MFOs establish clear guidelines about the families they want to work with, and only accept clients who fit within those parameters. This makes it easier to anticipate client needs while maintaining the highest level of personal service.

Integrated service offering

The MFO is a one-stop shop for affluent families seeking financial advice. It manages all aspects of client wealth, from building a portfolio to paying bills and structuring estate plans and charitable bequests. If the MFO doesn’t already have staff experts in a particular area, it should establish relationships with a network of specialists, and be ready to act as a “wealth co-ordinator” with those specialists.

“Four Seasons” service culture

Superior service is the hallmark of the successful MFO. In this vein, it operates similarly to a luxury hotel, whereby the intention is to not only exceed client expectations, but to establish a new standard of client expectations. Client-staff ratios should be kept as low as possible, and regular in-person contact between clients and professionals should be the cultural norm.

Emphasis on family

The MFO’s mandate is to build and preserve wealth for multiple family members, across multiple generations. That means MFO professionals need to be more than number-crunchers; they need to be comfortable working within a family dynamic, and should be able to offer guidance in case financial conflict arises among family members.

Long-term thinking

The MFO does not accept new clients simply to bulk up on assets prior to a sale to a larger firm. It encourages long-term employee loyalty, compensating advisors as if they were owners.

Open architecture

Unlike the more traditional service providers, the successful MFO is an independent shop offering the broadest range of products and services. It should not be tied to any one investment manager, and it should recommend products and services based on family need, not sales quotas.

Absolute confidentiality

MFOs must establish strict confidentiality guidelines for all staff. Since they are privy to the most intimate details of a client family’s financial affairs, professionals working in an MFO must go to extraordinary lengths to assure client families their financial information is in safe hands.

Commitment to technology

MFOs need to invest in technology to keep service levels at their highest. Information technology helps them to provide accurate and complete information to client families. More importantly, technology helps free advisors’ time, allowing them to offer more comprehensive and personalized service to client families.

These features are as much a way of doing business as an actual corporate structure. Even if you work within the framework of a larger institution, positioning yourself as an MFO will help you attract and retain more UHNW families to your practice.

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Thane Stenner, CIM, FCSI, is a first vice-president and investment advisor with The Stenner Group™ of CIBC Wood Gundy. The views of the author do not necessarily reflect those of CIBC World Markets Inc. This article is for information only. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF. Thane can be reached at thane.stenner@cibc.ca.

10/22/04