Creating a Family Office for the Rest of Us

By Dale Lam, CFP®
Strategent Financial

Dale Lam, CFP®

Dale Lam, CFP®

It’s a common belief that financial planning is only for the wealthy. And while most financial planners will tell you that’s not true, you wouldn’t know it from the number of firms that work only with high-net-worth clients. While financial planners believe that everyone should have access to competent, ethical advice, they also know that mass-affluent clients tend not to be profitable. That could be because they need even more basic services than investment advice, such as help reducing debt, establishing an emergency fund, or educating themselves about retirement options.

With fintech tools and robo-advisors gaining ground in the financial services sector, it’s possible that we could see more of a democratization of advice. Increasingly, consumers can pay a low fee, access a website, answer a few questions, and get a recommendation for a basket of ETFs according to their risk profiles. But is an algorithm the best way to serve mass-affluent retail investors?

We all know the potential downfalls of working with a robo-advisor that has no human intervention. First, there’s the issue of financial capability: If few consumers understand the basics of investing, it’s likely they’d struggle with some of the risk profile questions, and perhaps answer them incorrectly, resulting in a poor recommendation. In my home state of Virginia, for example, nearly 60 percent of consumers were unable to answer three of five financial capability questions correctly, according to FINRA. If you don’t know how to calculate net worth, for example, how can you tell a robo-advisor what your net worth is?

Next, what about the nature of the questions asked by robo-advisors? When we “secret-shopped” some top robo-advice firms in the U.S., we found that none asked whether the prospective client carried debt or had an emergency fund. Only one asked for a “description of the household,” including sources of income and number of dependents. So how well could a robo-advisor serve someone with a special-needs child and massive credit-card debt if the question is never asked?

Finally, we all know humans are emotional animals. Would a robo-advisor counsel a client not to pull out of the market during a downturn, or not to invest more when prices are high? I’ve read that some robo-advisors are working to address this issue, but for now, consumers are largely on their own.

In my opinion, while technology offers great advantages to people seeking financial advice, a hybrid approach, involving humans and technology, presents the best opportunity. And financial planners who can use technology to lower costs and create efficiencies can become even more “human” with clients – providing them with important personal services that clients want, but that that advisers didn’t – or couldn’t – offer before.

Rethinking the Business Model

We know that single or multi-family offices provide a variety of services beyond investment advice for their high-net-wealth clients, including bill payment, family consulting and education, business succession planning and other concierge-type services. But the need for some types of services aren’t limited to the ultra-wealthy. In 2013, for example, a Deloitte report looked at family offices with an eye toward reaching a more mass-affluent crowd with independent, objective advice, broader, high-touch services, outsourced suppliers and multi-generational planning.   

 As new software applications and other technology progress on the adviser side, making it easier to streamline operations, automate certain functions and speed up others, it makes sense that smart advisers could spend more time expanding their networks. They could spend time developing agreements with third-party providers, creating a menu of concierge services, growing their client base and deepening client relationships.

Potential Service Offerings

Financial planning blogger Michael Kitces suggests that one potential service could involve helping clients get organized. He argues that rethinking the discovery process, and perhaps turning financial organization into a service, could be valuable to disorganized clients who likely wouldn’t complete a “data gathering” form anyway.

Another potential service is family consulting and education. Certainly, high-net-worth individuals aren’t the only ones who could benefit from this service. Organizing a family meeting, in which the adviser provides a slightly customized educational presentation and leads family members in a short directed discussion, could be provided for a flat or hourly fee. Other services could include helping small businesses with succession or continuity plans, career counseling, or partnering with a patient advocate service to help clients navigate the healthcare system. 

Making Money from a Mass-Affluent Family Office Model

Respondents in the Deloitte research expressed a preference for fee-based compensation, based on percent of income or type of service. But flat or hourly fees, or a slight mark-up on services provided by third parties, could also be a possibility. Advisers who charge by the hour could adopt an agency model, in which a paraplanner could provide some services at a lower hourly rate. For full service clients, the adviser could customize a monthly retainer package.

Of course, not all of these ideas would work for every financial planner. However, as technology continues to disrupt the financial services sector in general, and financial planning in particular, advisers could benefit from a business strategy evaluation to explore how to differentiate themselves and keep their businesses growing.