Lawrence Solomon noticed something was missing in the planning process for his clients in the early 2000s: There was a disjointed approach.
“Along with financial advice, every plan included tax planning and strategy and estate planning analysis and recommendations,” says Solomon, now a client advisor at Mercer Advisors’ Washington, D.C. office, who was a financial planner at another investment advisory firm when he first noticed the problem.
The firm, where he worked in 2007, like the majority of registered investment advisories, did not have certified public accountants or estate attorneys on staff, and referred clients elsewhere for tax preparation and estate planning documents.
Solomon saw problems with this disjointed approach.
“For example, we would develop planning strategies to manage clients’ taxes through tax-loss harvesting and charitable giving throughout the year,” he says. “But often we would not get an accurate picture of the client’s tax situation from their accountant, including earnings, deductions and capital gains and losses, until after they had already filed that year’s tax return when it was too late to do anything about it.”
Similarly, Solomon might recommend that clients establish a revocable living trust to protect beneficiaries and avoid probate. He or his colleagues at the RIA would refer clients to a qualified estate planning attorney to create the trust documents but had no way of making sure the trust was funded properly.
“More often than not, the trusts documents would be signed, but the client’s assets, like their primary residence, bank accounts, or other holdings, would not be correctly retitled into the trust, making them a lot less useful,” he says. “We could coordinate with the tax preparers and estate planning lawyers, but the actual implementation of these strategies was out of our control and often up to the client themselves.”
Solomon began looking into better ways of addressing these problems for his clients.
“I’d heard about firms that offered financial and investment advice, tax preparation and estate services under one roof, which is often referred to as a family office, but thought it was only available to the super affluent, in the Bill Gates or the DuPont family range,” he says.
“One day I saw a job listing at a local registered investment advisor that had in-house lawyers and CPAs and offered financial advice, tax preparation and legal services for clients with between $1 million and $10 million in investable assets, and it was like a light bulb went off in my head. Intrigued, I applied for and got that position and spent the next decade there honing my craft at providing integrated and holistic advice,” Solomon says.
There’s no reliable tally of the number of family offices in the U.S., although a 2016 EY report estimated 10,000 worldwide, with at least half being formed in the previous 15 years. EY found that a key growth driver is the increasing concentration of assets held by very wealthy families.
Although some RIAs offer family office services to clients with a few million in investable assets, the more standard definition refers to clients with $100 million or more to invest.
There are several different business models, including multifamily and single-family. Some RIAs have family office services as part of the offering, but also provide more standard investment advisory and planning services to other clients. Others focus solely on family office services.
Joe McLean, managing partner at Intersect Capital in San Ramon, California, runs a multifamily office RIA.
Like Solomon, McLean noticed a gap in services that could be addressed.
“Seven years ago, we discovered most financial plans were not living and breathing documents,” he says. He notes that most plans ended up sitting on a shelf once completed.
“We felt a valuable service would be to add bill pay, bookkeeping, project management on clients’ home renovations, budgeting and cash flow analysis, vehicle and other major purchases and family education,” he says.
McLean believed that approach was the solution to bring financial plans to life and allow the firm to “co-pilot the relationship with the client, so they could benchmark their future milestones in real-time. Thirty percent of our clients are athletes and entertainers, and this was a requirement to serve them at the highest level possible,” he says.
Intersect Capital breaks out its family office services into four areas: lifestyle management, which includes bill paying, bookkeeping and monthly cash flow reporting; risk management, which includes all insurance needs; investment management; and advanced planning, which includes multigenerational and estate planning.
Mitch Kovitz, principal and founder of Kovitz Investment Group Partners in Chicago, says some employees are dedicated solely to the firm’s family office and others overlap.
Kovitz says he wanted to form deeper relationships with clients by offering an additional layer of services on top of what the firm already provided.
One of those additional services is an outsourced chief investment officer for a family.
“Having a seasoned investment professional as the quarterback for your investments, that works alongside the relationship manager, which in our case is one of our senior financial advisors, really adds some extra horsepower to what’s possible for the client, as they both bring different lenses and expertise to the relationship,” Kovitz says.
The firm’s family office services include a customized handbook that encapsulates the family’s situation. “It pairs with the investment policy statement, both of which are part of recurring, regular family trainings that include multiple members of our family office services team,” Kovitz says. “The trainings are an opportunity to get to know and develop relationships with each member of the family.”
Developing an Efficient Model
McLean suggests that advisors who want to start or join a family office firm understand the day-to-day workings of the business model.
“It can be a very labor-intensive model if not done correctly. When you are in the business of (a) family office, you will learn quickly that personal finance is far more personal than finance,” he says.
Solomon says aspiring family office advisors should understand what parts of the business are commoditized and depend on personal service.
“The bottom line is that technology is increasingly commoditizing every aspect of the financial services industry,” he says. “TurboTax and other programs allow almost anyone to prepare and file income taxes themselves quickly and cheaply. LegalZoom and the like can create an estate plan, including wills, trusts and powers of attorney for a fraction of what a traditional attorney would charge. And investment advice is the ultimate commodity, widely available through robo-advisors and technology-driven solutions for almost nothing.”
That’s where the human touch is so crucial, Solomon adds.
“Integrating these services under one roof and delivering them through holistic, human-powered wealth management solutions is not a commodity,” he says. “It’s something much more unique and powerful, and it has persistent value in the marketplace that clients and prospects recognize. When it comes to financial, tax and legal advice, the whole is truly greater than the sum of its parts.”
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A Family Office Can Address Gaps in Client Services originally appeared on usnews.com