BTW, WTH are MFOs?

Some acronyms are more recognizable than others. Some acronyms are unrecognizable even when spelled out. Since I represent an MFO and I am asked quite often, let’s address this question once and for all: “By the way, what the hell are Multi-Family Offices?”
Let’s start with this:
Multi-Family Offices or MFOs are advisory firms that manage the wealth and resources of several families by investing across various asset classes.
It’s easier to distinguish an MFO by comparing with and contrasting against more common financial institutions, listed below.
- Banks— As the most ubiquitous financial institution, banks are the primary channel for savings. Retail banks solicit deposits from individuals while commercial banks focus on companies. In turn, these banks use the capital to deploy debt products, including personal and business loans. A private bank is a form of retail bank that caters exclusively to high net worth individuals. An MFO is similar to a private bank in the sense that it manages the wealth of several families who are looking for alternative investments with higher average returns.
- Financing Companies — One of the defining characteristics of a bank is its fiduciary responsibility to its depositors. In other words, banks are heavily regulated to protect depositors from losing their money. As a result, most banks are unable to provide credit to younger and smaller businesses that are inherently riskier. Financing companies fill this void in the financial ecosystem by focusing on loans to SMEs. Financing companies are usually established by entrepreneurs and take very little capital from other investors. Rather, they grow by borrowing money from banks and earn money from the margin between lower cost financing and the higher interest rates they charge to riskier companies. SME loans is just one among many categories of asset classes that MFOs invest in.
- Funds — For individuals and corporates that seek higher returns on their capital but want to only make passive investments rather than directly invest in businesses or start their own financing companies, funds are a good alternative. There are various funds that focus on different strategies, including mutual funds, private equity, and venture capital, which invest in listed securities, mid-sized private corporations, and tech startups, respectively. MFOs would normally look at these asset classes as well, opportunistically or actively depending on the background of the professionals managers. Another fund category that is comparable to an MFO based on a multiple asset class strategy is a hedge fund. Similar to an MFO, hedge funds may also decide to invest in all of the above plus real estate, commodities and foreign exchange. The big difference is that hedge funds actively leverage their portfolios by taking on debt to take advantage of short term opportunities such as event-driven and technical trading. In contrast, MFOs are normally more prudent investors and put more emphasis on wealth retention than return outperformance.
In a November 2016 report by Crowdout, they indicate that MFOs account for $1.6 trillion of investible capital globally while another $2.4 trillion is accounted for by single family offices. The growth in MFOs may be attributed to the low interest rate environment globally, pushing investors to look for alternative investments. Meanwhile, there is a perception that hedge funds and other private funds take on too much risk because of the industry-standard compensation structure. Hence, family offices are quickly becoming a preferred investment vehicle because of the focus on wealth retention. As a single family office grows and builds a track record of successful investments, they extend their services to other families to become an MFO. Subsequently, the MFO can pursue new strategies and diversify into more asset classes.

In general, MFOs are more low profile than banks, financing companies or funds. They are not as active in sourcing for new investors or families to advise. Yet, they play an important role in a financial ecosystem by allowing families with successful businesses to pool their excess funds and re-invest into other segments of the economy. It’s clearly time that more families look into MFOs, IMHO.
