Who Should Manage Your Family Wealth?

If you are in the fortunate position to be the owner of a profitable family business you might consider hiring an expert to help manage your wealth. If so, you should be familiar with two primary business models available to assist in wealth management: traditional wealth management firms and family offices.

While there is overlap in the services provided and the clientele served, there are some key differences in deciding which financial solution is best for an ultra-high net worth individual or family.

Traditional Wealth Managers

Traditional wealth management offices are the most accessible avenue for financial guidance and most cost-effective solution for managing family wealth. Clients of traditional wealth managers include everyone from the mass affluent (typically considered a net worth of above $250 thousand to $1 million) to ultra-high net worth individuals (exceeding $30 million). In general, wealth management advisors manage a client’s wealth holistically, typically for a set fee based on total assets under management, a flat fee, or an hourly fee.

Wealth management advisors manage a client’s wealth holistically, typically for a set fee based on total assets under management, a flat fee, or an hourly fee.

The investment process often begins with financial planning, communicating a client’s financial situation, goals, and risk tolerance. Once an investment plan is in place, investors can expect annual or quarterly meetings to review and rebalance the portfolio according to the client’s current financial situation. Asset classes and investment products utilized may differ among wealth managers but for the most are usually selected based on the objective of the client.

Wealth managers can either manage your assets on a discretionary or non-discretionary basis depending on what level of involvement you prefer. For those who are looking to entirely outsource their investment panning, a discretionary plan will allow an authorized broker or advisor to buy and sell securities without the client’s consent for each trade. As wealth accumulates, many families pursuing a traditional wealth management route seek management on a discretionary basis.

In the wealth management community, there are two primary business types to work with: wirehouse teams and independent Registered Investment Advisors (or “RIAs”). Wirehouses include well-known brands such as Morgan Stanley, Bank of America’s Merrill Lynch, UBS, Wells Fargo among numerous others. Wirehouses are typically much larger than RIAs with branch offices and correspondents internationally sharing financial information, research, and prices. Clients can often choose to be charged on a fee basis in which advisors are paid a percentage of assets managed or by commission on transactions.

In the wealth management community, there are two primary business types to work with: wirehouse teams and independent Registered Investment Advisors (or “RIAs”).

RIAs are generally much smaller and more well-known RIA brands include Cambridge Associates, Mercer Global Advisors, and Fisher Asset Management among others. However, because RIAs generally consist of a single office with a handful of advisors operating on a local or regional scale, it is likely that the most readily available and appropriate RIA for you is locally owned, operated, and known (much like a local or regional bank).

Hallmarks of RIAs include the fee structure of assets managed for compensation, the use of custodians, and the “Fiduciary” standard. While assets and transactions are overseen by an advisor, assets are “held away” with a custodian such as Fidelity, Schwab, Pershing, or TD Ameritrade, among others, to ensure the safety of assets and minimize holding costs. The fiduciary standard legally binds advisors to act in the best interest of the client in all circumstances. By contrast, other advisor models are held to a lower, “suitability” standard. In recent history legislation has increasingly narrowed the divide between these two standards.

Other wealth management models include regional firms such as Raymond James and Ameriprise Financial, as well as boutique firms such as Credit Suisee, Deutsche Bank, and Barclays. Regional firms operate similarly to wirehouses despite having a limited geographic presence. Boutique firms are generally located in major metropolitan areas and cater to clients with a minimum of $2 million in liquid assets held. Depending on the firm, boutique managers may offer more flexible and unique investment strategies or may offer expertise in a single, niche asset class or strategy.

Family Offices

The concept of a family office dates back as far as 27 BC, however, the modern family office, as we know it today, took shape in 1882 when the Rockefeller family (with approximately $1.4 billion, equating to around $255 billion today) founded their family office to organize the family’s business operations and manage their investment needs.

Like a traditional wealth manager, a family office provides investment management services. However, a family office offers a wider variety of services providing a total outsourced solution tailored to individual family needs. A family office can assist in investment management, tax planning, charitable giving, family education, legacy planning, and in some cases, even lifestyle assistance through travel arrangements, personal security, and other household services. Because most family offices are built around an individual family’s needs, it is difficult to identify a “typical” family office.

A family office offers a wider variety of services providing a total outsourced solution tailored to individual family needs.

Single family offices cater a comprehensive array of services to a family, but the costs can be prohibitive due to their extensive and unique nature. Typically, a family’s assets must exceed $100 million to warrant the operation of a family office. Multi-family offices were developed as a more cost effective option, pulling a group of families’ assets (usually in excess of $25 million per family) with similar needs to share overhead. Unlike a single family office, multi-family offices must be registered with the SEC and are typically structured like RIAs or trust companies.

One key differentiator is that a multi-family office is a profit driven institution whereas a single family office’s primary goal is to preserve and generate wealth for the family. Because profits are shared between families (via returns on investment) and the ownership base, multi-family offices theoretically generate lower returns on assets than single-family offices despite being more efficient due to the cost sharing across families.

Which Is Right For You?

At the end of the day, it comes down to your needs and, to a certain extent, preference. Family offices offer a more tailored client experience than a traditional wealth management firm and can provide a great deal more flexibility and convenience due to their ability to manage nearly all aspects of client financial life. However, traditional wealth managers can help prevent disputes arising from mixing business with family and don’t come with the prohibitive costs or necessary asset base associated with opening a family office.

Most advisors recommend a balance sheet figure of approximately $100 million dollars in net worth before considering a family office and often $250 million before considering in house investment management and research. However, just because you can afford one, doesn’t mean you need one. The decision to start a family office is nuanced and relates to the complexity of a family’s portfolio, liquidity needs, lifestyle, and estate planning among numerous other factors best discussed with a personal wealth advisor.

For instance, even an entrepreneur with several hundred million dollars in net worth may not need the support of a family office if his/her wealth is mostly held in one company stock. Similarly, families with net worth’s mostly tied to trading securities will not need a family office, regardless of net worth, as such a portfolio would be more efficiently served by a wealth manager. Conversely, for an investor with a highly diversified portfolio with a high degree of illiquidity and legal and accounting complexity, a family office may be justified.

A complicated lifestyle and expenditure can also qualify a family or individual for a family office. If a family’s time spent budgeting, coordinating private travel, and making purchases is burdening their ability to run a successful enterprise, a family office may free up time and resources better served in the careers and businesses that created such wealth to begin with. Or perhaps, a family office can free up a family to pursue philanthropic endeavors. Families with complicated estate plans consisting of multiple family entities, foundations, and trusts may also require full time staff to execute.

Family offices are not merely reserved for the passive investor. Family offices often facilitate direct investments into private equity and allow for a more “hands on” approach of investment alongside qualified professionals into alternative asset classes. The prominence of direct investments by family offices has been growing in recent years as private business owners looking for liquidity are often attracted to the longer holding periods of a family office while family offices are increasingly looking invest in specific industries or make an impact.

Ultimately, the family office will be funded by a family’s sustainable discretionary income, not necessarily assets held, and the benefits of financing a family office should outweigh additional costs of simply working with a team of advisors and CPAs. For reference, a survey from Citibank estimates a small family office with two professionals and four support personnel can cost anywhere from $1.5 million to $1.8 million per year.