One of the biggest concerns among family offices surveyed in the Family Wealth Alliance’s Fall Forum 2012: Report on the Fifth Annual Single-Family Office Study (Single-Family Office Study) in October 2012 was sustainability of the family office, with a strong emphasis on expenses outpacing asset growth.1 Margins are demonstrably tightening, and family offices are looking at ways not only to save man-hours, but also to focus on the core skills that allow them to provide unique services to their clients. Outsourcing—contracting with outside agencies to perform tasks that are either highly labor-intensive or require specific knowledge—has become an increasingly important component of the family office’s suite of services. 

No single-family office (SFO) or multi-family office (MFO) has the deep skill or the product set to offer everything, any more than an automobile manufacturer has the wherewithal to build a car from the ground up. By working with outside agencies that are the best in their respective fields, with specific knowledge, airtight security and broad technical experience, the family office can offer world-class services without acquiring all that knowledge in-house. 

There are many questions a family office has to ask before outsourcing critically important tasks. It requires some background knowledge, some technical understanding and a willingness to relinquish some control. But many family offices that have decided to outsource certain functions have found the decision has helped to make the family office much more sustainable for the future.

 

Background

According to the Wharton Global Family Alliance study, Benchmarking the Single Family Office: Identifying the Performance Drivers, 2012 (the Wharton study), an SFO is:

 

. . . a professional organization, owned and controlled by a single wealthy family. It is dedicated to managing the personal and financial affairs of family members. In addition to managing the personal fortunes of family members, SFOs’ activities often include a range of accounting, legal, educational and personal services which are dedicated and tailored to the exclusive needs of family members.2

 

In 1853, U.S. Trust was founded as the first real family office: a company that would act as executor and trustee for the funds of individuals and institutions. Previously, individuals, rather than institutions, performed the functions of a family office, until New York passed a law that allowed for a board of trustees to manage these functions.

One hundred and sixty years later, family offices have risen as a means of managing the wealth of some of the world’s most influential people. Today, between 1,500 and 2,000 SFOs are managing more than $1.2 trillion in assets, offering objective advice, stable management and a breadth of other services. 

In general, today’s SFOs handle between $200 million and $1 billion in assets and feature somewhere between four and a dozen staff members. Many SFOs leverage a single core expertise, investments or taxes, for example, and then outsource the balance of the other tasks a family office typically manages. 

Along with financial management, many family offices offer “concierge services,” such as managing homes, hiring staff or guiding philanthropy. In general, U.S. family offices are more likely to provide these services than those in the rest of the world.

Most SFOs are centered around five major activities: asset allocation, investing, managing selection and monitoring, risk management and estate
planning.

MFOs are also increasing, as SFOs merge and outsource tasks. There are somewhere in the range of 150 MFOs in the United States today, managing around $400 billion in assets, according to the Wharton study. The average office manages about $51.5 million, but averages can be misleading. The barrier for entry for a full service family office has gone up steadily. While it was common to create and maintain a single family office a short while ago with $25 million to $50 million, a typical family office created today manages around $250 million. Part of this increase can be attributed to the cost of sustaining a stand-alone office in the post-Madoff era, but it’s also due to the increase in quality and quantity of commercial multi-family offices. See “Family Office Statistics,” this page. 

 

Single- and Multi-Family Office Outsourcing

 

What to Outsource

Rick Flynn, managing director at Rothstein Kass’ New York office, one of the partners in the Single-Family Office Study, notes that family offices are in need of expert, professional assistance, and it’s really down to deciding what functions to outsource, rather than whether to outsource at all. “The best model we found was that they stick to their knitting,” said Flynn, “and find the best firms to outsource to, in order to provide the best service.”3 

“Comprehensive Wealth Management,” p. 39, indicates that 60.7 percent of respondents are outsourcing one or more significant functions to third parties (we get this number by adding the percentages of the two levels
(3 and 4) that involve outsourcing significant functions). Flynn notes that most SFOs and MFOs are taking a four pillar approach to outsourcing: “tax, what we call ‘administrative/lifestyle,’ trust administration and investments.”4 Two thirds of respondents in the Wharton study said that they had sufficient expertise to evaluate investment vehicles and strategies. “That means, of course,” the Wharton study comments, “that one third do not believe they have sufficient expertise, and their numbers are concentrated among smaller family offices.”5

 

 

A family office can outsource anything from investment management, asset allocation, charitable planning and administration, estate planning, estate and trust administration, income tax compliance and planning, beneficiary education, the concierge services mentioned earlier and accounting. 

