Single-family offices, facing headwinds, eye partnerships with multi-family offices

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In the last few years we have seen a notable trend – single-family offices (SFOs) partnering with or transitioning to multi-family offices (MFOs).

SFOs with less than $1 billion are most likely to be looking at alternatives. They can typically reap many benefits from partnering with an MFO and accessing its more robust infrastructure. But there are also many examples of larger SFOs that are using a generational change or the pending departure of a key employee to weigh their options.

The reasons for these shifts are typically unique to each family, but we at Northwood Family Office have noticed four main factors at work.

Key person risk

The first is “key person risk.” Many SFOs rely heavily on a key staff member who leads the office. As that person nears retirement – or there’s a risk of them being lured away to another role – the family begins to realize that their departure would leave them with a serious gap.

It is often very difficult to replace that person through another direct hire, especially given the knowledge and trust they have built up over many years. Families can sometimes feel it’s too risky to rely on one new replacement leader and they instead opt for a multi-family office because there will be backup of institutional memory and multiple people familiar with the family situation.

The reason we are seeing more of this now is simply the age of the key leaders in family offices. Many of them are headed toward retirement or have passed it and are staying around because the family needs them. But they will ultimately have to retire (or slow down), and the family will have to sort out which direction they want to go after that.

Continuity is another issue here. Many SFOs are small operations that struggle to continue in a steady state. And some can find it difficult to create workplaces that consistently attract and retain top quality staff, especially if it can be more difficult for staff to advance and build equity.

Compliance

While key person risk is likely the main driver of change, the second issue is compliance, administrative and other costs. They are a substantial burden for many SFOs due to their lack of scale and ability to share costs. The scale of an MFO can often help ease or at least share this compliance burden.

Cost/value equation

The third reason is the cost/value equation. Family offices can be expensive to operate, and SFOs particularly so. Many families are reviewing the costs of their offices (including the investments in technology, staff and other resources) and investigating alternative service models that provide more economies of scale and reduced household costs over time, as well as greater capabilities, infrastructure and services available to the family.

Alignment among family members

The fourth reason is alignment. In some cases, there will be a divergence of opinions among family members as to the vision and role of the SFO, particularly as the number of next-generation households increases. Some family members may want more independence, others might desire a different focus than their siblings and cousins, and some are not interested in managing the staff of an SFO and want to outsource that responsibility.

There also might be differing service levels for different generations of the family, which may not meet the specific needs of the individual families within the SFO.

Next steps for SFOs

What do these partnerships between SFOs and MFOs look like? In some cases, a multi-family office can provide the core services and the SFO or the family can still keep some duties in-house, such as bookkeeping, personal services for family members and executive assistant functions. In other cases, SFOs will decide that they are no longer sustainable (or won’t be in the future) and will wind down and outsource their operations to an MFO or another set of providers.

As we know, one of the constants in life is change. Many family offices are sorting through how they will deal with these changes, including key staff succession, rising costs, increasing numbers of households and diverse visions of the future. Some will stay as single-family offices and some will shift to other models, including MFOs, depending upon their assessments of the costs and benefits of each.

Scott Hayman is President and Chief Operating Officer of Northwood Family Office in Toronto. In 2003, Scott co-founded Northwood with partner Tom McCullough, and the pair have built Northwood into one of Canada’s leading family offices. Scott has spent more than 30 years in the financial services industry and is the senior partner at the firm, responsible for relationships with existing clients. He is also a lecturer for the Management of Private Wealth Course in the MBA program at the University of Toronto’s Rotman School of Management, and an Entrepreneur-in-Residence at the Ivey Business School. Over the years, Scott has been involved in a number of charities with much of his time devoted to the Juvenile Diabetes Foundation. Earlier in his career, Scott worked at a fee-based financial planning firm and in senior roles at RBC Dominion Securities and Scotia McLeod. He started his career in public practice with a “Big Six” accounting firm where he obtained his CA designation.

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