Within this article, the Wigmore Association’s Chairman, Tom McCullough, broaches the recently-trending subject of how inevitable it is that Single Family Offices (SFOs) convert at some stage during their lifetime to become a Multi Family Office (MFO).
This is a question I am hearing more and more, which may be due to the recent level of family office consolidation and acquisition. It is important to remember, however, that as much as I do believe there will be more consolidation to come, there will also be more family offices being set up. Given the increasing client demand for holistic one-stop management, many larger investment firms will buy a multi-family office to get a jump start in the integrated wealth advisory business.
There are two ways an SFO might ‘convert’ to an MFO. The SFO can add staff and infrastructure to take on additional clients and share costs. They can also go further and try to make the new MFO a commercial profit-making enterprise.
On the other hand, an SFO can shut down their operations and hire an existing MFO or merge their people into an MFO, if that is possible.
In the first case – converting an existing SFO to an MFO – is a challenging task. Many families will recognize that SFOs and MFOs are two completely different animals. An SFO is a serviced office for one family; an MFO is generally a commercial business that provides professional services to many families. My experience is that most families (who currently have and run a SFO) want their family office to make their lives easier and allow them to focus on their core business or their personal interests; they don’t want to be “in the business of running an MFO”. There are exceptions to be sure – and some have been successful – but let’s just say it is much easier said than done, and not particularly common.
There are, however, an increasing number of SFOs who are shutting down their SFO and shifting to an MFO. Why?
- ‘Key person risk’ – Many SFOs rely heavily on a critical staff member who leads the office. As that person gets closer to retirement, the family often realizes that their departure can leave them with a severe gap. It can be challenging to replace them through another hire, especially given the knowledge and trust they have built up over many years and their central role in holding the SFO together. When the SFO executive leaves, it puts the family into motion and under pressure immediately to find a solution. This may be the single biggest reason and certainly the most critical catalyst for SFOs to review their options. An MFO has institutional memory, back up and redundancy that most SFOs will struggle to build;
- Continuity – Many SFOs are small operations that struggle to continue in a steady state due to costs, frequent regulatory challenges, technology requirements and other factors. They can also find it difficult to create dynamic and inspiring workplaces that attract and retain top quality staff, especially since there is rarely an opportunity for staff to advance and build equity.
- Divergence in views – As the family grows or the founder retires or dies, the vision for the SFO from other family members may diverge. It’s better to think about – and talk about – the views of all the family members ahead of time and build a game plan that accommodates the multiple perspectives. Some family members want full service, others want an ‘a la carte’ choice, and some prefer a combination of multiple external advisors. It can be hard for a family to agree on what role the SFO should play and what it should offer.
- Cost/value equation – It is hard to scale an organization that serves only one family. And family offices can be expensive to operate. With costs for personnel, technology and real estate rising, many families are looking for ways to mitigate those costs. Sharing those costs with other families via an MFO is one potential solution. MFOs provide more significant economies of scale and support in reducing household costs over time. As well as this, MFOs can offer greater capabilities, infrastructure, and services available to the family due to the significant investment that is made to support multiple families.
- Compliance and administrative burden – Every family office has many compliance and admin responsibilities, and these can become a significant burden, particularly when the SFOs don’t have scale and cannot share those costs. The scale of an MFO can often help ease this compliance burden.
- Additional services – In an increasingly complex world, there are more skills and tools required to meet the many challenges. Pooling together with other families in an MFO is often the way a family can get access to improved technology, investment management resources, and other in-house skills and resources
Depending on what an SFO requires from a Family Office, other benefits of MFOs can include:
- exposure to a broader range of experience gained from working with multiple families;
- wider and more in-depth research on investment alternatives;
- exposure to high-minimum and hard-to-access investments;
- improved economies of scale and pricing, due to shared buying power of multiple families;
- enhanced IT infrastructure, cybersecurity, portfolio reporting, research, and access to in-house talent; and
- in the case of the Wigmore Association and others, access to an international network of independent family offices to support globally-minded families.
All of this being said, of course, an MFO is not always the right choice for a family. From my experience, families each need to assess what will work best for them before joining an MFO, or starting (or setting up) an SFO. Families with very large asset bases where family office costs are not a concern may simply prefer to have the completely dedicated resources of an SFO. Similarly, families with particularly bespoke requirements from their family office may well choose the SFO route. This might include elaborate involvement in the family activities, a close connection to the operating business, and continuous proactive M&A work on direct investments – all of which might require unique skills from individuals which would be difficult to find in an MFO).
However, it cannot be denied that what we see now is a noticeable uptick in the number of SFOs approaching MFOs and using those critical moments of transition to rethink what will best work for them in the future.
Within the Wigmore Association we have experience with both Multi Family Offices and Single Family Offices. Should you wish to get in touch to speak to one of our member firms from across the globe, please contact us through our website.