Why a Multi Family Office?
A multifamily office is a service concept designed to solve the problem of managing money for the well to do or wealthy. The well-to-do generally have complex scenarios because of the volume of information. More correctly, the well-to-do should have complex scenarios – many of them don’t and that is also generally a failure, albeit in a different direction. The multi-family office service concept rests on two main goals: to centralize and to professionalize.
Centralize
The well to do, like anyone, have multi-faceted problems. In fact, all good financial planning and investment management sits at the intersection of income tax, estate tax, investment returns, and risk management.
This includes insurance plans, investment strategies, income tax plans, legal documents, estate tax strategies, and the list goes on.
Most retail professionals exist in a silo. Their strategies primarily are built around a single premise or the assumption that you know you need what they have to offer. Or in the worst cases it is built around a sales strategy to create a problem in your mind they have the answer to.
This necessitates the client to be the nexus of the information and strategies. Which is usually not an optimal choice since they tend to be the least technically knowledgeable person involved in most of the transactions or strategies being implemented.
By centralizing the design, monitoring, and execution of all the aspects of the client’s world, we can create a more comprehensive plan and be able to ensure that strategies interact properly with each other.
The end goal should be a single source of truth for the client to receive information and data.
Professionalization
Many of the best and most impactful strategies are complicated and involve several moving parts. Coordinating an investment means not just making sure that it is a good investment, and that interacts with your other investments properly, but that it is being accounted for in your liquidity plan and being done in an income tax efficient manner and in the proper estate tax vehicle also.
This can require a few different sorts of professionals – and instead of the client being the arbitrator and coordinator, the family office team can ensure that it happens.
Behavioral finance research consistently demonstrates that poor investment performance (or for that matter poor outcomes in general be it tax or risk-based outcomes) are most often driven by emotional and biased decision-making processes. By moving the decision analysis to a team of professionals the clients will generally improve their outcomes. The goal, of course, isn’t to remove authority or decision making from the client – but by running decisions through professionals first you can streamline and frame the decisions the clients must make. This gives the clients better decisions to make with better information to make them.
The end goal should be to outsource the anxiety clients feel around making complex decisions (although not the decision itself) to professionals better able to frame those decisions.
OUR TOOLS
What a family office does can be wide ranging and can only be specific after an engagement is designed for your specific needs. But while the details are always unique, the rails on which the Family Office is built are always consistent. We’ve established a set of tools that form the backbone of each Family Office. Each Pillar one sits in a different position to support a specific function.
Family Contact Dashboard
The Family Contact Dashboard is a tool that centralizes all the people, entities, and third parties that are relevant to the family.
This will include:
Family members (with their relevant biographical data)
Trust & Holding entities (with their relevant legal and tax statuses)
Business entities (with their applicable state registrations and ownership)
Advisors (with area of expertise and contact information)
This allows us to track and integrate relevant parties and have a central storage of data to provide to third parties and underwriters when necessary. It ensures that relevant professionals are included when appropriate and that family members aren’t required to wonder and look for data when they need it.
Monthly Report
The Monthly Report is the most varied of the Pillars. It takes a unique form for every single family. It can even take different forms for different members of the family. It might include a change in net worth, it might be a summary of business operations, or it could be an asset allocation report.
While every family has different types of data they want to see on a regular basis, there’s nothing unique about a family wanting to have insight into their situation a regular basis. And that’s what makes the monthly report a consistent Pillar in every deal.
Our most common monthly report items can include:
Liquidity Report
Change in Net Worth
Investment Performance
Business Operation Summary
Deployable Capital & Deals In Process
Tax Tracker
Income taxes (and the tax tracker is specifically for income taxes) tend to permeate everything that well-to-do families do. This tool recognizes that the traditional CPA firm mentality of “we’ll do taxes during tax season and if things get crazy, we’ll do a projection in the fall” is not sufficient for families with this level of complexity.
To address that we use the Tax Tracker which is a multi-purpose tool. It simultaneously tracks the required data for every tax paying entity (replacing your annual organizer) and tracks the impact of those items to arrive at a projected liability.
It is updated on an ongoing basis – as new investments or information comes in we have a consistent “landing place” for that data. It could be adding a new K-1 to the organizer list after an investment is made or updating the projected income from a deal when we get an update from a money manager. The days of waiting until the question is asked to start gathering data should be behind you. Tax planning, preparation and data gathering for a well-to-do family is an ongoing and never-ending process.
Family Personal Financial Statement
The name of this Pillar is an oversimplification of the value and data contained in this tool. As the name indicates, it is statements of the assets and liabilities of the family. But unlike the form you had to fill out when you got a bank loan or used to prove you are an Accredited Investor for your last investment, this report becomes the “source of truth” for a couple different kinds of information about the family. It is most easily understood by how it is built – each step reflects a different layer of information that is needed to make the reporting clear:
1. We start with all the assets and liabilities of the family. At this point we aren’t building a financial statement; this is purely just a top-level list of all the things the family owns.
2. Ownership is the next filter; we provide an overlay that indicates which legal entities own which assets and in what proportion
3. Sub-Asset Allocation – where appropriate the family PFS might aggregate data (Private Equity Investments) and at this stage we create supporting schedules to break out detail where necessary (e.g., a list of the private equity investments that make up the total)
4. Estate Tax Exposure – finally we overlay what assets have exposure to estate tax and on what time scales. This allows us to allocate effectively when making investments.
In addition, every Family PFS includes a portion where money in motion is tracked. Deals rarely take less than 30 days – so a running Deployable Capital report which aggregates total liquidity, liquidity kept in reserve, and upcoming deals that will utilize liquidity is created. This allows the Family to know, at a glance, how much money is available to invest at an given point in time.
The goal of the Pillars is straightforward: to make the complex simple and to help the family focus on the critical data for decision making, instead of being lost in the weeds.
Additional Tools
There are several tools that can be added to the Pillars. Most of them are simply an expansion of an existing Pillar. But these are the tools that are used less commonly and more situation specific.
Deal/Strategy Tracker
This tool takes the Deployable Capital report and expands it to include not just deals and the amounts earmarked for them but also their stage in a diligence or negotiation progress.
This is mostly for families with lots of private equity investments or real estate deals which require longer and large Due Diligence processes.
Family Investment Policy Statement
A more comprehensive management tool for internalizing and professionalizing the investment due diligence process. It is helps the family set a formal rubric for their investment and manager selection process.
This is most common in families that have succession planning as their key concern. It helps to open up the dialogue between departing (from management) senior family members and the rising younger family members.
It can cover charitable concerns, investment focuses and be used to provide guardrails prior to investments being reviewed so that the “excitement” of new deals and new ideas don’t override allocation and risk exposure concerns.
Global Asset Allocation
This report is an expanded overlay on the Family PFS and is a more detailed view of the asset allocation of the family. It sets a target for an asset allocation and then compares deltas, alongside the deployable capital report, from actual allocation to the target.
This is mostly useful for families that have recently had large liquidity events and/or have large amounts of capital that need to be deployed. It helps to immediately identify the areas of focus for sourcing deals.