also: three drivers of exceptionalism.
by anthony glomski and russ alan prince
your $5-million high-net-worth practice
when it comes to their financial and personal lives, the wealthy are increasingly attracted to the family office model. at the very high end, there is a strong preference to create a single-family office. for the wealthy for whom the costs of a single-family office are unreasonable or do not want the management or oversight responsibilities, there are multi-family offices and virtual family offices.
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with the family office model, you are providing a broad array of expertise holistically. consequently, you can deliver substantial value to the wealthy. many accounting firms provide family office services. while family office is in the name of these practices, a large percentage of them are offering a limited menu of single-family office capabilities. the services tend to comprise business management expertise and other accounting and tax-related capabilities.
keep in mind that you can adopt different business models to build a $5 million high-net-worth practice. the family office model – and there are many variations of how the model can be implemented – is only one possibility. nevertheless, because of its high potential, we will describe it in this post.
let us now look at the three basic types of family offices.
single-family offices
the super-rich (net worth = $500 million or more) have historically embraced the single-family office approach going back to the sixth century when the king’s steward played a dominant role in managing the royal wealth. today’s single-family office is traced back to the 19th century with the likes of morgan, rockefeller and carnegie.
with the vast increase in private wealth even through the covid-19 crisis, the single-family office’s appeal is probably stronger than ever before. a single-family office is an organizational structure that manages the financial and personal affairs of one wealthy family. because a single-family office is driven purely by the needs and preferences of the one family, there is no standard for how one should be structured.
some single-family offices, for instance, are lean enterprises that focus exclusively on investing with a skeleton crew. in contrast, others are robust organizations with in-house staff, numerous vendor relationships and a broad platform of services. this disparity means it’s challenging to establish hard and fast criteria for how a single-family office should be defined, other than its dedication to a sole family.
at the same time, single-family offices are expanding beyond wealthy families. we are working with a growing number of unrelated but strongly connected individuals to help them establish their version of a single-family office. for example, we have assisted some religious orders and communal organizations in creating structures that closely mirror what a single-family office provides.
all said, single-family offices are still the template for other types of family offices that cater to those less affluent. by examining the offerings of a large percentage of single-family offices, you can gain perspective on what your high-net-worth family office practice can offer.
expertise provided by single-family offices
single-family offices, broadly speaking, tend to provide two principal categories of expertise: those that relate to managing wealth and those that relate to family support. under the umbrella of wealth management, we often find investment management and wealth planning. included in family support services are often administrative and lifestyle services, as well as special projects. here is an overview of the types of expertise typically provided by single-family offices:
administrative services: all accounting firm family office practices provide administrative services for which they are particularly adept. examples of administrative services include:
- dealing with all tax compliance matters including filing tax returns, audit defense, estate and gift tax execution, tracking and administration
- developing and updating the family balance sheet
- producing income and cash flow statements
- providing budgeting plans
- bill paying and expense reporting
- providing the general ledger reports
- tracking and reporting investments including addressing cost and tax basis
- bookkeeping
- administering an estate
- providing customized reports
- monitoring the wealthy family’s art collection
- tracking days in the country for tax purposes
- auditing providers
investment management: a meaningful number of accounting firms deliver various investment management services. this is done through subsidiaries, joint ventures or other working arrangements.
few single-family offices offer other types of financial products, such as life insurance. still, many accounting firms that provide investment management services offer other types of financial products such as life insurance and credit.
wealth planning: tax planning is a strong suit for many accounting firms and critical to much of wealth planning. by helping the wealthy with tax mitigation, you can regularly generate substantial revenues and referrals. the following are the most common specialties within wealth planning:
- income tax planning focuses on legally mitigating taxes on money earned by working. for example, in certain situations, it is possible to modify corporate structures, resulting in income taxed at significantly lower rates.
- estate planning involves using legal strategies and financial products to determine the future disposition of current and projected assets. it is critically important to determine who will own the assets and how they will be owned.
- marital and related relations planning entail planning for disruptions in the relationships between spouses and other lovers. the intent is to plan for actions that will protect the family’s wealth.
- business succession planning principally deals with tax-efficiently transitioning businesses to others, whether they are family members or not.
- asset protection planning entails employing legally accepted concepts and strategies to ensure that a person’s wealth is not unjustly taken. this is not about “hiding money” – transparency is the key ingredient in effective asset protection planning.
- charitable tax planning enables tax-efficient philanthropy. the tax code fosters philanthropy, and charitable tax planning takes advantage of this.
- cross-border and inbound planning is for the wealthy who are operating businesses or have income-producing assets in different countries or are moving to different countries. by understanding the tax laws of the respective countries and the treaties between countries, it is often possible to facilitate business opportunities and minimize the taxes that are owed.
