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The first rule is, don’t lose it, says Tom McCullough, a specialist in managing money for well-off Canadian families

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Tom McCullough, chairman and CEO of Northwood Family Office in Toronto.Michelle Siu/The Globe and Mail

People saving for retirement typically spend most of their lives fixated on increasing their investments. Over time – if all goes well – that priority eventually shifts to preserving and enjoying their nest eggs.

That transition may seem obvious, but in the finance industry it’s the strategic difference between wealth accumulation and wealth management.

Toronto-based Northwood Family Office specializes in managing wealth for Canadian families with fortunes between $10-million and hundreds of millions. Chairman and CEO Tom McCullough says his confidential client list includes some recognizable dynasties, but most of the firm’s $4-billion in managed assets comes from hard-working families who want to focus on enjoying the fruits of their labour.

“Most people who come to us have sold a business. They’re probably in their fifties or sixties and they’re too old to do it again. They’re risk averse,” he says.

Northwood offers a gamut of financial services including investing, managing a family businesses, and tax and estate planning – all adhering to the golden rule of wealth management: “The first thing is, don’t lose it. Then let’s see if we can make some money,” Mr. McCullough says.

He has just written a book on wealth management called Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask. Unlike an investment plan that targets returns, he says a wealth-management plan starts with establishing the day-to-day living expenses of investors.

“You need to determine how much of your capital you have to assign to fund your living expenses. You’re probably going to fund that with something conservative because you really don’t want that messed up,” he says.

Conservative investments in Northwood’s arsenal include dividend-paying stocks, mortgages and fixed-income portfolios with maturities laddered over time to take advantage of rising yields.

“As interest rates rise over the course of time, we don’t need to take that much risk. If you can get a 4- or 5-per-cent rate of return from a bond, that’s not half bad,” he says.

From there, investments are layered to target returns over time according to when the money is needed, which often stretches out to provide for future generations or charities after death. Mr. McCullough says longer time horizons provide opportunity for bigger returns in riskier investments. “If it’s for 20 years out, you can take risks,” he says.

One risk-free return booster in Northwood’s arsenal is tailor-made tax strategies designed to keep more money in the client’s pocket, such as splitting taxable income among family members in lower tax brackets, and establishing trusts for future generations.

“If you can save tax, it is a much more reliable way to get return than hoping for luck in an investment,” Mr. McCullough says.

In much the same way, he says Northwood tries to keep returns from getting gobbled up by fees. Like most high-net-worth wealth managers, Northwood can keep its cut low and still generate large fees because they are based on a percentage of assets under management. Fees for any high-net-worth clients are usually 1 per cent or lower. He says Northwood’s fee is negotiated based on the individual portfolio.

“We have the buying power of 60 families. We use that to get investment management much cheaper than a typical client can get on their own, and we pass that on to clients directly,” he says.

However, the biggest objective of wealth management is peace of mind – allowing clients to rest assured that their money is being preserved regardless of broader market volatility. The worst nightmare for any retiree with money in the stock market is a 2008-style market meltdown, which resulted in equity markets being slashed in half within a few months. Markets eventually recovered, but investors who needed the money to live were forced to sell low.

Mr. McCullough says his shock-proof portfolios withstood the 2008 meltdown and can weather any future meltdowns.

“When the 2008 meltdown happened, we got calls from precisely zero clients. They knew that the short-term liabilities they had were fully funded by conservative investments,” he says.

For more skittish investors, wealth management may not be enough. The ultra-risk averse can take it to the next level by putting some, or all, of their savings in annuities. Annuities are insurance products that guarantee fixed returns with the principal, much like defined-benefit pension plans. Annuity holders receive a regular allowance for the rest of their lives no matter what the markets do.

Simon Kay, president of IPS Insurance, provides annuities. “At least a portion of your capital should be converted to what is essentially a personal pension that will cover off all those core expenses that will give you peace of mind,” he says.

Annuities can be tailored to an individual's risk tolerance and return expectations. Returns from annuities are correlated to interest rates, which means the price of safety is relatively low returns as yields linger at rock bottom.

Mr. Kay says annuities are ideal for retirees who know exactly what they need for day-to-day living expenses and can stick to their budgets. “It’s not about what you have. It’s about what you spend.”

He says advisors are often reluctant to shift client assets to annuities because of a finance industry bias in favour of active asset management, and the fees it generates.

“The financial advisory world is all about assets under management. As soon as you do an annuity, you’re moving those assets to another institution off-book. It’s fundamentally against the model of keeping assets in house and growing them,” Mr. Kay says.

As ghoulish as it may sound, he says annuities also take the guesswork out of trying to time your assets with your death.

“The reality is that you will not spend all of your capital because you’re always going to be scared to dip into it for fear that you are going to run out,” he says.

“The annuity, while it may be a low-interest rate environment, is actually going to perform better than if you had not done it and lived off your capital because you are going to have surplus capital left over when you die.”