'It's certainly not fun': Paperwork a growing burden for family advisory firms

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With more family offices in Canada meeting the needs of more wealthy Canadians, these firms are finding that they also need to meet more rules.

“We’ve always been proponents of a strong compliance culture at our firm. It’s better for everybody,” says Mark Barnicutt, family office advisor and president, chief executive officer and co-founder of HighView Financial Group in Oakville, Ont.

“But there has been so much regulatory change in the past decade that the paperwork can be overwhelming for clients,” he says.

“You literally could have a few hundred pages to go through. It means providing a lot of education for clients. Obviously, the people in the families we work with are smart people, but it’s up to us to make sure they understand what they’re signing.”

“It’s certainly not fun,” says Elke Rubach, a lawyer and founder and president of Rubach Wealth in Toronto.

“It’s a bit easier for someone with a firm like mine providing individual attention to a small group of clients, but for big firms the burden of meeting all the compliance rules can be horrendous,” she says.

The same regulations do not apply to all family offices. Some, for example, offer tax and estate planning advice without managing their clients’ investment decisions, leaving those decisions to portfolio managers outside the family office.

In an online white paper, Tom McCullough, chairman and CEO of Northwood Family Office in Toronto, explains how family offices in Canada are regulated — or not, depending on the work they do.

“Firms that provide financial planning advice or family management are not regulated, but those that provide investment management are. Most often, those family offices that offer investment advice to multiple families are regulated by the relevant provincial securities commissions,” he says.

Meanwhile, “at the employee level, many professionals who work in family offices carry professional designations, subjecting them to the authority of their own professional organizations such as accountants, lawyers … etc., and therefore must comply with their relevant profession’s standards of care.”

Regulation is different in the United States, where single family offices often operate as corporations and multi-family offices often register as investment advisors, he adds.

In Canada, any family office that also serves as a portfolio manager faces a spider’s web of regulations and compliance obligations.

“Anecdotally, we are seeing more and more family offices that are becoming registered portfolio managers. Some operate as portfolio managers for some portion of their clients’ portfolio, while others may work with other portfolio managers on specialty asset classes,” says Katie Walmsley, president of the Portfolio Management Association of Canada (PMAC).

Family offices that do act as portfolio managers come under a rule called NI 31-103, which determines whether the office must be regulated by PMAC’s rules, Walmsley explains.

PMAC represents more than 300 asset management firms (not just family offices) that manage more than $2.9 trillion in assets, and members are all fiduciaries managing investments in the best interests of their clients, she says. The association’s mission is “to advocate the highest standards of unbiased portfolio management in the interest of investors served by members.”

In practical terms, for family offices this means adhering to at least 30 different policies and procedures guiding portfolio management, Barnicutt says. “A lot of the compliance documents are legally oriented; for me the most important one is the investment policy statement, which explains how the investment is going to be run,” he says.

It’s important to work with families to make sure that everyone is clear about what their particular investment policy statement means, Barnicutt adds. “It’s like the contract you make with a builder to build a custom home. You want to know how it’s all going to work.”

Such policy statements can run to as long as 30 pages alone, and several can be needed when working with a wealthy family whose holdings and investments span several generations, he adds. “It’s not uncommon to have three or four policy statements related to the investment decisions of different people in the family.”

To keep up with compliance and regulation, family offices need to focus and strive for efficiency, Barnicutt says. “When you’re a large organization like a bank you can put an army of people on this stuff; for smaller organizations such as family offices it’s a case of putting the right people on the right tasks,” he adds.

The requirements for a portfolio manager are complex, Rubach says. “They include all the standard rules such as ‘know your product,’ ‘know your client [understanding the client’s objectives and risk tolerance],’ due diligence about investments and so on,” she explains.

Even when families are successful and sophisticated in business, family offices that act as portfolio managers need to go through all of the compliance measures with their clients. “We try to simplify the issues as much as possible, to make sure that everyone knows what’s going on. It’s up to me to keep explaining until this happens,” she says.

Some firms try to address the complexities by hiring or engaging squads of compliance officers to oversee the process, Barnicutt says. But this can be a mistake, he warns. “You don’t want to over-hire. It’s a matter of getting the right processes in place and using technology to work efficiently,” Barnicutt says.

Larger family offices may hire one dedicated chief compliance officer to oversee the process of meeting all regulatory requirements, “but they’re expensive,” he adds. “In some cases the CEO of a smaller family office can handle regulatory compliance if he or she has a financial background. Or it can be the chief financial officer.”

Firms can also outsource to compliance specialists — to find these, check with PMAC, Barnicutt suggests. “They have a wealth of resources.”

“In any case, no matter who fills the role, you need a system. You need to understand all the policies and procedures of portfolio management. There’s a lot of tracking and monitoring that needs to go on.”

More from Canadian Family Offices:

• Five smart ways to transfer wealth to your children, grandchildren
• Paying the absolute lowest in tax no longer top priority for today’s families
• Recent changes to Canada’s tax laws could be costly to family businesses
• Money-related disorders are proof that wealth can’t fix everything

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