 

The 80/20 Rule

How does a family office maintain its relevance if it’s outsourcing critical tasks? Dennis Mangalindan, vice president of North American Sales and Marketing for Archway Technologies in Indianapolis—a provider of enterprise solutions for the investment and accounting industries—notes that family offices need to balance their core competencies, while always asking the question: “What is the most cost-effective way of managing this task?”

He gives the example of a large registered investment advisor (RIA): “That advisor’s expertise might be in management of wealth, but there’s probably no partnership accounting or reporting skill sets in that organization.” Daily reconciliation, for example, is a “mind-numbing exercise” for a professional in an RIA or a family office, he says. “Outsourcing that one task means that by 9:00 a.m. EST, you’ve reconciled sometimes thousands of accounts,” leaving the family office to concentrate on the services at which it’s truly adept.6 

There’s an 80/20 rule of thumb that suggests that 80 percent of the tasks performed by a family office are common to any business entity. If your family office’s accounting practices are significantly different from everyone else’s accounting practices, for example, there’s probably something wrong and some way to outsource those tasks and actually improve the service to the family. 

The 20 percent that’s most closely related to your core competency is where a family office can custom tailor the service offering. 

The family office needs to identify its core competencies and the services that the family or client values most and then balance those ideas against cost and quality to determine which services can safely be the responsibility of a third party and which services absolutely need to remain in-house. Sheila K. Christie, founder of Cashel Fiduciary Partners LLC in Portsmouth, N.H., suggests that a family office consultant can help identify the core competencies, allowing family offices to whittle down the common tasks and focus on the areas in which they can provide the best service. “We need to be looking at the family office as a vehicle that needs to be corporatized. It’s no longer mom and pop,” Christie adds. It involves a mental shift. “What do we want to do with this entity?”7

 

Identifying Technology Requirements

The options are widespread, but for the sake of brevity, let’s focus on one topic a family office might consider when making the decision whether to keep a function in-house or to contract with a third party: technology.

Many family offices have lagged behind in providing real-time, interactive, quality reports. Engaged family members aren’t afraid of technology. In the last three years, they’ve become familiar with tablet computers and have much greater expectations for quality reporting. They’re not going to be satisfied with a quarterly report arriving in their mailbox. Family offices need to get a handle on the technologies that facilitate reporting, and they need to do it now. They also need to stay abreast of emerging technologies that will eventually surpass the tablets that we’re all using today. 

Providing best-in-class reporting technology and security, along with handling the design implications of ever-evolving platforms, is well beyond the capabilities of an office with fewer than a dozen professionals on staff. “Technology allows for just-in-time reporting,” says Flynn, but while a number of companies are working on an all-in-one solution, he adds “aggregation of data is a challenge. It’s far from solved.”8

There are technological functions that simply have to be outsourced to remain relevant, current and cost-effective. Mangalindan suggests that the demands of building a next-generation, web-deployed technology that integrates a full suite of financial modules are often well beyond the capabilities of a family office. Just like a family office is able to focus on its core competencies, companies like Archway Technologies and ByAllAccounts focus on the technology or financial account data aggregation and provide services that would be far outside the abilities of a family office.

The respondents to the Wharton study agreed. The study identifies the custody platform and the consolidation/aggregation platform as key technologies used for the operation of SFOs. The criteria by which SFOs selected these technologies were focused on adaptability and customization to the SFO’s context, as well as ease of use. (See “Key Technologies Used by Single-Family Offices,” this page.)

 

Single- and Multi-Family Office Outsourcing

 

Conflict of Interest

Conflict of interest is another area in which trying to find the right partner can lead you back to internal sourcing. This has led to the internalization of activities that were in the past outsourced. But the conflicts of interest that have largely arisen have been in the form of investment-related areas, leading many SFOs to resume control of these activities, further stressing the importance of an in-depth audit of your clients’ family office’s skill set and any potential conflicts of interest, before they decide to outsource a function.

