"Your challenge is not just knowing what you need to know to serve the very wealthy, it's also knowing how to execute the business model in a profitable manner."

In the Family Way

By John Bowen

"Family office" is a hot buzzword in the financial services industry today, but does working with the wealthiest clients within the family office model make the most sense for you? As the level of financial complexity that comes with immense wealth increases, so does the demand for financial advisors who can ably serve those with $10 million or more in investable assets—realistically, the minimum amount required to run a profitable family office.

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This high level of complexity means that few advisors are fully qualified to meet all the needs of the ultra-wealthy. Doing so requires an extraordinary combination of skill, knowledge, and experience in technical areas, as well as superb client relationship management abilities. Nonetheless, many advisors have a keen interest in this market.

Is working with this market something you should even consider? To help you answer that question, I'll look first at what it really takes to work with the very wealthy and second at what it takes to make a family office run successfully.

Given their wealth, these individuals and families have many options when it comes to choosing advisors. They are not impressed with ordinary financial advisor credentials. Instead, what they most want are answers to their complicated challenges—real solutions backed up by real expertise and real service.

It would be difficult to overemphasize the intense level of complexity that is inherent in the financial affairs of the extremely wealthy. Before you consider working in this area, you must first grasp the kind of complexity that you would need to manage. It's probably of a completely different dimension than the most complex of your current clients.

Consider a typical affluent family (and you must always think of the very affluent not simply as individuals, but as the members of extended families). There will be a patriarch, a matriarch, and perhaps their two adult children. The adult children may each have several children themselves, some of whom are of marriageable age. With these three generations—and a fourth soon on the way—the financial advisor is confronted with planning not 10-20 years out, as he or she is accustomed to now, but as much as 100-200 years out.

Next, consider the number of entities controlled by this typical ultra-wealthy family. There is the professional corporation that was originally created to support the family. There are four different limited liability companies and two different limited partnerships, all engaged in different types of businesses. There are four separate trusts, each set up to accomplish a specific goal. And then there is the family foundation.

The advisor has to consider each of these different entities from tax, compliance, planning, investment advisory, estate planning and gift diagnostic perspectives. There is also accounting, bill-paying, and expense management for each entity. And the ways in which each entity affects and is related to the other entities must be considered as well.

Add to this the fact that each individual in the family has a different and unique set of goals—personal goals, family goals, education-funding goals, tax-planning goals, charity goals and retirement goals. The financial professional must consider all of these with an eye to cash flow and investment management, from a multi-generational wealth transfer perspective. And he or she must do all of this in a way that meets the risk needs and fiduciary requirements of each individual and each entity.

Finally, there is a layer of emotional complexity to consider. The family patriarch and matriarch might each have different types of relationships with each of their children. The siblings each have unique interpersonal relationships with one another, with their children and even with the children of their siblings. All these layers of relationships and emotions become part of the larger picture when you're managing financial affairs and dealing with people inside and outside of the family.

Your challenge is not just knowing what you need to know to serve the very wealthy, it's also knowing how to execute the business model in a profitable manner. Assuming that you may want to take on the myriad challenges involved in serving this market, your first step would be to consider which business model to use and how to use it to ensure a profit. Generally, there is a single model currently in use by advisory firms that serve the ultra-wealthy—the family office.

For many, the term "family office" lacks a clear definition. Generally speaking, a family office is an organization that is dedicated to meeting the entire range of clients' financial and personal needs. It typically has an in-house staff to provide its core services of investment management and administrative services, such as recordkeeping, aggregated statements, and accounting. Other services are outsourced to external specialists.

We typically break family offices into three distinct types:

Single family offices. These are not profit-making operations, but rather are family support systems. A family creates one to take charge of its own finances. By coordinating all functions through one office, the family's financial life is much easier to manage and control. There are exceptions, but these family offices generally serve families that have at least $100 million or more of investable assets. Because of their structure, these offices offer no opportunities to independent financial advisors.

Multi-family offices. These offices typically serve several families, although one family may have 30 percent or more of the assets in the office. By combining their resources, these families can capture a higher level of cost and operating efficiency than each would achieve alone and obtain access to otherwise unavailable investment opportunities. While again there are many exceptions, these offices typically handle families with $25 million or more of investable assets.

Commercial family offices. Generally, commercial family offices are comprised of investment advisors who offer money management and administrative services in-house and outsource other services. As value-added, they may arrange personal services for clients. Commercial offices work with families with $10 million or more to invest. If you choose to pursue this market, the commercial family office should be your model.

A word of caution: It's a prescription for disaster to think that you will be able to accept clients with as little as $1 million in investable assets into your family office and still make money. Providing the range of services that a family office typically provides is expensive and can quickly put you out of business if you try to serve clients who don't have sufficient wealth. Even with a minimum of $5 million in investable assets, you would find it a challenge to make money. Unless you are truly committed to offering the high-end services needed by the very wealthy, you will be better off simply sticking with what you know best—providing top-notch investment management on a long-term, consultative basis.

Operating a family office can be profitable, but only if the business is managed in specific ways. Our own experience shows that advisors who operate family offices vastly increase their chances for success when they do five key things:

1. Minimize overhead. If you try to put together a complete in-house team of experts, it will be hard to recoup all your costs. Instead, you must outsource most work to qualified outside experts.

2. Create an effective network. Your ability to bring together and manage a network of professionals is absolutely critical to your success. Successful family offices recognize that they cannot be all things to all people. While they manage key items in-house (such as cash flow, investments, and the structures and relationships of various entities and trusts), they outsource expertise in most other areas to specialists. They make it their business to know all of the experts in every field related to the management of their clients' affairs.

3. Use the wealth management model. To be successful, you must use the classic wealth management model—providing a range of products and services to the same client. These might include insurance, credit services, and investment banking, all in addition to investment products and management. The wealth management model offers cross-selling opportunities, which translate directly into higher profits for the family office. In fact, research by CEG Worldwide principals shows that family offices that offer multiple products and services are, on average, three times more profitable than family offices that offer primarily investment management and a few supplemental services.

4. Offer lifestyle services. You must differentiate yourself from the many other firms now calling themselves "family offices" that offer largely similar investment services. A key way to do this is to offer value-added services that complement advanced planning and wealth management, such as educational services, collection advisory, family security and concierge services. But these non-investment services can be expensive to provide, so don't make the mistake of assuming that they can simply be paid for out of your asset management fee. Instead, charge clients for these services and deliver them via outsourcing.

5. Be prepared to invest a substantial amount in the business. Even when you minimize your overhead as much as possible, you will still need to increase it significantly above what is required to run an investment advisory business. It is not unusual for family offices that are just beginning to spend many millions of dollars alone on the technology that is necessary to deliver comprehensive financial reporting, for example.

Serving the very wealthy in a family office setting is not for every advisor. To be successful in this challenging field, you need to have outstanding interpersonal skills, deep technical knowledge and resources, and most importantly, the ability to package and deliver effective solutions to each client.

However, for those advisors who do master these challenges, working in this market can be rewarding, both personally and financially. If you believe that you may be right for it, I encourage you to do substantial further research into both its challenges and opportunities before transitioning your business.