In late February, Northwood attended the semi-annual meeting for members of the Wigmore Association, a group of eight leading independent family offices from around the world in São Paulo, Brazil. These meetings provide an opportunity for the leaders of the member firm to share knowledge and perspectives, and to discuss industry trends that benefit clients.
This is our purpose statement:
- Purpose: Working together globally to help our families thrive.
- We do this by:
- Providing independent global intelligence
- Offering exclusive access to a trusted international network
- Helping our families navigate an evolving world
- In so doing, we will become the recognized standard for the world’s best and most trusted family offices.
On the theme of global intelligence, it became apparent in the last two Wigmore meetings that one particular trend is accelerating significantly in the industry and certainly amongst our member firms around the world. We have seen a larger-than-average number of single family offices (“SFOs”) winding up and transitioning their operations to an established multi-family office (“MFO”).
Of course, most families with SFOs are retaining them, and appropriately so, but what we are seeing in the last few years across all firms is a notable acceleration of the “SFO to MFO” trend. A number of the member firms have been onboarding SFOs for several years and many have current such projects on the go.
What is the reason for an increased number of SFOs looking to move to an MFO?
There seem to be several main reasons for the increased number of SFOs who are looking at joining an MFO. The first is ‘key person risk’. Many SFOs rely heavily on a key staff member who leads the office. As that person gets closer to retirement (or if there is risk of them being lured away to another role), the family begins to realize that their departure can leave them with a serious gap. It is often very difficult to replace that kind of person through another direct hire, especially given the knowledge and trust they have built up over many years. Families can sometimes feel that it is too risky to rely on one new replacement leader and opt for an MFO because there will be back up institutional memory, and multiple people familiar with the family file.
The reason we are seeing more of this now than in the past, I think, is simply the age of the key leaders in family offices. Many of them are headed toward retirement age or have passed it and are staying around because the family needs them. But they will ultimately have to retire, and the family will have to sort out which direction they want to go after that.
The second reason is continuity. Many SFOs are small operations that struggle to continue in a steady state. And some can find it difficult to create workplaces that consistently attract and retain top quality staff, especially since it can be more difficult for staff to advance and build equity.
However, while key person risk is likely the main driver of change, compliance and administrative costs are another factor, since they are a large burden for many SFOs due to their lack of scale and ability to share costs. The scale of an MFO can often help ease or at least share this compliance burden.
The third reason is the cost/value equation. Family offices can be expensive to operate, and single family offices particularly so. Many families are reviewing the costs of their offices (including the investments in technology, staff and resources they will need) and are investigating alternative service models that provide more economies of scale and reduced household costs over time, as well as greater capabilities, infrastructure, and services available to the family.
And the fourth reason is alignment. In some cases, there will be a divergence of opinions among family members as to the vision and role of the SFO, particularly as the number of next gen households. Some family members may want more independence, some want a different focus than their siblings/ cousins, and some are not interested in managing the staff of an SFO and want to outsource that responsibility to someone else.
Is there a trend in the specific size of assets of SFOs joining MFOs?
SFOs with less than $1 billion are most likely to be looking at alternatives. Smaller SFOs like that can typically reap many benefits from partnering with an MFO and accessing their more robust infrastructure. But there are also many examples of larger SFOs that are using a generational change or the pending departure of a key employee to weigh their options.
There are several options an SFO can consider. In some cases, the MFO can provide the core services and the SFO or the family can still keep some duties in-house, such as bookkeeping, personal services for family members and executive assistant functions. In other cases, SFOs will decide that they are no longer sustainable (or won’t be in the future) and will wind down and outsource their operations to an MFO or another set of providers.
Why aren’t more SFOs simply changing their business model and becoming an SFO themselves?
That is definitely an option for SFOs, but in reality, it tends to be quite difficult for an SFO to transition successfully to an MFO. Most SFOs don’t have the robust sustainability required on their own, and it has proven to be a real struggle to get to scale. As well, the skillsets to operate an SFO are not the same as those required to run a successful MFO.
As an MFO, they need to become a commercially-viable enterprise (or at least self-sustaining), they may need to become regulated, and they need to develop effective service models for multiple families. MFOs also typically require years of investment experience and deep technical know-how that is beyond the capabilities or interest of some SFOs.
Another consideration is that potential new families being invited into an MFO can be wary about playing ‘second fiddle’ to the founding family. So, it is possible for an SFO to convert to an MFO, but these days it is much more common that they will fold themselves into an independent MFO to get better scale, more resources and, in some cases, reduced annual expenses.
As we know one of the constants in life is change. Many family offices are sorting through how they will deal with these changes, including key staff succession, rising costs, increasing numbers of households, and a diverse set of visions of the future. Some will stay as single family offices and some will shift to other models, including MFOs, depending upon their assessments of the costs and benefits of each. The experience of the Wigmore Association members firms over the past few years is that this evaluation process and shift to new models is picking up in a big way.