 

The Future of Outsourcing 

SFOs and MFOs have more or less officially been around since the 1850s, but in actuality, they’ve existed, and will continue to exist, as long as wealthy families are looking for expert advice and management of their assets. It’s more important than ever that family offices get a handle on costs and maintain current technologies. For most family offices, this means that outsourcing certain functions is a foregone conclusion.

As outsourcing evolves to offer even more services and technology to the family office, it’s important to understand and react to the trends on the horizon.

Mangalindan says that companies existing to provide outsourced technologies to family offices are asking how they can accomplish tasks faster and cheaper, while maintaining their own core competencies in-house. “Proprietary technology is one area where companies have been able to maintain an edge over competitors,” he says. He also notes that as outsourced technology and call centers have moved offshore, companies are investing in call centers here in the United States. “Our employees are all in the Midwest,” he says, and the management of that company is vigilant in conducting stringent background checks of its employees.9

Flynn sees a “trickle, more than a trend,” toward “virtual family offices,” spurred by younger family members who’ve experienced a more virtual business world.10 Such an office would have a very light infrastructure, with an exceedingly small number of full-time professionals quarterbacking a team of best-in-breed outsourced professionals.

 

Looking Ahead

The months leading up to the Dodd-Frank Wall Street Reform and Consumer Protection Act were stressful for SFOs and MFOs that were trying to get a grip on what regulatory hurdles they’d have to cross. (See “Dodd-Frank and the Family Office,” this page.) But when the dust finally settled, it really came down to the sustainability of the family office and the ever-rising costs of managing wealth. 

 

Single- and Multi-Family Office Outsourcing

 

In the Single Family-Office Study, over 70 percent of those family offices surveyed responded that they were either very or somewhat concerned about the family office’s sustainability, a huge jump from just over 50 percent when they were asked the same question just a year before. 

Part of that concern is focused on shrinking assets, but at the other end of the seesaw, costs are outpacing all expectations. 

Christie suggests that at the end of the day, trust is what allows a family office to put significant functions in the hands of an outsourced agency. Word of mouth, an established background and transparency in fee structures and policies are critical. “History counts,” she says. “Stability is very important.”11 

Remember that your family office is unique to your situation. Bradley G. Fisher, managing director of Silver Bridge Family Office Partners in Boston, writes in its publication, Silver Bridge Insights:

 

Once you’ve seen one family office, you’ve seen one family office. . . every family is different, with unique priorities and distinct visions regarding their sense of purpose, the management of their financial affairs, decision-making, and everyday life. The details are infinitely varied, but the underlying fundamentals are generally not. Every family office blends a universal set of key functions12 (emphasis in original).

 

Outsourcing that 80 percent of common tasks allows the family office to provide the best in holistic wealth management services to its clients by partnering with agencies that have much deeper wells of subject matter or technological expertise than a family office could ever provide on its own.              

 

Endnotes

1. The Family Wealth Alliance, Fall Forum 2012: Report on the Fifth Annual Single-Family Office Study, www.fwalliance.com/The_Alliance_%20SFO_Study_Results_2012.pdf.

2. Wharton Global Family Alliance, Benchmarking the Single Family Office: Identifying the Performance Drivers, 2012, http://wgfa.wharton.upenn.edu/documents/WGFA_BenchmarkingSFO_Highlights_2012.pdf.

3. Rick Flynn, interview by phone by author, Dec. 18, 2012.

4. Ibid.

5. Supra note 2.

6. Dennis Mangalindan, interview by phone by author, Nov. 15, 2012.

7. Sheila K. Christie, interview by phone by author, Dec. 13, 2012.

8. Flynn interview, supra note 3. 

9. Mangalindan interview, supra note 6.

10. Flynn interview, supra note 3. 

11. Christie interview, supra note 7.

12. Bradley G. Fisher, “Selecting a Structure: An Approach for Families in Transition,” Silver Bridge Insights (September 2012), www.silverbridgeadv.com/documentsPub/0124E34E-906B-4961-9209-82EB16C94AD9/SB_Insights_Brad%20Fisher.pdf.