What does financial planning mean to you? More than likely, every person reading this article will have a different answer because the term is, in a word, ambiguous. This ambiguity can lead to a poor client experience and potentially poor outcomes. The performance is dependent solely on whether your “financial planner” is a skilled planner, or just an investment manager.
An investment manager may invest for hundreds of clients, versus a planner who works on a strategic and evolving plan for a few affluent families in addition to managing investments as part of the holistic service offering. At Handwerk MFO, when we meet with a potential new client and they say that their financial planner is doing a good job, the first question we ask is, “At what?” Generally the answer is investing. In the middle of a stock bull market most anyone can make money if they are fully invested in stocks. The real issues present themselves once the stock market goes down and interest rates go up. That is when families lose money in the stock and bond markets.
Usually a financial planner is an investment manager who may or may not take a superficial look at your insurance (which is another sale in order to make money) and a few other areas. Their effort is usually not comprehensive and very few give ongoing input into your financial affairs. A multi-family office is much more comprehensive in its approach and works closely with families for generations.
What is a Multi Family Office?
- A small team of skilled wealth planners offering integrated wealth management services for affluent individuals and families. These professionals combine investment management, financial, tax, estate planning, charitable giving and asset protection in conjunction with the families’ other professional advisors.
- A group that provides advanced holistic services to high-net-worth families that includes all aspects of asset management planning and family dynamics, private banking, trust, fiduciary,and administrator services. The goal is to help clients to grow and protect their money, and then to transfer their wealth in a tax-efficient manner.
- From an investment perspective, MFOs offerfee-based fiduciary advice by developing holistic solutions that optimize the client’s investment portfolio’s risk-adjusted returns while attempting to achieve their life The investment philosophy should incorporate the endowment investment philosophy via use of alternative asset categories and strategies.
The private family office grew out of the major wealth created by titans of industry and technology. When the founder of a company had several hundred million dollars to billions of dollars he or she needed an office to administer their day-to-day needs as well as to orchestrate their financial well-being. This orchestration involved tax accounting, investments, and asset protection as well as organization of family meetings, financial education, consulting on foundation management, and business consulting. At times it also included concierge services such as property management, travel arrangements and shopping assistants.
The multi family office grew as an extension of the private family office. It did so out of a need to reduce fixed costs and spread those costs over a larger number of clients. The cost to have a tax attorney, estate attorney, administrative professionals, and accountants on staff is significant. In order to reduce the overall costs these large single-family offices started allowing other wealthy families to work with them and reduced their service offering in order to have similar services but reduce the overall cost to the original owner via shared infrastructure with the new families.
What a Multi Family Office is Not
- A brokerage company whose goal it is to collect asset
- A practice servinghundreds of clients, or in the case of an insurance agent, thousands of clients
- A seller ofproprietary products from their own portfolio to clients
- A life insurance broker
- A seller of any permanent insuranceunless absolutely necessary and is no-load or low load
Who is Making Money vs. Saving Time: A Brief Case Study
Recently a large registered investment advisor with about a billion dollars under management contacted me. They were a very sophisticated company and had beautiful offices. But what I noticed were three things:
- They were more interested in volume andthe number of clients increasing than they were in the clients having a quality experience and high level of service
- Theirinvestments were all public securities traded on the various exchanges, which made scalability easy for them but in a significant economic contraction all securities may trade down as occurred in 2009. Ergo, their clients were not as diversified as they could have been.
- They were not interested in working with an accountant
As I mentioned I was fairly impressed with this firm but when you look at the three items above and consider the implications, the value to a client is greatly diminished. Again this firm had over a billion dollars under management and is known in the area as a very high-end registered investment advisor.
Let's start with the third point and then work backwards. They were not interested in working with any accountants because it took too much of their time to work with the accountant in order to understand the client’s needs. I was told they would rather have their account executives go out and open new accounts and get more money under management than spend time working with the accountant. My concern is that a major value to any of my clients is that I work with their accountant to understand how taxes can be reduced, sometimes in a dramatic fashion.
The second point regarded using public securities. When the stock market took a nosedive in 2008, almost all stocks and securities traded on the New York Stock Exchange and other exchanges basically all acted the same: almost all of them went down. The term for this is called correlation. One of the only winners in the securities market was treasury bonds because they were perceived as a safe haven and clients wanted return of principal vs. return on principal. Ergo, having more of an endowment model philosophy where many asset classes are used, including investments which are not traded on the public markets, would help to cushion these types of dramatic falls.
The first point was regarding number of clients vs. dollar volume. The firm collected a percentage of assets so the more assets they had under control, the more money they made. According to Professional Planner, in May of 2012 the average number of clients per advisor across all industries is 481. According to CEG Worldwide LLC, in April of 2011 the average financial planner had 269 clients. And it is very difficult to find the number of clients per advisor for any of the major brokerage houses. Why is this? If an affluent client would realize that they were one of 269 or 481 clients they would more fully understand that their financial planner, (broker or insurance person) would not have time to monitor their financial situation on a comprehensive and ongoing basis and may really be more interested in increasing their own net worth.
In summary, if you are affluent and you are looking to work with a planner/advisor or want to evaluate that you are receiving good advice and value for your money ask the person:
- How many clients do you have?
- What service do you provide for your client and which of those services will you delegate to junior people?
- What is your value proposition?
- What type of investments do you use and why? (You want to be diversified and have alternative assets classes and strategic investment strategies.)
- What makes you unique? (If they talk about investing or show you a proposed investment allocation you might be sitting with an investment person vs. a planner)