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Single-family offices often born out of ‘triggering’ events

Families realize they need to apply the same rigour to managing the family as they did to running their business

How is a single-family office born? Usually, these one-stop shops that serve one wealthy family come about because of a triggering event.

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“In some cases, there’s a big transfer of wealth because the business got sold or went public. The family members step away from management, even if they don’t want to,” says Shai Dubey, adjunct assistant professor and distinguished faculty fellow of business law at Queen’s University in Kingston, Ont.

So how will they go about assembling the team that will help them maintain the family legacy and handle investing, taxes, philanthropy and succession issues?

No single recipe will suit every situation. Since a family office is “created by the family looking to keep the family and the wealth together to serve the needs and objectives of the family, the nature of that family office is really going to be driven by the needs and objectives of the family,” says Ed Giacomelli, market leader for Canada with the Chicago-based Family Office Exchange, or FOX.

“Our founder has a saying: if you’ve seen one family office, you’ve seen one family office.”

Dubey says, “There’s no definition for what a family office is. For some families, it might mean an administrative assistant; for other families, it means investment and legal advice, and coaching or teaching as well. The definition is fairly broad.”

Goals vs. strategy

One common element among wealthy families creating family offices is a significant change in outlook for family leaders.

“Highly driven entrepreneurs find sometimes that the things that were so invaluable toward their financial success can create headwinds when it comes to reaching family success or even defining what family success is in the first place,” says Jeremy Rosmarin, principal and managing director with Prime Quadrant, a Toronto-based family office that provides investment consulting services to more than 150 wealthy families, advising on assets of about $15 billion.

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“To confuse goals and aspirations with strategy and tactics is the first potential pitfall,” he says. “Starting a family office is a strategy; goals or objectives are things that bring long-term life fulfillment, like [being able to say], ‘My children are engaged with my wealth and living lives that we are proud of.’”

Families may begin the process at different starting points, ranging from square one to already having an engaged second generation and a clear shared vision.

“They might be having family board meetings; they might already have a mission or vision statement, but they might not have a full-time person who can make sure things don’t fall through the cracks,” Rosmarin says.

Wherever a given family lies along the spectrum, the first step is communication. All the stakeholders – including those who may not be actively involved in running the family business – need to discuss their plans and aspirations, either as a family or with the help of a professional facilitator.

Before someone sets up a family office, succession also needs to be settled, Giacomelli says.

“Often there’s a family business involved; they will likely have decided to undertake a management succession and have started to look at their business interests from an owners’ perspective rather than a management perspective.

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“And I think they will also have come to the realization that they need to apply the same rigour to managing the family as they did to running their business.”

Looking for expertise

As family members begin to define their goals for the future, they will begin to understand their staffing needs. Where are the gaps in skills and knowledge? Can some of these be covered off by family members? Does it make sense for some family leaders to acquire further training and education?

“In some family offices, the family members are quite active, and it’s a good thing,” Giacomelli says. “It’s their capital at risk, and if they have the interest and the skill, so be it.”

A lot of families turn to some trusted advisor ... to be a sounding board about what the objectives are, to help sharpen that vision.

Ed Giacomelli, Family Office Exchange

If the family lacks needed skills, where will they find that expertise? They may have relied on advice from the legal and financial professionals embedded within the family business, but typically they will lose these key players when the business is sold.

Conversely, some skills may not be needed. For example, Dubey says, “if it’s just wealth preservation and investing in the stock market, I would say why do you need a family office, because there are all kinds of wealth advisors out there.”

The process of setting up a family office is to a certain extent cyclical. The more the family can agree on a well-articulated purpose for its wealth, the more clearly they will be able to understand the size and structure of their family office. They will identify key advisors, who will help them fine-tune their plans.

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Giacomelli says, “A lot of families turn to some trusted advisor, not necessarily to help them with structuring the family office but to be a sounding board about what the objectives are, to help sharpen that vision.”

Hire someone to be a ‘bridge’

If the founder is going to be actively involved, the next most important role is going to be the finance person, he says. “You want to be thinking about a few things in parallel: family alignment, governance and leadership.” (FOX runs an ongoing series of Canadian Family Office Design workshops to help families understand their options.)

Dubey says, “The challenge is how to co-ordinate with the family, and so several families I’ve talked to may have hired a lawyer – not to be a lawyer, but to be the bridge. They were hired as facilitators, coaches, teachers, and to be able to bring the right people in at the right time, and sometimes to unscramble terminology that the family may not have been familiar with.”

Ultimately, because no two families are exactly alike, every family office will be unique.

“Everybody has their own reason for doing it,” he says. “If I talk to 30 different families, I’ll get 60 different answers.”