Part II: When to Make the Transition to an MFO – Identifying the Signals

It Takes a Village to Change Your Tax Domicile

By Neil Shapiro, TAG Associates Managing Director, Head of Family Office Services

See Part I: The Benefits of a Multi-Client Family Office: Efficient Wealth Management

Transitioning from a Single Family Office to an Multi-Family Office can potentially provide better services, deeper expertise, continuity, and improved results. As discussed in Part I, an SFO is not always an efficient model, and often doesn’t have the necessary resources and breadth of services that MFOs have.

For families already with their own SFO, transitioning to an MFO can be the right option. However, recognizing the right time to make this move is paramount. There are a number of factors that can play into the timing for a transition.

The following are some significant indicators that might signal the need for such a shift:

Leadership Change or Retirement

As mentioned in Part I, running a family office is akin to a family with expertise in other areas overseeing their own wealth management firm. It is a challenge they may not be equipped to handle, particularly when there is leadership turnover in the family office.

If the head of the SFO leaves for another job or retires, and there’s no clear trustworthy and prepared successor, it may be the right catalyst for a family to consider a transition. The task of replacing experienced leaders can be monumental and may pose significant risks to the family’s assets and planning.

MFOs, on the other hand, have a structured process in place to mitigate such leadership transition risks, one of their inherent advantages over SFOs. They are built as institutions that are not overly reliant on any one or even small group of individuals and they have management hierarchies with succession plans and extensive hiring experience. Switching to an MFO in lieu of going through the process of hiring a new leader may be in the family’s best interest.

Fractured Family Dynamics

As the family behind the SFO grows and branches out, and as family leadership moves from one generation (or family branch) to the next, there may be internal disagreements. Namely, family unity behind managing their own SFO may fracture over time.

Key points of divergence might include the next generation not wanting to be involved with the family office, or different branches of the family having varying needs that can’t be serviced by one office. Frequently, there’s a leader in one generation who took responsibility for managing the SFO unilaterally. By the next generation, there is often more than one opinion on how the SFO should be run, creating friction.

That can be another catalyst for seeking an MFO that offers customizable solutions that can cater to individual family members’ needs while maintaining comprehensive wealth management effectiveness.

Growing Family Size and Needs

As the branches of the family grow, the wealth can be diluted. Instead of one family with $500 million in assets, there might be ten families with $50 million in assets. As time goes by, the number of family members grows, while the assets per family become smaller, typically.

That can mean an expansion of needs that an SFO isn’t equipped to handle. It can also mean that the cost of running an SFO is no longer economical. This is among the very reasons why MFOs have grown in popularity.

MFOs, with their scalable operations, can offer a broader range of services that are economically suited for large and ever-expanding families in ways that simply cannot be replicated by an SFO.

Additionally, as discussed in Part I, families with SFOs pay a premium for privacy and discretion (or more realistically, the appearance of more privacy and discretion). When families realize paying that premium is on the wrong side of a cost-benefit analysis, it can be the right time to move on.

External Events

An external event such as a poor economic environment or difficult and changing investment markets can create challenges that the staff of an SFO may not be equipped to deal with. If there’s a major change in the regulatory regime resulting in added compliance costs, that can be a tipping point as well.

Even a significant family event, such as a divorce or a tragic death in the family could trigger the need for a transition. These situations often lead families to re-evaluate their wealth management strategies, opening them up to the prospect of moving towards an MFO.

Stagnation of Investment Approach

SFOs see many inbound investment opportunities, but it’s dependent on their relationship network, which is often tied to the family’s original source of wealth. Despite this access to investment managers and deal flow, stagnation of investment approach can occur.  This may unfold when portfolio ideas originate from a single source, such as a private bank, or are concentrated with a handful of asset managers or investment platforms. Seeing limited investment options or an unexpectedly concentrated investment allocation may be signs it’s time to move on from an SFO.

On the other hand, MFOs, because of their large scale and important role as intermediaries for clients, are often the first to hear about new investment opportunities. They are on the front line to be pitched the latest trends in terms of asset class flows, products, and diversification. Naturally, they can offer a broader perspective on market opportunities, helping to avoid an overly narrow or stagnant investment approach.

To sum up, several factors could signal the need to transition from an SFO to an MFO. Recognizing these indicators along with timely action can lead to more efficient wealth management and ensure continued growth and stability of family wealth.

In Part III of our series, we will explore the service options and onboarding process in MFOs, helping you take an informed step towards this transition.