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Your own private CFO

Family offices serve as quarterbacks for the wealthy’s financial game plans and battles. If their walls could talk...

Tom McCullough, CEO, Northwood Family Office (Photo: Markian Lozowchuk)

You’re an entrepreneur who has worked for decades to build your business. Then someone comes along and offers you $30 million for it. After the last champagne bottle is drained, the new Bentley is in the garage and you’re back from the Bora Bora vacation, you start to realize there’s a big difference between running a company worth $30 million and managing $30 million in disposable cash. Taking care of that wealth is a business in itself. Which is why more and more of Canada’s most affluent people turn to what are known as family offices.

While most of us have an accountant, a lawyer, an insurance guy, an investment manager and other individual advisers, for the very rich these issues’ complexity is compounded by the sheer amount of capital involved. Enter the family office: a collection of professionals who act as a personalized C-suite, taking on the roles of chief financial officer, CEO and COO of your life.

“It’s a customized service, because each family has very specific issues,” says Tom McCullough, who runs Toronto-based Northwood Family Office. The company handles 24 clients with family net worths ranging from $10 million to $500 million. Those in lower tax brackets can make do with standardized investment products, wills and tax forms. “In the wealthy family world, nothing is standard,” says McCullough.

The family office is a nascent business in Canada. (McCullough still gets asked if he works in birth control.) But it’s been growing over the past decade as more entrepreneurs and executives in this country reach an age and wealth level that makes them open to a new approach to asset management. In the U.S., which has a longer history and larger population of multi-generational wealthy families, the industry is much bigger, established and more diverse.

There are two types of family offices in Canada: single-family and multi-family. Single-family firms typically serve the most rarefied elite—those with assets worth $300 million and up—often over the course of multiple generations. According to a recent global wealth study by Boston Consulting Group, Canada ranks seventh in global “ultra- high-net-worth” households, meaning those with assets exceeding $100 million. But the “backbone” of Canada’s well-to-do class, says McCullough, are people who, through business or investing success, have amassed a few tens of millions of dollars. “They’re not mega-wealthy, and they don’t just live in big cities like Toronto. They also live in places like Red Deer.”

According to Jennifer East, founder of Onida Family Advisors, which often works with family offices to help ease tricky discussions about money, this group is better off engaging a multi-family office, because “the cost of having [a full] staff alone just doesn’t make sense.” Multi-family firms can offer better rates because of their large asset pools. Some charge flat fees while others are compensated based on a percentage (typically between 0.5% and 1%) of invest- able assets. Generally, however, the cost of the services depends on the family’s size and the complexity of the financial management it requires.

Those who are newly rich, or have less than $50 million in assets, tend to be the least familiar with the concept of a family office, but are often the most in need of such services. One Northwood client, who asked that his name be withheld, says that following the sale of his transportation business in 2003 for between $25 million to $50 million, he was surprised how complex and time- consuming managing his new wealth was. Northwood has helped his family organize everything from insurance to taxes, estate planning to investments. It even proved valuable in drawing up something as seemingly simple as a personal budget. “I was a business executive, where I dealt with budgets every day,” he says. “But one thing I’ve really valued from Northwood is annually put- ting my personal budget in the context of the whole estate, the whole package.” This way, he says, he can see the implication 25 years into the future of taking out a certain amount today.

Family offices are essentially the quarterbacks who co-ordinate the activities of clients’ other advisers and assist in tackling any financial issues that touch the whole family. Investment management may be their most fundamental function, but these firms have been known to help organize health care, such as finding available specialists for particular ailments, and source tax experts for dual-citizen clients. For larger families with more than one generation of siblings and spouses, the office often acts as the boardroom from which clients direct investing decisions and other financial endeavours such as philanthropy.

But what family-office advisers find is often their most appreciated service is mediating family disputes and helping relatives communicate about money. Every family has its unique dynamic, but wealthy families face larger financial consequences when those dynamics become fraught. For a family office, that can mean gathering siblings and their spouses together so they can discuss financial affairs somewhere other than a holiday dinner table. Or it can mean laying the groundwork for younger kids’ financial future.

Since Canada doesn’t have as much multi-generational wealth as the U.S. or Europe, many of this country’s richest people are facing succession issues for the first time. Consultant East has helped a number of family-office clients ease the transition from the generation who built the fortune to the one who will inherit it. “Often, the governance structure up to then had been straightforward: Dad made all the decisions,” says East. “These family members may never have had meaningful discussions about the business, the future and how involved each would like to be.” She finds that adult kids tend to be afraid of stepping into financial discussions because the father had always maintained control and they were treated like children.

East is often brought in to help the firms set up decision-making structures for families that ease or avoid potential conflicts around money. “I have several clients where the youngest child is an artist,” says East. “And they don’t feel they’re taken seriously because they don’t know anything about business. But they’re still a one-fifth equal partner.” In some cases, the family tensions are so strong that the best solution is for one or more members to sell their stakes in the family business.

The biggest concern, especially for people new to wealth, is how sudden affluence will affect their children. It’s not just about pre- paring the money for the kids, but preparing the kids for the money. The parents “don’t want to take ambition away from their children,” says Margaret Franklin, CEO of Kinsale Private Wealth, a wealth management team that works closely with family offices.

This was a major issue for the transportation entrepreneur who hired Northwood. He has three kids ranging in age from late teens to early 20s and, eight years after coming into his millions, he and his wife still have not told them the extent of the family’s wealth. But Northwood staff have met with each child individually and begun to help them navigate modest stock investments of their own, so they start to learn the workings of the market. The firm also holds all-family meetings to discuss charitable-giving decisions. “Northwood helps us with educating our children,” says the client. “I didn’t want them to wake up one morning and have me say to them, ‘Guess what? We’re wealthy, so you can do what- ever you want with money.’”

The fact that family offices have no affiliations with financial institutions can give the clients an extra peace of mind. “Much of the financial business boils down to [selling] product,” says McCullough, who spent more than 20 years at RBC Dominion Securities before starting Northwood. “At a family office, there is no pressure to push any particular product. It’s a great position to be in.”