EXECUTIVE
SUMMARY |
Multifamily office
(MFO) services have long been
offered by a variety of financial
services providers. Increasingly, CPA
firms have made this provision of
comprehensive wealth management and
personal services to select client
families a major facet or even
cornerstone of their practice.
For many firms, MFO
services are a logical next
step as their client base begins to
include more individuals who have
amassed wealth through such means as the
sale of a business. That evolution often
begins with tax services, broadens to
investment management and culminates in
passing on assets to children and
charities.
To offer MFO
services, firms need in-house
technical expertise plus a referral
network for professionals to help with
specialized concerns that can run the
gamut, even to personal and family
counseling. Possible downsides include
the greater impact to your practice if
you lose a client family and competition
from banks, trust companies and other
financial advisers.
Lyle K. Benson Jr. ,
CPA, PFS, CFP, is president of L.K.
Benson & Co. of Baltimore, a
member of the AICPA’s National
Accreditation Commission and president
of the Association of CPA Financial
Planners. His e-mail address is
lyle@lkbenson.com.
| It
shouldn’t come as a surprise that CPA practices
often reflect society’s basic institution—the
family. Whether crafting the finer points of a
generation-skipping trust or simply advising
parents on paying their children an allowance, a
family office practice, as it has long been known,
can be perhaps the most personal of personal
financial services. While single-family office
services for high-net-worth individuals have more
often been provided by other financial services
professionals, CPAs are increasingly getting into
offering such services, often by modifying the
concept to accommodate a select few in a
multifamily office. A wide range of
financial services providers and wealth advisers
labor in the multifamily office (MFO) field, from
Goldman Sachs to medium-size and small firms. And
that field is expanding rapidly. A survey last
year by the Family Wealth Alliance of 68 companies
of all sizes found that multifamily office assets
under management grew by more than 15% to $226
billion from the year before. Small and
medium-size companies grew even faster, by 20%.
CPAs haven’t historically made up a large portion
of the MFO landscape, but many have found it to be
a growth opportunity for their firms. For
many CPA firms, family office services are a
natural extension of financial planning work
they’ve always done, as their clients’ financial
situations grow more complex and multigenerational
and those clients seek advanced services that
coordinate a variety of aspects of their personal
financial planning. Many CPAs now in this practice
area began with a focus on tax services and then
broadened their services. They then saw the need
to help their clients with investment management
and began to provide investment monitoring,
selection and reporting services. From there, they
gradually evolved into a broader role as wealth
managers. Providing MFO services is a
logical next step for your higher-net-worth
clients with the most complex financial
situations. Some CPAs do so from a traditional
firm structure, while others have evolved into
focusing solely on family office services. Still
others have grown into trust companies or other
financial service organizations. Our firm has come
to emphasize financial planning, offering a broad
range of services. While there is no clear
definition of MFO services, they are distinguished
by their types of clients and services and may
have particular staffing and practice management
issues.
TYPES OF CLIENTS
The needs of MFO clients are typically
diverse and sophisticated. They are seeking an
individual or an organization that can look at the
entire personal financial situation for them and
their family. Often, this provider coordinates a
team of advisers for the clients’ benefit. These
clients tend to have sufficient assets that need
focused, dedicated attention but are not large
enough to establish their own single-family
office, which can entail a significant cost. The
typical MFO client has about $25 million to $50
million in assets available for investment. Often,
a family-office practice develops around the
firm’s service to a family-owned business and
meeting the needs of the business’s owners,
especially after they have sold the business.
CASE STUDY: SALE OF A CLOSELY HELD BUSINESS
We worked with a family for many years in
our traditional CPA firm environment. The husband
and wife ran a successful closely held business
for several decades. Their three children were
employees of the business but not involved in
management. After much thought, realizing the
children would not succeed them in running the
company, they decided to sell in a stock
transaction. The result was a large, concentrated
stock position in a publicly traded company. Our
role quickly grew beyond the typical individual
and business tax services that we had provided in
the past. Developing an overall investment
and asset allocation strategy became very
important. Knowing that the clients would only
gradually part with the company stock, we had to
take this process one step at time. While we
explored a variety of concentrated stock
strategies (hedging, exchange funds and others),
they wanted to proceed by gradual outright sales
over a number of years. They have been able to
gradually build a well-diversified portfolio while
still holding a large allocation of the
concentrated stock, and it has performed very
well. Estate planning and passing the
wealth along to their children continues to be a
critical goal, and balancing it with their
charitable intentions is a constant struggle for
the family. To accomplish these goals, we set up
trusts for the children, as well as a family
limited partnership, which was used to gift assets
with depressed values, taking advantage of
valuation discounts to further reduce the current
taxable gift. A private foundation was established
to provide a vehicle for ongoing charitable
contributions and play an important role in their
estate plan after death. After they sold
the business, an important family goal was to
provide ongoing financial education for the
children. We have tutored the children in the
basics of income tax planning, monitoring their
investment portfolio and making sure they have
current estate plans. We have also helped with
buying houses, leasing apartments and establishing
college savings plans for the grandchildren.
Regular family meetings are part of our ongoing
services and an important part of what the clients
want from us.
SERVICES OFFERED
The range of services that can be offered is
as broad as the client wants it to be and will
often need to be customized to meet a family’s
needs. While MFO services might start with more
traditional ones in the critical areas of
investment management, tax planning and
preparation, and estate planning, they might
expand into risk management and insurance,
lifestyle management (bill paying, property
management, domestic payroll) and family
philanthropic and charitable services. Many MFO
clients, since they involve multiple generations,
want their advisers to be involved in educating
their children about personal financial matters
and assist in running periodic family meetings.
