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| Best Practices: Financial Advisors |
Finding the Perfect Fit
Sara Hamilton
12/01/2004
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The second family, now in
the process of identifying a multifamily office to hire, is motivated by three
factors. First, the family office business has become more complicated in
respect to compliance and investment management. Second, the cost to bring the
20-year-old family office’s capabilities up to a suitable level to continue to
operate independently would be prohibitively expensive. Third, the principal
family member involved in operating the family office has no logical successor
for the CEO position.
The family is seeking estate planning, tax planning
and assistance with intergenerational planning. But equally important is a
cultural fit. “We want an office that our family feels comfortable with and
wants to go to,” says the family member responsible for the search. “And we want
a firm that will allow us to maintain an active oversight role. Even though we
are subcontracting the family office function, we want to remember that this is
a family business and keep the family involved,” he says.
More important than
size is how the family fits into the firm’s client base. “I’m not sure I want to
be the biggest client. I don’t mind learning together, but I don’t want to be an
experiment. Then again, I don’t want to be the smallest for fear that we might
not get the attention we need. We want to fit in their comfort zone,” he
says.
Getting the Lay of the Land
Not all firms serving the private client
marketplace are created equal—nor are the needs of wealth owners. The lines of
demarcation are often difficult to identify, but, in my view, there is a
hierarchy of business models. Each offers a progressively complex set of core
services appropriate for different levels of wealth, with some overlap.
At
the base, there are pure investment managers and brokers offering asset
class-specific portfolio management in separate accounts, mutual funds or other
commingled accounts. Investment advisory firms and investment consultants occupy
the next level, adding strategy and policy development, asset allocation and
manager selection, performance measurement and analysis, and investment risk
management to the mix. Some wealth management firms and private banks offer the
investment diversification services of the former along with basic tax and
estate planning, cash flow management, financial planning and guidance on
philanthropy. If our assets are in the $1 million to $20 million range, these
firms may be adequate, but we will need to oversee their work.
Wealth
advisory firms and trust companies commonly evolve over time to a multiservice
platform in response to client demands. They offer more sophisticated tax and
estate planning and add oversight of tax compliance, fiduciary services and tax
sensitive asset management.
Some of these advisory firms evolve into
multifamily offices, offering integrated wealth planning, oversight of fiduciary
services, risk management, lifestyle management and assistance with strategic
philanthropy, family continuity and governance. This is the most comprehensive
form of wealth advisory firm, offering business owners and multigenerational
wealth inheritors a broad array of services, coupled with the highest levels of
client interaction and strategy implementation.
It is too soon to know
whether the choices made by the families mentioned here will provide a good
long-term fit. We do know, however, that the criteria and processes they used
gave these families a thorough understanding of the firms’ strengths and
weaknesses and a solid foundation for an informed decision. Each family
established their priorities and developed specific criteria through consensus.
From there, they built a shortlist of firms for consideration. To conduct due
diligence, they interviewed key personnel, visited the firms’ offices and sought
a demonstration of their expertise.
When wealth is a not a burden, and
instead provides freedom, opportunity and deeper bonds between family members,
you have been successful in your search.
Illustration by Kevin Spaulding.
Sara Hamilton is founder and CEO of Family Office Exchange LLC.
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