- life management planning addresses an array of concerns from a wealth planning perspective. one example: when wealthy individuals structure their wealth to deal with the concerns of longevity.
lifestyle services and special projects: when accountants provide lifestyle services, they almost always are outsourced. you or your firm might provide something like philanthropic advisory or business coaching, but most lifestyle services require bringing in specialists.
many accounting firm high-net-worth family office practices will help their wealthy clients with one-off special projects. here, the accountants source and coordinate others to deal with a possible range of situations such as:
- facilitating an adoption
- buying an island
- arranging for experimental stem cell treatments in a foreign country
- overseeing the construction of a 60,000-square-foot mansion
- arranging the paperwork and facilitating the process for admissions to a private club
- restoring the identity of a family member after her company was hacked
multi-family and virtual family offices
using the standard deliverables of single-family offices as a guide, your family office practice can either act as a multi-family office or provide virtual family offices to the wealthy or a combination of the two.
multi-family offices: the power and appeal of the single-family office are considerable. we see this in the precipitous rate at which the number of multi-family offices are multiplying. the wealthy want the value of single-family offices to deliver, and high-performing multi-family offices can provide a comparable value for families for whom single-family offices are not viable.
simply, a multi-family office aims to deliver the same or similar range of services and products along with an exceptional experience like a single-family office. however, as the name suggests, the multi-family office is doing this for many individuals and families.
virtual family offices: this type of family office structure is a recent innovation. they happen when knowledgeable and capable professionals construct a single-family office equivalent around a family or individual.
there is a subtle, nuanced and significant difference between multi-family offices and these newer virtual family offices. the former have institutional components, such as investment capabilities, and aim to provide them to wealthy families. virtual family offices intend to be just like single-family offices: completely bespoke.
multi-family offices and virtual family offices are further democratizing the family office concept and model. with these types of family offices proliferating, the incredible demand for the advantages and benefits of single-family offices is made available to the wealthy who cannot afford or don’t want the managerial and governance responsibilities of a single-family office.
three drivers of exceptionalism
because the wishes, expectations and limitations of wealthy families differ from family to family, every single-family office and every virtual family office is unique. nonetheless, achieving an optimal financial world is regularly a function of three drivers. these drivers are also characteristic of the very best multi-family and virtual family offices.
1. the human element: one of the most powerful and consequential drivers of value in the private wealth industry – and in all business, for that matter – is the human element. the only way you can provide highly tailored exceptional results to the wealthy is to truly, deeply understand their idiosyncratic worlds, concentrating on helping them achieve their self-interest and communicating with them in a way that truly resonates.
by mastering the everyone wins process, you are making everything all about them. you are developing an in-depth understanding of their self-interests, from their goals and concerns to their self-image and the underlying basis for their beliefs. because of your insights into their worlds, you can discern how best to be of service and frame your messaging so they understand it to the required level.
2. cohesive team: you can’t deliver all the expertise the wealthy require or desire. you need a team. some of your team will likely be partners at your firm. other possible team members will be experts you can call on as needed. your teammates will have four main characteristics:
- specific expertise: the specialists involved are some of the very best authorities in a relatively narrow area (such as income tax planning or concierge medicine).
- integrity: the highest ethical standards are indispensable for all the professionals you bring to a client.
- professionalism: in every way, from responsiveness to inquiries to perpetual learning, the specialists embrace professionalism.
- personal chemistry: there is a healthy level of comfort and appreciation among everyone involved.
there are times when your teammates work directly with your wealthy clients. other times, they will play a more supporting or behind-the-scenes role by addressing issues you are dealing with.
what is essential is that your team is composed of several strongly motivated experts who can work seamlessly together on behalf of your wealthy clients. establishing and coordinating a cohesive team is hard work, but it’s necessary. to help ensure your team is indeed cohesive, you can use the everyone wins process to understand and then help them achieve their self-interests.
3. systematic processes: so often, professionals – even extremely technically capable professionals – deal with their clients in a haphazard and disjointed manner. this approach is anathema to the very concept of a family office. to get superior results, you must intricately coordinate all solutions while extracting synergies.
stress testing is a cornerstone of the systematic process employed by more and more single-family offices to ensure that errors are rapidly corrected, and meaningful opportunities don’t get overlooked. stress testing is proving so significant that it is getting adopted by all manner of affluent individuals and families.
conclusion
for some accounting firm high-net-worth practices, the family office model is optimal. the aim is to reproduce – as closely as possible – the advantages the super-rich receive from their single-family offices. accountants do so with multi-family offices, setting up virtual family offices for their wealthy clients, or some combination of the two. irrespective of the type of family office, all the best-performing ones concentrate on the human element, and have a cohesive team and systematic processes.
there is no “correct” or “best” accounting firm high-net-worth business model. you need to determine what works best for you, your firm and, most importantly, your wealthy clients. thus, the family office model is one possibility. be aware that irrespective of the various viable high-net-worth business models you choose, you can build a $5 million high-net-worth practice.