This publication talks to a North American MFO about why family offices make the "multi" switch.

This month we are looking in detail at the trends shaping the world’s family office market and, of course, the most mature of all of them is in North America. One specific question is why and how single family offices make the jump to the multi-office business model. A person well qualified to discuss this is Tom McCullough, chairman and chief executive of Northwood Family Office, based in Canada. This news service recently interviewed Tom. Here is what he had to say after he had recently met industry peers at the Wigmore Association, a group of MFOs from around the world.  

Family Wealth Report: What in the broadest sense is the reason for an SFO changing to an MFO?
There seem to be several main reasons for the increase in SFOs who are looking at joining an MFO. The first is ‘key person risk’. Many SFOs rely heavily on a key staff member who leads the office. As that person gets closer to retirement (or if there is risk of them being lured away to another role), the family begins to realize that their departure can leave them with a serious gap. It is often very difficult to replace them through another hire, especially given the knowledge and trust they have built up over many years. In some cases, there has already been ‘an event’, such as the departure of the SFO leader (or perhaps the death of a founder), which puts the family into motion immediately to find a solution.

In a recent conversation with the head of an SFO who is retiring and has recommended to his principal that they move to an MFO, the SFO leader said: “It is too risky to rely on one person, in case they leave. We’ve decided to move to MFO because there will be back up, institutional memory, and multiple people familiar with our file.” The second reason is continuity. Many SFOs are small operations that struggle to continue in a steady state. And many 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.

As the family grows in size, there is often a divergence in views on what they want from their SFO. Some family members want full service, others want an a la carte choice, and still others prefer a combination of multiple external advisors. The third reason is the cost/value equation. Family offices can be expensive to operate, and single family offices particularly so. Many families are reviewing the costs of their offices and investigating alternative service models that provide more economies of scale and reduced household costs over time, as well as greater capabilities, infrastructure, and services available to the family.

Q. Specifically, can you talk about the particular benefits that SFOs are looking for in the MFO option?
If a key SFO leader is likely to retire, instead of hiring a replacement leader and perpetuating that key person risk, many SFOs are now looking seriously at using some services of an MFO, and even folding their operations into a MFO, which tend to have more staff back-up and redundancy to mitigate these risks. MFOs are more likely to continue in perpetuity to support future generations. My Wigmore Association colleague Leslie Voth, CEO of Pitcairn, has a lot of experience working with SFOs. She says, “An MFO provides more options in case those generations are not committed or don’t have the time to oversee their own office, and it avoids many of the governance and management complexities of an SFO.” MFOs tend to be larger and independently owned, and can provide the career and equity opportunities key staff may be looking for to keep them engaged.

Similarly, because MFOs serve a number of families, costs per household are often lower and there is a typically a wider range of services and resources. On the other hand, it’s always important for family members who are used to having exclusive access to their own SFO to remember that the staff and resources in an MFO are shared. It depends a lot on the individual organization, but other benefits of an MFO can include:

-- exposure to a wider range of experience gained from working with multiple families (vs. just one); 
-- a broader and more in-depth review of investment alternatives; 
-- better availability of high-minimum and hard-to-access investments; 
-- improved economies of scale and pricing; 
-- enhanced IT infrastructure, cybersecurity, portfolio reporting, research, and access to inhouse talent; and
-- in the case of the Wigmore Association and others, access to an international network of independent families' offices to support globally-minded families.

Q. Why don’t SFOs just convert themselves into a MFO? 
That is definitely an option for SFOs, but in reality it tends to be quite difficult for an SFO to transition successfully to an MFO. Most SFOs don’t have the robust sustainability required on their own, and it has proven to be a real struggle to get to scale. As well, the skillsets to operate an SFO are not the same as those required to run a successful MFO.

As an MFO, they need to become a commercially-viable enterprise (or at least self-sustaining), they may need to become regulated, and they need to develop effective service models for multiple families. MFOs also typically require years of investment experience and deep technical know-how that is beyond the capabilities or interest of some SFOs. From the family side of things, many families have already sold their business and are not looking to start another one (like an MFO), especially in a field that may be new to them and where they don’t have a lot of experience, skills or competitive advantages.

Another consideration is that potential new families being invited into an MFO can be wary about playing second fiddle to the founding family. So it is possible for an SFO to convert to an MFO, but these days it is much more common that they will fold themselves into an independent MFO to get better scale, more resources and, in some cases, reduced annual expenses.

Q. In your experience is there an approximate size of AuM where you think an SFO should consider joining with other families rather than going alone? What is the “trigger point” where a single family office should consider the move?
There is no single answer, but SFOs with less than $500 million are most likely to be looking at alternatives. Smaller SFOs can typically reap many benefits from partnering with an MFO and accessing their more robust infrastructure. But there are many examples of larger SFOs that are using a generational change or departure of a key employee to weigh their options. There are several options an SFO can consider. In some cases, the MFO can provide the core services and the SFO or the family can still keep some duties in-house, such as bookkeeping, personal services for family members and executive assistant functions. In other cases, SFOs will decide that they are no longer sustainable (or won’t be in the future) and will wind down and outsource their operations to an MFO or another set of providers.

