There used to be only one choice for a wealthy family to make when selecting a financial advisory firm: which gigantic wealth management firm (often called a wirehouse) to use.
Not pictured: any multi-family offices. Yet.
The problem with huge firms is that the advisor has many restrictions and incentives placed upon them by the bank they work for. Most of these are not obvious to their clients until they feel the sting of a slew of high fees or a conflicted decision impact their bottom line.
The CEO of a multi-family office told me he created his firm because his family asked the wirehouse they used to give them a breakdown of all the fees they paid. After a month, they came back and said it was impossible to give them a final number because the fees were intertwined into every investment and relationship the family had with the bank.
The disappointment that many clients have experienced due to conflicts of interest inherent in the big bank that they have trusted with their most precious assets has created a demand for a more independent model.
Enter multi-family offices (MFOs) and registered investment advisors (RIAs). I will call them MFOs for this post.
True MFOs began as a sophisticated single-family office that had so much success that other families were attracted to them to join forces.
Usually, the original SFO continues to operate as the manager and decision maker, with other families paying a fee to join the platform.
MFOs are called "open architecture" because they are not restricted to investing in only the products and strategies that their bank offers.
The benefits of joining MFOs are manyfold:
increase investment sizes for economies of scale (benefits: easily meet minimum investment sizes, negotiate lower fees)
diffuse costs for staff, diligence, and software
combine networks and expertise amongst families to increase deal-flow and strategic ideas
The best MFOs have poached CIOs from endowments and large single-family offices to run institutional-style portfolios of alternative assets. This allows clients to access best-of-breed investments that are tailor-made for their overall portfolio.
Many MFOs also have team members who are well-versed in tax so that the investments all end up in the right place with the best bottom-line outcomes for the family.
Open-architecture MFOs can work with outside advisors, sit in meetings with the families' accountants and lawyers, and add value by bringing the entire picture together, without pushing any of their agendas through revenue shares or the like.
Pro-tip: To check up on an MFO's conflicts, just check out the Form CRS/Form ADV Part 3 relationship summary.
https://adviserinfo.sec.gov/
My favorite MFOs have a significant portion of the owner's own money in the platform and "eat their own cooking," as the saying goes. Sure, they get paid extra to run the platform, so it might be worth it to put their own money in as a marketing tool, however, if it is a significant enough portion of their own capital, it sends a real signal.
There is a lot more to say about this topic, and it is surprisingly not as well known as it should be. I think many people would be well-served not just to hire an MFO, but if they are in the wealth-management world, go work for one! I truly think it is the future of wealth management.
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