The right reasons – and a big wrong one – for starting a family office

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No one knows exactly how many family offices are operating in Canada, but most experts agree the numbers are growing rapidly. It’s also generally acknowledged that this growth is tied to demographic trends, as family businesses founded decades ago pass into new hands.

With a liquidity event comes the loss of financial and legal advisors tied to the operating business, as well as new roles and priorities for family members who have become managers of investments rather than the business. Enter the family office.

“The liquidity event is the biggest driver in starting a single-family office,” says Adam Hoffman, an advisor to Vesta Wealth Partners in Calgary and other family offices. “Sometimes, as a family enterprise gets big, its holding company becomes a single-family office through sheer scale alone.”

Mark Auger, an independent family-office executive and strategic advisor based in Montreal, points to a more common motivator: an increase in complexity. “Where is that complexity? It is in the assets and liabilities that compose the physical and financial stakes of the business family,” he says.

In his 2017 doctorate of business administration dissertation for Kennesaw State University in Georgia, titled Built to Last: Exploring Family Strategy in Dynastic Business Families, Auger identifies reasons that families set up family offices. They range from the straightforward to the ambitious.

Among the former are such considerations as controlling “agency costs” and managing multiple business interests, excess business capital or a growing workload. The latter include dynasty-building initiatives, such as developing customized plans for capital management, taxation and estate planning intended to last for generations.

Another reason families establish family offices is “to thwart family activism,” Auger says, including when one or more family members try to exert untoward control of the family enterprise.

Complexity builds as families “manage multiple and significant holding positions in listed and unlisted operating companies, significant real-estate holdings and holdings of a various nature,” Auger says. As they take on “more asset types and more liability types, in different currencies, you can see how the variables keep compounding, and at some point you need a business unit that is singularly focused on these assets.”

In addition, he says, “because of that complexity and because of the singular focus of the family unit, you are also achieving higher levels of control and transparency and control of operating costs. You become an aggregator of capital.

“I would say those are the two main factors that would push a business family to look at that. It’s a new business within the family business group to address needs that are specific to the family interests.”

A well organized, customized family office creates alignment and helps ensure survival, says Carolyn Cole, founder of Cole & Associates, an independent family-office strategy and design firm, who splits her time between Vancouver and Toronto. “It provides the platform to find alignment on objectives and ways to accomplish them.”

Liquidity events may account for as little as “one quarter of the equation,” Cole estimates. “Sometimes, people will start a family office because they feel it is something they should do. Perhaps their friend has one, or they have heard that at a certain level of wealth, they need one.

“I have actually talked people out of setting up a family office. The wrong question to ask is ‘how much should I be worth to start one?’ The right question is ‘what is your intention for your wealth?’”

She describes four types of family offices, each one established for a different reason:

• An administrative family office collects data and enables informed decision-making.
• A legacy family office is created to assist inheritors who will be bound together by some form of wealth vehicle.
• An embedded family office functions within a family-owned enterprise without an independent structure, and has various duties assigned to it, based on the family’s needs.
• An institutional family office is focused solely on strategic deployment of family capital, and may not have any family working with the team.

Other key elements that a family office can provide are communication, education and transparency, says Cole. “They’re all interrelated. It takes a lot of facilitation and co-ordination to bring everyone onto the same page.”

This is critical. She cites the case of a family that was setting up one of five children to own family business shares without realizing she had no wish to do so. Disaster was averted through “a facilitated conversation that happened within a family office.”

One advantage of a family office “is the power of diverse service providers,” Cole points out. “For a family to truly be served in their own best interest, they often need to find their own dedicated talent who are impartial. Their biggest challenge is finding the talented people that they need.”

Achieving the right mix can be tricky, Adam Hoffman says.

“The hardest thing to advise on is families trying to right-size the in-house services,” he says. “The common mistake is in-housing too many services too early, which can lead to spending too much on certain services and not enough on others.

“You almost always have to outsource certain service profiles, because they have to remain subject experts in the field. For example, cyber-security.”

At the end of the day, Mark Auger says, “why you create a family office is the underlying assumption that it makes more sense to have more control, better governance, more transparency, better scale – which are essentially the same motivations from which the wealth was generated in the first place.”

More from Canadian Family Offices:

• These five ‘land yachts’ show how luxurious RVs have become
• Donovan Bailey’s secret to success: investing in himself – and real estate
• How to best pass on wealth and the business
• Where to invest $1 million right now

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