What is a multifamily office, otherwise known as simply an MFO? It is best described as a firm that serves the "middle-market" woman who just netted $60 million for the sale of her business interest or upon stepping down as a senior executive of her company. While no one else feels sorry for her, we do. She is considered a tweener in the marketplace–too large for most of the traditional wealth management firms, but too small to have her own dedicated staff to run her affairs, which more affluent families often handle via dedicated single-family offices.

Enter the MFO. This firm aggregates her assets with those of other, unrelated private families and individuals to achieve the critical thing that she lacks: scale. Scale allows an MFO to provide its clients a combination of sophisticated advice and a broad range of carefully integrated service offerings. It allows MFOs to provide the family office services that were once only available to families with billions in assets.

Most families and their trusted advisors are uncertain, which reflects the lack of standardization and clarity in the industry itself.

Unfortunately for our mid-market example (the Alliance defines middle-market private families as having between $20 million and $200 million in net worth; there are about 30,000 of these households in North America), she and most others in her situation would not recognize an MFO if they tripped over it. MFOs are not household names; they place a low priority on marketing, and when they do put themselves forward, they often have difficulty differentiating themselves from their peers. Meanwhile, although wealthy families may covet many of the services offered by top-tier MFOs, as a rule, they also prize their privacy and are often unmoved by marketing pitches. Because of this, families and the MFOs often have trouble connecting. (This is not to say they never do: According to the second annual Multifamily Office Study & Listing conducted last year by the Alliance, MFO assets under advisement grew 28 percent from 2004 to 2005.)

What services do the best MFOs offer? Most families and their trusted advisors are uncertain, which reflects the lack of standardization and clarity in the industry itself. To provide some guidelines, the Alliance published its inaugural Multifamily Office Standards last year, detailing the 10 core service offerings that best-in-class MFOs provide (see "MFO Service Offerings," page 56).

Each of these 10 core services requires definition. Fortunately, some already have been defined (such as the Certified Financial Planner Board of Standards’ definition of comprehensive planning and the Association for Investment Management and Research’s portfolio management standards). Suffice it to say that the best-in-class MFOs provide a majority of the core services in-house, and have integration and/or management planning responsibility for any core services that are outsourced, delegated or shared with third parties or other intermediaries.

Who are these MFOs? The Alliance has identified eight different types of wealth management firms, based primarily on the size and complexity of the families they serve. The single-family office is at the largest, most complex end of the spectrum, serving the $1 billion and above family, while firms advising families of $1 million are at the other end. Somewhere in the middle are the MFOs.

Where a client sits in the spectrum also determines which of the service offerings he needs. If you are a just-retired executive with $1 million in assets, you will most likely need the first four offerings on the 10 core services list, and are best served by a financial planning firm. But if you belong to a $1 billion multigenerational family, then it is likely you will require all 10 core services at one time or another.

Origins and Competencies
MFO firms originate from various sources: single-family offices that have invited nonrelated families into their fold; independent financial advisory firms that expand their offerings; large financial institutions that establish family office services; and, increasingly, from merged organizations (the most common being an independent firm purchased by a banking or trust institution, that keeps the independent’s name). The Alliance has found best-in-class firms that arose from each of these origins. However, families must also weigh other factors, including specialization, independence and management continuity.

MFO SERVICE OFFERINGS

1. Comprehensive financial planning

2. Portfolio management

3. Back office/consolidated reporting

4. Estate and wealth transfer

5. Tax planning, preparation and compliance

6. Risk management

7. Trustee services

8. Life management

9. Family consulting, governance, meetings and education

10. Strategic philanthropy and administration

For example, accounting-based independent MFOs are often strong in tax and compliance work, and tend to work with first-generation wealth creators (e.g., the business owner who sells out). However, because these MFO firms are independent, they may not have business continuity plans in place. On the other hand, large financial institutions can be counted upon not to go away entirely, but they are often subject to mergers and other restructurings. These institutions generally have higher employee turnover, and they may push their own products, which in turn can affect the objectivity of their advice. And just because an MFO comes from a single-family office, for instance, there is no guarantee of success in delivering services on a consistent basis to the private families it invites in. Families must ask the right questions to ascertain whether these issues affect the MFOs they consider hiring.

What professional credentials, competencies and experience does the MFO firm need to possess in order to implement and manage the 10 core services that are essential to the private families they serve? Each firm will have a personality, in that along with its point of origin, it will emphasize and specialize in certain core services offered and the types of families served (such as first-generation wealth creators versus multigenerational families). According to the Alliance’s Multifamily Office Standards, best-in-class MFOs will have a multidisciplinary staff (e.g., CPA, CFP, CFA, JD or other professional credentials) that demonstrates professional competency and the experience to serve complex client families. They will have at least three years’ experience in providing services to a minimum of 10 unrelated families with a minimum median net worth of $20 million. They should also demonstrate their professional involvement and commitment by assisting in setting standards and self-regulation; participation in family office conferences, seminars and meetings; and membership in leading organizations. Finally, these firms should be stable in terms of their ownership, management and business continuity to ensure their long-term viability and ability to serve succeeding generations of their client families.

The Alliance estimates that there are now more than 100 MFOs in North America, but it recognizes few more than 20 that are truly best-in-class. The typical best-in-class firm is independently owned and operated with a staff of 30 professionals. It serves about 40 families with a median net worth of approximately $50 million, for a total net worth under advisement of about $2 billion, roughly four times the size of the average single-family office. While growing as a whole, these MFOs struggle with managing their growth and with finding the key to consistent, replicable delivery of services to their clients. They also have a difficult time finding and retaining key talent to serve their growing list of families. And, because they are largely independent, they have issues surrounding the business continuity of their firms.

How the firms manage these issues sets the leaders apart. The best-in-class MFO firms are well managed and are most concerned about giving their clients objective advice. They are not as concerned about growing their client list. Indeed, they consider the best-fit nature of a long-term relationship with any new family referred to them. As a result, the best-in-class MFO firms back away from as many potential client families as they accept. Because of this, these firms appear "shy" and unsophisticated in their marketing efforts. When matched with the privacy concerns and inaccessibility of wealthy families, one begins to understand why it is so difficult to find a best-in-class MFO suited to that prototypical middle-market woman and her complex needs.