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Separation anxiety: When to split a family office from the business

Conflicts of interest, need for privacy can drive and inform a difficult decision

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When the CEO of the family business has a question about her personal legal or financial matters, it’s a natural thing to stroll down the hall to check in with a professional who’s already on the company payroll.

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In fact, that’s how families often lay the foundation for a family office that will serve their needs. But when is the right time to separate the family’s affairs from those of the operating business?

“It’s a very interesting question,” says Tina Di Vito, partner of family office services for the accounting firm MNP LLP in Toronto.

It seems logical to consult with existing staff, she says. “They’re already very familiar with the family, so it’s quite easy for the family members to ask a personal question or get them to assist in an investment decision.”

But this informal arrangement can begin to show signs of strain.

“For many families, that works for them. For other families, as their needs grow – philanthropy would be an obvious one – they begin to see a need for something outside the family business,” says Karen Macdonald, chief operating officer of Viewpoint Group, a family office in Calgary.

Viewpoint started as a single-family office for the Van Wielingens, a leading family in Alberta’s oil and gas sector, providing investment management, philanthropy, estate planning, financial services, tax oversight and personal concierge services. It later launched an investment-management business, Viewpoint Investment Partners Corp., which provides portfolio and investment services to other high-net-worth families.

“As a family’s personal affairs start to require more time, effort and commitment, that sometimes is a reason to separate away from the family business,” Macdonald says. This allows for a separate focus on the company’s opportunities and governance apart from those of the family.

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Discomfort and conflicts of interest

The need to distinguish between family and business matters isn’t only a concern for the ultra-wealthy.

“You don’t have to be a billion-dollar family to justify that need for somebody to be managing things beyond the scope of operations,” says Cindy David, president and estate-planning advisor with Cindy David Financial Group Ltd. in Vancouver.

Separating the family-office services from the operating company allows for more clarity.

Karen Macdonald, Viewpoint Group

“I’ve very often seen a CFO become a trusted advisor and provide family-office duties within the organization,” David says. In the normal course of family dynamics, however, this arrangement opens the door for discomfort at best and, at worst, conflicts of interest.

“Let’s say I’m the second-generation son of a first-generation business owner, and I’m expected to have family meetings with my dad’s CFO: You’re not representing me. Can you represent all family members equally and fairly?” she asks.

Worse, what do you do “when you’re the family advisor, and the patriarch comes into the boardroom to say, ‘I’m having an affair, and I want you to keep it secret from the rest of my family’? As a family advisor, you’re not the keeper of secrets,” David says. “These can be really difficult conversations to have.”

Pain of maintaining the status quo

Di Vito points out that there are lots of pros and cons at work here. On the positive side, “those individuals generally are already on the payroll. They’re already trusted individuals, they have inside information – not in an illegal way, but they know what’s going on within the organization and they know the details of that individual’s cash flow.”

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She points out that the resources available within the company may be more far-reaching than those of a smaller office, such as emergency plans and cyber-security. On the other hand, each family might feel differently about “having one individual in their business who not only knows everything about the business but also knows a lot of personal information about the family members,” Di Vito says.

As the family grows and changes with the birth of new children, the arrival of new spouses and, all too often, the development of family frictions, the pain of maintaining the status quo is likely to eventually outweigh the pain of change. Also, at some point the company advisors may begin to have trouble differentiating situations in which they’re acting on behalf of family members from those in which they’re acting for the business.

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Macdonald says, “The more complex it is, the more the need for clarity. Separating the family-office services from the operating company allows for more clarity.” Conflicts of interest could arise when employees are not clear about responsibilities and where their allegiance is as an employee.

The lines start to blur, she says, “and there is the potential for employees to be pulled in different directions: The matriarch of the family is asking me to help with some personal activities, but the operating company has a deal that is closing this afternoon.”

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Optimum use of professional skills

The decision to open a separate office will ultimately relate to the optimum use of professional skills, says Di Vito.

“When you’ve hired very experienced individuals to run the operating company and be strategic and manage staff, do you want them to be distracted in helping the family to manage their own personal affairs?” she asks.

Conversely, she says, when family members need someone experienced in estate planning or family law, they may not get the best advice from the legal professionals inside the business, whose expertise is likely commercial or corporate law.

In some situations, the original operating company ends up evolving into a family office that manages the shared wealth of all the family members. However, says Di Vito, “it often makes sense to set up a separate office, and often if there are multiple generations that would like to be part of that family office, cost-sharing arrangements can be set up.”

Another option is to join an existing multi-family office.

“They are going to have to establish new relationships, build trust,” Di Vito says, “but they know that they are being given advice that is independent of what may be happening with the corporation.”

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