As an ultra-high-net-worth (UHNW) family’s wealth grows, so does the complexity of managing their assets. It’s not only traditional services that are required, such as investment management, philanthropy, and legal, tax and estate planning, but also business advisory services, governance, financial education, and maybe even lifestyle management for current and next-generation family members.
In the coming years, an estimated $400 billion is expected to be passed down from one generation to the next in Canada. Considered one of the largest wealth transfers in history, it’s never been more important for families to find ways to effectively build and maintain their wealth—and the services of a family office can help.
What is a family office?
There are many types of family offices. Broadly speaking, they provide integrated private wealth management services using a team of professionals who oversee and manage the financial affairs of UHNW families. These teams can include one or more professionals who serve just one family, or many families, often with assets valued in the multimillions of dollars.
Determining whether to set up a family office depends not only on the family's net worth but also on how complicated their financial affairs have become, says Mark Fell, head of family office and strategic clients at RBC.
“It comes down to complexity and size of investment management needs, which is different for different types of families and situations,” he says. “Sometimes the family is quite dependent on the family office to handle everything, and other times the family is very engaged and interactive. There are no two family offices that are alike.”
In many cases, family offices are set up when parents want to build and maintain a legacy for their children or relatives while also advancing the family's vision through either a business or philanthropy, or both.
“Family offices can be created to extend wealth, but also to help families grow and evolve,” Fell says.
Set clear goals
People considering setting up a family office should start by defining their long-term goals and determining what resources they want at their disposal to achieve them, says Michael Moran, a managing director at Walnut Ridge, the family office behind the Kanfers, who run Ohio-based GOJO Industries, the maker of Purell hand sanitizer and other products.
“Ask yourself ‘What do I want to accomplish in the next 10 years?’” Moran says. “And get a clear assessment of the complexity of your estate and the nuances that require this intimacy [of a family-office structure].”
While there are core functions with a family office, such as taxes, trusts and estates, Moran says families should also determine how involved they want professionals to be in other areas, such as investing, philanthropy and financial education. The more integrated the services are, the more comprehensive the advice will be long-term, he says.
“One thing that we've learned along the way is that there is a benefit to getting some smart people around you,” Moran says. “For example, if you want to do direct investing and you bring in somebody who's really good at it, represents all the values you have and brings a professional approach to it, which also helps you manage things in other areas. You're going to benefit just off the intellect that person brings.”
Single-family office versus multi-family office
There are also the options of having a single-family office or a multi-family office. Moran says the decision will depend on considerations such as how much you'll be actively investing and the overall complexity of assets being managed.
“If you plan to put money into the market and want to come up with a good diversification strategy and then just let it ride, you probably don't need someone in-house every day working with those investments,” he says. “However, if you want to go out and do direct investing, you probably want to have somebody right alongside you who's going to be able to execute on that and deliver the resources. Or, if you have a lot of trusts ... you're going to need somebody in-house to deal with those complexities and connect your ecosystem. ”
A family office often works like a translator, Moran explains, connecting and communicating the needs of the family to the business and to each family member.
“It's an interesting role,” he says, that includes stewardship and protection of the assets as well as providing business and personal guidance to family members.
Build a team of professionals
And while some family members may choose to work in the family office, Moran says the model is often more effective when it's managed mostly by third-party experts. Not only do the outsiders often have more appropriate skill sets and experience to manage the family's affairs, but they can also help keep emotion out of the decision-making.
“A family office is a business and requires specific expertise,” he says. “It's similar to your car breaking down; you wouldn't let your brother, who has no idea how a car works, fix it. You'd take it to a mechanic because they have expertise.”
Even if a family member has some of the relevant skills—for instance, if they're a lawyer or an accountant—Moran recommends they still surround themselves with outside professionals who are impartial and can help make the right decisions for the family and the business. ”You really have to think about the competencies that you need supporting you,” he says.
For a family office to truly create value long-term, Moran recommends families have a defined purpose, vision and values for themselves and their assets that will shape all future decisions.
“Those values can then translate into everything you want to do and how you treat each other,” he says. “From there, you can focus on the strategy and the resources and how to execute it.”
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.