Choosing the right account structure—and avoiding surprises down the road
The optimal structure largely depends on the family office’s individual priorities
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What account structure should a Canadian family office be utilizing to hold their investments? This question may not be at the top of the family office’s priority list but it probably should be. There are important trade-offs for a family office to consider when choosing the right investment account option. It’s all about ensuring that the family office doesn’t experience any surprises down the road.
First and foremost, there are no right or wrong answers. The optimal structure largely depends on the family office’s individual priorities. What’s your risk appetite? How important is leverage to your investment strategy? What are your investment return objectives? Is consolidation of data for ease of management important for the family? The answers to these and other important questions will help family offices determine the account structure that best meets their particular needs.
The family office has two main account structure options to choose from:
Brokerage model
Under this arrangement, a broker provides the family office with access to a brokerage account (aka an investment account). The family office deposits funds into the account, enabling the broker to buy and sell securities on behalf of the family office. The broker registers the family office investments in “street name.” This means that all securities held by the broker, including treasury bills, certificates of deposit, stocks, bonds and mutual funds, are registered in the broker’s name and not under the name of the family. This allows the broker to easily settle trades, collect income, vote proxies and perform other back-office functions.
There are generally no additional charges to administer the brokerage model
Registration of the securities in the broker name also enables the broker to commingle the family office’s assets with other assets on the broker’s own balance sheet, thereby generating revenue from the assets as collateral for loans and other forms of leverage. This revenue is retained by the broker and not shared with the owners of the securities. The broker may impose transaction fees on trades executed on behalf of the family office but there are generally no additional charges to administer the investment account.
It should be noted that the broker’s balance sheet, including the assets of its family office clients, is considered part of any broker bankruptcy proceedings. While the broker is required to obtain insurance based on rules set out by the Investment Industry Regulatory Organization of Canada (now the New Self-Regulatory Organization of Canada), there is no guarantee of full coverage of the family office assets in the event of default.
Custodian model
The second option involves the family office’s appointment of a custodian, which is also a trust company or bank. Federal trust companies and banks in Canada are supervised by and must adhere to rules established by the Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada. In addition, Canada’s industry standard is for custodian agreements to require custodians to follow a general standard of care and control of the assets in a custody account. Such a standard is not typically in agreements governing brokerage accounts.
Family office investments are held by the custodian in “nominee name”—in the name of the nominee on behalf of the client and separate from the custodian’s balance sheet. Similar to the brokerage model, holding the assets in the nominee name allows the custodian to easily settle trades, collect income, vote proxies and perform other back-office functions. However, the securities in nominee name are segregated from the custodian’s own assets. The custodian cannot pledge the family office securities for leverage and, in the event of custodian default, the securities are fully protected and continue to be available to the family office.
The custodian model focuses on safety and security of the family office assets
The custodian levies a fee based on assets under custody. Loans and other forms of leverage are available to the family office as part of a custom arrangement with the custodian. It is necessary for the family office to obtain the services of an external asset manager and choose a broker to act on its behalf—in addition to the custodian. The primary responsibility of the custodian is to safe-keep and protect the client’s assets, providing the family office with the ability to invest across multiple asset classes around the world, including consolidated reporting for a portfolio that appoints multiple investment managers.
The optimal solution
Family offices should consider the importance of choosing the account option that best suits their needs. The brokerage model is typically attractive to family offices that use leverage as a key component of their investment strategy and are comfortable having multiple custody accounts with various investment managers.
The right account model depends on the family office’s priorities
On the other hand, the custodian model provides the family office with safety and security of its assets in a consolidated manner across all investment managers. However, this model comes with fees based on the assets under custody, as well as separate charges for leverage (if deployed), asset management and brokerage services. In the end, the individual priorities of the family office are key to determining the optimal investment account structure.
This story was created by Content Works, Postmedia’s commercial content division, on behalf of RBC Investor Services, which is a member and content provider of this publication.