Here, too, is a valuable opportunity for CPAs to
be at the forefront in passing on the lessons of
financial literacy in real time, with real wealth,
to a second generation that may have little of the
acumen that their parents may have acquired the
hard way over time. Or the family may have major
philanthropic goals your firm can help structure.
Many families want to do both simultaneously.
CASE STUDY: SERIAL ENTREPRENEURS
A couple who primarily used our tax services
started and ran several successful businesses over
a number of years. They orchestrated several
successful sales of the businesses, gradually
building a portfolio of investments. They moved
some of their wealth to their three children
through trusts set up when the children were
young. The family’s tax planning needs became
complex as their income fluctuated. We provided a
core ongoing service of building a
well-diversified investment portfolio. This was
done gradually and sporadically but with an eye
toward their long-term goals. The investment
strategy was closely coordinated with the tax
planning picture, an important aspect of the
planning. Charitable giving played a key role as
the family set up a donor-advised fund. We
began to work more closely with the children as
the wealth in their trusts grew. We helped one who
was finishing medical school buy his first house.
Another, who embarked on a music career after
finishing his undergraduate degree, has used our
help in developing his budget. The third spent
time between high school and college deciding what
direction to take and has used the trust to help
during this transition. All of this work has
brought us closer to the family as a key part of
their advisory team.
STAFFING STRUCTURE
The skills required by the MFO staff can be
broad and deep. Depending on the service areas,
you will need to determine whether it is better to
try to provide the services with in-house staff or
outsource them. While there are pros and cons to
outsourcing services in this area, many CPAs will
outsource services such as tax preparation,
investment management, estate document drafting
and insurance services. Much of this is driven by
the needs of your clients and the expertise
available from existing staff. Providing
MFO services tends to be very personalized and
requires much high-level client attention. We have
also found that these families tend to be spread
out throughout the country and beyond. Many times,
these clients are used to getting immediate
service around the clock. It is very hard to
“commoditize” these services, and a key
competitive advantage may be for the family to
have the ability to work closely with high-level
professionals.
CASE STUDY: SECOND-GENERATION WEALTH
BUILDING We had worked for many
years with a tax client who had income from a
family business and real estate. Gradually, we
became more involved in her broader family
situation and worked with her siblings to better
understand the family business holdings. Thus, we
became an adviser to the other siblings in the
family investment partnership and real estate
ventures. We realized the client had
concerns about her two young adult children.
Helping them to better understand the nature of
the family’s business activities went well beyond
attending the annual family meetings. We spent
time with the children individually to better
understand their needs, cash flow and goals. Over
time, our role continued to grow as we helped one
child rent an apartment and deal with a number of
medical issues. We also helped the other put a
prenuptial agreement in place. As we
worked more closely with the senior generation, we
were able to work with children of our original
clients’ siblings. Helping them with the impact of
the family business and integrating it into their
own financial situations has been a rewarding
process for everyone involved.
|
Besides traditional
practice areas, your firm’s
multifamily office services
should include risk management
and insurance, plus a range of
activities in what might be
called “lifestyle management.”
These services might include
bill paying, property management
and managing a domestic payroll.
For many MFO
clients, CPAs’ duties can extend
to offering basic financial
education to clients’ children
and assisting them in making
choices about their futures.
Build and maintain
a strong network of
professionals in many fields
families might need to call on,
including family and individual
counseling.
| |
MOVING TOWARD AN MFO PRACTICE
How do you know if your financial
planning practice is moving in this direction? In
most cases, CPAs providing personal financial
planning services will recognize when they are
going beyond usual PFP services to include such
additional services as bill paying for clients,
organizing and leading family meetings, or helping
client families with tasks such as buying houses
or leasing apartments. We’ve found as that
happens, word of mouth can bring more families
seeking your services. What should you do
to help with this transition? Of course, you
always want to be sure that you have the technical
expertise to provide any additional services, or
have a strong referral network for those better
handled outside your firm. These matters often go
beyond wealth management as it is narrowly defined
to include not only real estate and insurance but
even personal and family counseling. Clearly,
talking with other colleagues who provide MFO
services is important. It makes sense to look for
any other organizations that you can get involved
with—two are mentioned in the resources box
accompanying this article. Sharing resources and
experiences is a great way to enhance your skills.
You should also give considerable thought to
one of the biggest downsides to offering MFO
services: You could wind up with a large portion
of your revenue coming from a small group of
clients. Make sure you know what the impact would
be on your firm if you were to lose any of them.
COMPETITION
Other businesses and providers offering
similar services include:
Private banks/trust companies.
Most of the major Wall Street firms
have groups that focus on serving these types of
clients. We have also seen that trust companies
and banks are paying particular attention to this
target client.
Brokerage firm service teams.
Modeled after the financial planning
organizations, these groups within brokerage firms
typically focus on the investment aspect of the
relationship but provide services that touch on a
variety of areas.
Non-CPA MFOs. Many MFOs
have evolved from other forms of businesses, such
as law firms or trust companies, which may create
a division or group focusing on high-net-worth
individuals. They have built business models
around their clients’ needs, such as investment
management, often over many decades.
Single-Family Offices (SFOs).
For clients who have significant
assets (typically between $50 million and $100
million or more), creating their own family office
and building a staff dedicated to serving just
their family’s needs often makes sense. For the
family that has sufficient resources to support
the substantial cost to set up and run an SFO, the
rewards include a dedicated office to support
family activities.
THE CPA ADVANTAGE
CPAs are likely to find that the kind of
nurture and care that ties families together
offers one of the brightest venues for their role
as trusted advisers. Compared with some of their
larger institutional competitors, they can offer
the personal touch of a locally based practice,
with easy accessibility. It’s where many firms are
finding they can make a difference—from one
generation to the next. |