No two family offices are alike, but an important distinction can be made between those who serve a single family and those who work with multiple clients.
Why is this difference important? We asked Sam Reda, who is president of Maralex Capital Inc., a consultancy to investment management companies, and co-founder and chairman of AlphaCCO Software Inc., a provider of compliance solutions.
QUESTION: How do single- and multi-family offices differ?
ANSWER: Families with a single-family office are ultra-high-net-worth families, typically with wealth of many hundreds of millions of dollars, or billions. Multi-family offices, on the other hand, spread their costs by serving more than one client. There can be differences in the services that single and multi-family offices provide, but many of the services are similar or the same. These services can vary among offices, and also among multi-family offices.
There is no single set definition of the term family office in Canada. The biggest difference is the cost – it costs more for an office that is dedicated to just one high-net-worth family, but the family can afford it and wants control over the activities and shape of their single-family office.
Q: What questions should a family ask when considering one or the other?
A: To be honest, you probably would not even ask which type to consider if your family’s net worth is below a certain threshold. That is because of the cost of having a single-family office; if a family’s net worth is, say, $50 million, it’s going to cost at least $500,000 a year, and properly a lot more. A multi-family office will not be as costly.
The choice for some families, say with $50 million, is not between a single- and multi-family office but rather between a multi-family office and the private wealth services offered by banks and other similar providers to high-net-worth clients. The multi-family office is usually more specialized and usually provides complete independence with their advice.
Those who choose a multi-family office should bear in mind that such offices operate also as a business; they profit by taking care of the interests of several wealthy families and spread their services and costs among them. A single-family office is an extension of the family itself, but they incur all the costs themselves.
Q: What services should families expect from the different types of offices?
A: No matter which type, there are some services for which a family office, whether single or multi, will seek help externally. The question for each family is which services they want the family office to provide themselves.
Investment is only one type of service. There are a lot more – accounting and reporting, bookkeeping, tax strategy, estate planning, setting up trusts, philanthropy and various others.
Family offices often also are involved in what is called conciergerie services – taking care of personal family requirements.
Family governance and education are also important services. For example, a family office can facilitate how different members of the family communicate about wealth-related subjects. And they can help educate members of the family who will inherit lots of wealth and will need guidance in managing both the wealth and the transition – how to ensure that future generations become responsible stewards of their own wealth.
Q: Do single-family offices provide services that are not offered by multi-family offices?
A: There’s no standard. It comes down to the wealth of the particular family and what they engage the family office to do. With a single-family office the service can be whatever the family wants. Staff of the family office may get tickets for members of the family who want to go to Florida; they may go with the family, too. But some multi-family offices may also provide these conciergerie services. Whether a single or a multi-family office, all services can be provided. It is a question of costs and needs. If the family is too small to be able to have its own family office, it will have to choose a multi-family office that will provide the services it needs.
Both types of offices can also outsource – for example, having documents notarized, or getting specialized lawyers to put together trust agreements, or providing cybersecurity and data protection. Whether it’s single- or multi-family, the office may not have the expertise or staff for every single thing, and in both cases they’ll go outside to get the right help.
Q: How do multi-family offices avoid conflicts of interest that might arise from managing the interests of several high-net-worth families?
A: Multi-family offices are registered with securities regulators (as most provide investment management services). The multi-family offices must make 100 per cent certain that there is total confidentiality between clients.
Single family offices are usually not registered. They usually serve one family. But since they could serve various branches and generations of the family, the confidentiality among these members may also be very important, as with the multi-family offices.
Although multi-family offices compete with private wealth services offered by certain institutions, there is a difference. Normally the multi-family offices don’t offer any in-house products. In this sense, the multi-family offices offer transparent objectivity.
Q: Do clients of multi-family offices sometimes “graduate” to single family offices?
A: This can happen when a family’s assets approach the upper end of where multi-family offices serve – say $150 or $200 million, but there is no fixed rule. It is a question of the wealth of the family and the direct control they want on all aspects of their wealth.
But like previously mentioned, there are substantial costs in setting up a single-family office. Sometimes a family will acquire this level of wealth when they sell their operating business. At that point, the family might start a single-family office to administer the wealth they have acquired from the proceeds of the sale.
Q: Do the families who have single-family offices behave differently than those who use multi-family offices?
A: Sometimes. I know of one family now with billions of dollars that sold its business, and the head of this family said they would probably buy another or a few other businesses, because that is what they’re good at – running businesses. Their single-family office will assist them because they built it as such; a multi-family office might or might not be in a position to advise one of their client families about business acquisition.
Q: What else should we know about the distinction between the two types of family offices?
A: Family offices, and especially multi-family offices, are a relatively new concept in Canada. They grew out of the services that used to be provided by the old-fashioned trust companies, which got taken over by or merged with the banks. The number of both single- and multi-family offices has been growing for many years, and I predict that there will be a lot more in a few years. Both can serve the various needs of the families, whether a single family or a multitude of families.
Sam Reda, CFA, is President of Maralex Capital Inc. and co-founder and chairman of AlphaCCO Software Inc. This article has been excerpted from a longer conversation.