Key Considerations When Deciding Between a Single or Multi-Family Office

The creation of substantial wealth is often born of tireless entrepreneurial grit and dedication. Once realized, the same effort spent on accumulating the assets often needs to be thoughtfully focused on how wealth should be managed for future generations. Self-managing extraordinary wealth, and the coordination of surrounding legal and tax professionals, often comes with the risk that ‘balls’ are being dropped in the implementation of plans or spotting common issues or opportunities. With that, families are typically left with deciding whether or not to form a Single Family Office (SFO) or hire a Multi-Family Office (MFO) to support their needs. The characteristics that define both solutions are outlined in this article, but ultimately the best decision for a family is driven by their long-term objectives, values, and family structure.

What is the difference between a Single Family Office and a Multi-Family Office?

Single family offices are entirely dedicated to serving the wealth management needs of one family. The size and scope of these offices is dependent on the complexity of the family and can range in staff size from as small as 2-3 people to over 200 employees. Generally, families that decide to form a single family office desire a high degree of privacy and control, enjoy being involved in running the office, and are not concerned with the costs of formation, managing employees, and ongoing operation.

Multi-family offices are commercial entities that provide wealth management to more than one family. However, given the complexity and scope of services that a multi-family office provides, they often limit their services to a smaller number of clients than are found in most registered investment advisory firms. Families that select MFOs typically desire a fully outsourced solution that gives them the freedom to not worry about the challenging and evolving requirements that intergenerational wealth demands. MFOs are a cost-effective alternative and are highly regulated, therefore, they tend to adapt quickly to issues with security, technology, and reporting.

Costs

The formation of a single family office and on-going operation is driven by its size, complexity, and scope of services. According to UBS’s 2021 Family Office Report, smaller family offices’ expenses often amount to about 1% of the family’s total active assets, including investment portfolios, trust assets, and liquid assets. Excluded from active assets are typically concentrated equity positions, operating businesses, residences, art, and various other assets. So, the approximate cost for a family with $150 million in active assets would be $1.5 million annually. The cost for larger family offices as a percentage of active assets typically cascades down as scale can be leveraged and range from 30 to 50 basis points.

Family office components generally fall into the following four categories. Before endeavoring to establish an office it’s important to appreciate the similarities (and complexities) of a single family office compared to running a business.

Multi-family office pricing structures vary widely, although assets under management (AUM) is still the predominant factor in determining client fees. Most firms will also charge a minimum fee to ensure that costs are covered for lower AUM families. Fixed annual fees based on scope of services being provided or an asset based fee are also common arrangements with families. Families that select MFOs are realizing the size and scale benefits of a larger pool of assets. The breadth of services offered by a MFO to wealthy families are already established and are typically included in the fee charged.

While not a deciding factor, the tax deductibility of both MFO fees and costs to operate a SFO should also be noted. Tax reform legislation on December 22, 2017, suspended miscellaneous itemized deductions under IRC Section 212. IRC Section 212 allowed taxpayers to deduct expenses incurred for the production or collection of income to the extent such expenses exceeded 2% of the taxpayer’s adjusted gross income. At the same time, however, IRC Section 162 was not suspended permitting taxpayers to deduct ordinary and necessary expenses paid in carrying on a trade or business. This scenario was tested in Lender Management, LLC v. CIR where the US Tax Court held that Lender Management, which is an SFO, carried on a trade or business within the meaning of IRC Section 162 and could deduct expenses. So with a properly structured SFO, deductibility of costs to operate may be achievable.

Resources

Staffing

The management of a single family office requires the skills of highly experienced professionals, causing staffing to be the largest cost driver for an office. These personnel come from varying fields with backgrounds ranging from investment, finance, law, tax, risk, and marketing. Staffing decisions are based on services provided by a SFO and can range from:

Staffing for the breadth of services above can be understandably overwhelming for families forming SFOs. On the other hand, MFOs are positioned to support most, if not all, of the above categories and have teams of experienced professionals in place that are drawn from a national pool of talent. MFOs tend to field larger teams of experts than SFOs and have infrastructure in place to make collaboration and teamwork more efficient. Staffing experience at MFOs also tends to have deeper and broader experience as a result of working with a large number of families who present a myriad of different situations.

Technology

An often underappreciated component of running a SFO are the technology requirements. After staffing, technology is another significant cost driver for family offices that has been evolving quickly and with which it can be difficult to keep pace. Technology needs can be broken into four categories:

MFOs have no choice but to keep up with this rate of change due to regulatory requirements and competitive demands. While the risk of a cyber-attack is always present, MFOs do offer a ‘plug and play’ solution for technology demands giving families more freedom to not worry about managing, monitoring, and keeping abreast of evolving threats.

Investments

Large single family offices can benefit from their personal and professional network with deal flow to which they have access. Their investment time horizon can often be more patient than traditional, alternative fund cycles lending to more unique strategies. Some SFOs leverage the expertise of the wealth creators and can take direct, controlling stakes in companies without having to pay the fees that funds charge.

On the other hand, MFOs are generally larger in aggregate than most SFOs and typically have access to a broad scope of deals, especially in illiquid alternative asset classes like hedge funds, private equity, venture capital, and real estate. Investment teams at MFOs tend to be larger and more capable of evaluating opportunities comprehensively at the onset and have controls for ongoing diligence. Deal flow is constant for MFOs and given the size of the cumulative asset pool, fees and terms can often be negotiated more favorably for their clients. In determining whether a MFO is a good fit for a family, it is important to understand whether both the family and MFO’s investment philosophy is aligned.

Conclusion

Deciding whether to build a single family office or outsource wealth management to a multi-family office can be deliberated at the point of wealth creation or can be re-evaluated over time. There is no right decision for all families of significant wealth, but rather long-term needs, values, and family structure should be considered along with the points outlined in this article to inform the path forward.

Forming a single family office may be best for those families that desire a high degree of involvement, enjoy running a business, understand costs, and value complete privacy and control. Families that value a more cost-effective solution that provides robust infrastructure, an experienced team, comprehensive planning, idea sharing with other families and experts, and asset management all controlled by compliance, leading technology, and cybersecurity systems, may find that a multi-family office provides a turnkey solution.

If you would like to discuss how a multi-family office may be the right fit for you, please reach out to speak with one of our experienced advisors.