Engaging the services of a family office is an attractive proposition. Who wouldn’t want to have their own CFO and CIO, entrusted to oversee all of their financial matters?
If your wealth level, your personal or family circumstances and the increasing complexity of it all is compelling you to seek help, know that this growing segment of the wealth management industry is increasingly winning over well-heeled folks like yourself.
Upon reaching the conclusion that you are ripe for this important transition, the far more daunting task ahead is to find the right multi-family office (MFO) for you and your family. Your selection process should be rigorous and extensive, as it is one of the most consequential decisions you will make in your lifetime.
In this article, I will provide advice on how to select an MFO. I will cover some basics for the sake of completeness, then expand on the critical, more subjective aspects so you can find a proper fit and begin a successful, long-term relationship.
An MFO should be independent, objective and aligned with your interests. It should be led by a team of capable, competent and trustworthy professionals of impeccable character. They should have a strong governance culture, adherence to comprehensive policies and procedures as well as an infrastructure to safeguard the sensitive and personal data they have in their possession. The family office should be stable, with minimal turnover to ensure that none of these most fundamental traits are compromised.
Beyond that checklist, you will need to prioritize your needs and wants and bring your values into focus. The challenge is to find the best fit, as MFOs have their own personalities, values, strengths and weaknesses.
- Here are some questions to help you define your priorities:
- Is preservation of capital your priority, or is it to maximize capital appreciation?
- Do you seek aggressive tax minimization strategies, or do you prefer to sleep soundly knowing your tax filings won’t likely raise any red flags with the authorities?
- Do you value simplicity over complexity?
- Do you expect your MFO to handle your financial matters only, or do you expect concierge services as well?
- Do you need an MFO to focus on the hard issues (investment, tax and estate planning) or soft ones (family governance, legacy and trans-generational issues, education), or both?
First you should meet with the principals of the MFO, with some restraint on your part, at least initially, on providing clues to your hot buttons. Let them describe their philosophy, experience, services and values so that you get a more genuine picture of their offer.
Do not hesitate to use your network to gain insights; members of your peer group could provide valuable information about their experiences with several firms. Do not hesitate to go beyond your immediate circle of contacts as well. This will give you perspective on the types of clients that gravitate to one family office over another. You will likely see patterns emerge, as some firms attract specific types such as people with inherited wealth, entrepreneurs, sports and entertainment figures and people from certain industries or political affiliations. Be inquisitive. Ask your contacts why they chose a specific firm over others.
While these patterns may offer perspective, consider that your best “fit” has more to do with shared values. If there is a preponderance of a certain type of individual in their client roster that you would normally avoid, you can strike that firm off your list. But also be mindful that the MFO’s interest is to increase its revenues, and they will likely be willing and able to conform to your needs, to a point.
You should also consider to what extent your wants and needs might be outside their more “typical” relationships. While they may genuinely see you as an opportunity to expand their services, and they may very well surpass your expectations, there is the risk that you could remain an outlier.
The size of your assets in relation to their client base also should be considered. Would you be one of their smallest clients, average or among the largest? While most firms will say that “every client is important,” some may be more equal than others. Feedback from clients who have left one MFO in favour of another can also be valuable to your process. You may find that what didn’t work for them may be perfect for you, or not.
You may be of an aggressive, risk-taking nature, and this trait, which is typically reflected in your investment preferences, may also extend to your willingness to push the envelope with regards to tax strategies. Not surprisingly, you will likely seek out an MFO that is demonstrably capable of addressing these preferences and caters to a like-minded clientele.
But you should consider that your spouse or children might not share your fearlessness. If something were to happen to you, a portfolio can be de-risked in relatively short order. However, if one of your tax-motivated strategies should raise attention long after your demise, you may have unintentionally left behind a burden on your heirs that far outweighs the benefit. The heirs of several wealthy individuals have seen their names forever tainted by appearing in the Panama Papers, for instance.
Objectivity, in-sourcing vs. outsourcing
Most family offices are independent of any financial institution or money management firm. On the investment side, it is a near universal feature that they provide objective advice on the selection of asset managers for their clients. However, they may provide many of their professional services via their own team members. Should one be concerned that the cherry-picking principle applies only to investment management?
If your need dictates a specialist on cross-border estate planning, for example, does that expertise exist in-house, and will they seek outside advice when appropriate? You will quickly understand why they say, “if you’ve seen one family office, you’ve seen one family office.” Some may have developed an internal asset-management capability in private equity or real estate, etc. While this goes against the independence and conflicts-of-interest principles, it may in fact be a compelling feature. Be open minded. However, if they manage all or most asset classes internally, they are a money management firm, not a family office.
Privacy, security and turnover
Picture your entire personal and financial lives on a server somewhere. Is this server in their offices or in the cloud? What safeguards are in place to protect your sensitive information? Is the IT infrastructure managed internally or externally? A reputable outside provider is most often preferable to a limited internal IT department. In my experience, prospective clients ask few, if any, questions on this critical matter.
You should also inquire about stability of personnel, not just for senior team members but other staff as well. Consider, for example, that someone is tasked with tabulating all of your medical and prescription drug expenses in preparation for your tax filing or submitting your insurance claims. It is obviously preferable that exposure to this information be limited; your confidentiality may be compromised if a new staffer is assigned every year due to turnover.
Consider the firm’s succession plans
Hiring a multi-family office is a long-term commitment. Be sure to ask about their succession plan and get to know who will be leading the firm next. Your heirs will likely be dealing with them.
Scope creep and what is important to you
Be mindful that the provision of an exhaustive range of services may present drawbacks. Overextension can divert resources and focus from core competencies. This is where your priorities come into play. If you are looking for an MFO that excels in sourcing private investment opportunities, you may need to compromise on the provision of a dog walking service for Curly.
Values, chemistry and principles
At the risk of repeating, this a long-term relationship. Finding the right people is key. You need to share the same values and obviously have a high degree of trust. You need to know that they have your best interests at heart. In time, you will likely share intimate details about you and your family and seek advice on matters that may sometimes fall outside the initial scope of your relationship.
Wealthy families often struggle with internal conflicts, where an objective, experienced outside party can bring perspective and paths to resolution. Your family office can also be an invaluable resource to educate and prepare your heirs for the responsibilities and challenges that come with significant wealth.
In a family office, managing risk should go well beyond your portfolio and property. The firm’s care should encompass health, physical well-being and cyber-security – basically anything that could be a threat. It should also be able to advise you on liability risks arising from your directorships on corporate and non-profit boards.
This process could take several months, or years even, so take your time. If you do not find your ideal MFO, or your ideal is currently beyond reach, do not settle; consider either waiting or expanding your search outside your region. While proximity has naturally been a must, the pandemic has given us comfort and confidence with the use of technology to be serviced remotely. If you have not found the MFO for you in Ottawa, you may find it in Montreal or Toronto, or vice-versa. Consider as well that the MFO model is still very much in the developing stages in Canada; if your ideal firm does not exist today, it may see the light of day in a few years.
I hope that these insights will help you along in your process. At the very least, they should have emphasized, all things considered, just how important a decision this is. Extricating yourself from a poor match a few years down the road is something best avoided.
Bill Healy is the chief experience officer and chief investment officer of PortfolioHiWay Inc., a digital investment platform focused on addressing the needs of family offices and UHNW individuals. He is also the co-founder, former president and CIO of Patrimonica Asset Management Inc. and partner of the Patrimonica Family Office.