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Advisor News Family offices take hold as ultra-wealthy investor segment grows

A family office can serve as an ultra-wealthy family’s ‘institutional memory’ and bring a business-minded approach to personal financial planning, says Tom McCullough, chairman and CEO of Northwood Family Office in Toronto.

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As Canada’s population of ultra-wealthy investors continues to increase, financial advisors are developing specialized practices to serve their needs. Family offices – once rare in Canada – are coming into their own.

Structured as single-family offices that serve the needs of one extremely ultra-high-net-worth family, or multi-family offices, which pool resources to serve the needs of a few to several dozen ultra-wealthy families, they’ve moved from obscure to sought after. “Family office” has even become a marketing term – one that those who have been in the space for some time say is often applied to practices that don’t meet their definition.

“Ten years ago, people didn’t really know what a family office was,” says Chris Clarke, family office director and chief executive officer at First Affiliated, a multi-family office in Collingwood, Ont., that works with about 70 high-net-worth families. “Now, because of this need for independence, objectivity and holistic [financial] planning at an experiential level, [combined with the fact wealthy Canadians are also] thinking about the succession to the next generation, the needs [of the ultra-high-net-worth] are changing and their focus is changing. That’s why the family office is on the rise.”

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Tom McCullough, chairman and chief executive officer (CEO) of Northwood Family Office in Toronto, whose practice serves about 50 families, echoes that sentiment. He says he gets calls these days from people who are aware enough of family offices to search for them on Google. Often, these people have experienced a liquidity event, such as selling a business, but they may also be baby boomers who have retired from very high-paying roles. And, increasingly, the decision-makers are women.

Despite wider recognition and adoption, the family office channel isn’t as developed in Canada as it is in the United States or Europe, says Kevin Algar, president and CEO of GENn Family Office in Calgary, who has a focused practice serving 12 families. “There’s a lot of room left for the space to expand and be recognized.”

For Canada to catch up, a shift in mindset may be necessary, Ms. Clarke says. “In Canada, we still believe that when we die, we should divvy up our estates and distribute out our wealth to the next generation … whereas if you look at wealth in the U.S., the vast majority remains privately family-owned. There’s a reason for that: The legacy is passed on intact, no different than a business would be. If I spent my life building a business, I can’t imagine it would be successful if I stripped it of all its capital and paid out all the shareholders just before I passed it on to the next generation of owners.”

A growing market

Canada has the fifth-largest ultra-high-net-worth population in the world, with 10,840 people enjoying a net worth of US$30-million or more, according to Wealth-X Pte. Ltd.’s World Ultra Wealth Report 2018 – and the trend is upward, with a year-over-year increase of 13.9 per cent in population and 14.8 per cent in wealth from 2016 to 2017.

That said, clients don’t necessarily need quite that much to take advantage of family office services. Estimates vary on the minimum wealth required, but Dan Richards, CEO of Clientinsights in Toronto, says that a multi-family office may work with families that have minimum investible assets of between $10-million and $25-million. On the other hand, he suggests that justifying the expense and infrastructure of a single-family office generally requires at least $100-million – or perhaps even $250-million – in investible assets.

The reason for the wide variation is likely that family offices can be set up quite differently and may have fewer or more in-house experts. “Typically, your core expertise [of financial oversight] would be in-house. You’d typically have in-house expertise around tax planning and estate planning,” says Mr. Richards. “But what you wouldn’t have, necessarily, are the really in-depth experts in nuances. For that, you might go outside to supplement your in-house expertise.”

Despite these differences, many family offices share some specific qualities: integration, with perspective on a family’s overall situation; objectivity, offering many services without an agenda to sell particular products; and, often, a focus on family well-being as well as family wealth.

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Ms. Clarke explains that, beyond financial capital, families have human capital and social capital. Human capital may include education, ability to use talents and purpose in life. Social capital may include networks, teams of professionals and philanthropic activities. “A family office is in charge of enhancing and managing all those forms of capital for the family,” she says.

A family office can also serve as a family’s “institutional memory,” says Mr. McCullough, holding valuable knowledge for the benefit of family members who will inherit the wealth. And it can bring a business-minded approach to personal financial planning that’s essential in this market segment.

“I’ve had people say to me, ‘I would never run my business in the haphazard way I have run my financial affairs.’ That’s often the reason they come to a family office – to bring the same level of professionalism to their financial affairs that they do to their business,” Mr. McCullough says.

Approach of family offices not only for the ultra-wealthy

That type of integrated, objective, family-focused approach that defines family offices may also have resonance in other segments of the wealth-management market, suggests Mr. Richards.

“Are people looking for comprehensive advice at the top of the market? Yes, they are, but it’s not just at the top of the market,” he points out. “People with $500,000, $1-million and $2-million are increasingly looking to simplify their lives and looking for more comprehensive planning.”

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