Q. With some SFOs, the time to change might be when the original patriarch is nearing or in retirement age, or where a business transition is likely, etc. What in your view are the main triggers for a transition to MFO status? 
While patriarch retirement can be a catalyst for change (or at least re-evaluation) at an SFO, the impending departure of a key family office executive is often the most significant trigger. Replacing this type of person is a particular challenge because there is such a limited amount of talent in the marketplace – especially with the high levels of technical skill and emotional intelligence needed to run an SFO successfully.

The reason we are seeing more of this now than in the past, I think, is simply the age of the key leaders in family offices. (See an example of a move here and views from the firm Pitcairn.) Many of them are headed toward retirement age, or have passed it and are staying around because the family needs them. But they will ultimately have to retire and the family will have to sort out which direction they want to go after that. Given the large number of SFOs that are facing this issue, it’s highly likely this trend will continue. Other triggers for a transition to an MFO include rising costs, a growing number of households, a big technology expenditure requirement, and a divergence of opinions among family members as to the vision and role of the SFO.

Q. How big a factor are regulations and compliance costs in driving the change to MFO status?
While key person risk is likely the main driver of change, compliance and administrative costs are a large burden for many SFOs due to their lack of scale and ability to share costs. The scale of an MFO can often help ease or at least share this compliance burden. 

Q. Depending on the jurisdictions (inside and outside the US) are differences in the countries where people are more or less likely to want to switch status, and why? 
No. The trend of SFOs moving into MFOs appears to be picking up steam in all of the developed countries. It is interesting to note that this shift emerged in a recent meeting of the Wigmore Association as one of the notable trends each of the firms is seeing, particularly in the US, the UK, Australia, and Canada.

Q. Have recent changes to the US tax code (“pass through” taxes, changes to corporate tax rates, other) affected the thinking about whether to structure as a MFO?
It’s an issue, but not a major factor in families’ decision-making processes. The decisions we’ve seen have been much more service, scale, and succession oriented.

Q. Joining with other families can make an SFO nervous about surrendering control and independence. How should those thinking of joining an MFO think about the move and what can be done to put minds at rest?
Some of these concerns are natural, but are typically dealt with easily. A good MFO will ensure that “confidentiality is paramount”. As my Wigmore colleague Phil Harkness, CEO of Australia’s leading family office Mutual Trust, says: “MFOs are professional firms, and all families that are part of an MFO are treated as clients in a professional environment. Other families are not privy to other families’ business.” At the individual level, family members experience greater control, independence, and household-level confidentiality, and they no longer have their family members knowing everything about each other’s financial affairs. And MFOs can usually offer stronger technology and cybersecurity controls, which actually improves the family’s privacy. MFOs can also alleviate the headaches that come with managing daily operations.

Q. Some MFOs can become so large that at one point they aren’t very “family-like” any longer. How scalable are MFOs?
Yes, this is an important factor. When MFOs get too large, they can lose their family focus. Collaboration and integration is harder to scale (advisor model), so some MFOs resort to becoming asset gathering shops (product model). The important thing here is to have an environment that lends itself to a “family feel”. As Leslie Voth says, “MFOs need to think about not only what they’re doing, but also who they’re doing it for.” Specifically, client teams need to be set up so that families have unlimited access to staff where possible and access to key decision makers.

I think MFOs are scalable as long as the family clients are large enough to pay a certain level of costs which can maintain a team of experts. Client service and fee minimums are important here and MFOs need to be careful not to take on smaller clients which will dilute the offering to their core families.

Q. How is demand for greater professionalism in wealth management generally fueling the trend towards MFOs? 
James Fleming, CEO of Wigmore’s UK-based member, SandAire, suggests that “most families are looking for advisors who are transparent, objective, and have a fiduciary duty to put their interests first - not push product. Many families are beginning to see the value that family offices provide compared to traditional wealth management providers.” This is definitely another factor in the growth of family offices in general, and MFOs in particular. A related issue is the third party independence that an MFO can provide to client families. In some cases, SFOs are run by family members (or employ family members) and this can lead to preconceived notions about which family members require which services from the SFO. One feature of the MFO model is that the people who work at the MFO are typically completely independent from the clients who use its services. Additionally, because of their scale, MFOs are often able to hire more talent and create a more dynamic, sustainable work environment for employees than found at many smaller SFOs.

Q. Are there cases of MFOs where a family has broken away and gone back to SFO status?
I’m sure there are, but I am not aware of any personally. Not every family gets it right the first time. But since any such move is very costly, families need to make these decisions very carefully.

Q. Can you give a general piece of advice about what a family that is thinking of joining an MFO should do, and should be thinking about? 
Families each need to assess what will work best for them. And for many, an SFO continues to be the right choice. But what we are seeing now is a noticeable uptick in the number of SFOs approaching MFOs and using the critical moments of transition to rethink what will best work for them in the future.

There are four key considerations for families:
-- Key person risk – This may be the single biggest reason and certainly the most important catalyst for SFOs to review their options. You don’t want to be caught flat footed without a plan and lose the one person who has all the information and holds the SFO together. An MFO has institutional memory, back up and redundancy that SFOs will struggle to build; 
-- Continuity of the family – As the family grows in size 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; 
-- Cost – It is hard to scale an organization that serves only one family. 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; and 
-- 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.