All in the Family

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.

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.