How a custodian can help simplify the administration of family assets

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An unexpected death in the family can shake the well-ordered workings of a family office. It’s a challenging time from a personal perspective, and it often leads members to re-evaluate their roles and responsibilities as they determine whether the needs of the family enterprise can continue to be achieved by family members alone.

“If other family members are prepared to step into new roles through a succession plan, the enterprise is more likely to continue running smoothly,” says Sylvia Rizk, senior director at RBC Investor Services.  “In other cases, the office may look for assistance outside the family to provide expertise and continuity. Appointing a custodian to administer the assets can provide the expertise, stability and reporting framework that help the family continue its mission.”

Rizk recounts an instance where a Canadian family office in the industrial land ownership and development business accumulated approximately $500 million in assets. Spread across multiple brokers, the assets were primarily invested in the US and Canada, spanning the technology, metals and mining sectors. When the patriarch passed away, the family’s wealth was transferred to his wife and children. However, the administrative resources available to the family office were insufficient to replace the patriarch’s oversight.

“The family office’s matriarch and its chief operating officer had a number of concerns about the portfolio,” Rizk says. “The matriarch was historically not involved in managing the portfolio and lacked the confidence and expertise to take on that role. With the passing of the patriarch, there was no longer a single point of contact to administer the portfolio. They were unable to obtain a consolidated view of their assets and lacked tools to measure the performance and risk of the assets.” In addition, the portfolio assets were primarily concentrated with two brokers, and the potential for default was identified as a concern.

After considering their options, the family office appointed RBC Investor Services as custodian of the entire portfolio, onboarded RBC Investor Services’ risk and performance analytics service, and selected four well-known investment managers to manage specific aspects of the portfolio. How did this choice address their challenges?

“It allowed the family to simplify the administrative burden of working with different investment  managers,” Rizk says. “The custodian became safekeeper of the assets, providing a single point of contact and a consolidated view of manager performance across all accounts. The family office moved to an oversight role. If something was not reconciled in the portfolio or a trade didn’t settle on time, instead of needing to go out to a multitude of brokers, these matters could now be managed by a single contact at RBC. This made a lot of sense for the family office.”

At the same time, the family office was able to view the consolidated portfolio in real time, through RBC’s online portal. And RBC Investor Services’ risk and performance analytics service enabled the family office to perform the necessary oversight of its investments.

“This is typically a service that benefits families with more than one or two investment managers,” Rizk says. “They can look at overall performance against the family office investment policy. They can assess the concentration of their assets and do a deep dive into how well their investment managers are performing, or take a very granular look at each of the securities in the family portfolio. If they’re not happy with the performance of a specific investment manager, they can make changes as needed, with minimal disruption to the structure and reporting of accounts.”

Rizk notes that when a client holds their assets with a custodian, their securities are held in nominee name by the custodian – in other words, their securities are segregated from the proprietary assets of the custodian.  Of course this issue comes into play in a situation where the service provider becomes insolvent.  In the case of a broker holding the client’s assets in “street name”, those assets become part of the “bankruptcy estate”, and so are available to creditors of the broker.

While there’s a cost associated with custodial services, Rizk explains that family offices who are paying multiple fees to a range of different investment managers and brokers may find that consolidation results in cost savings.

“And while this particular family office recognized these challenges following the death of the patriarch, they’re already common to many enterprising families,” Rizk says. “Depending on how quickly wealth accumulates, newer family offices may find that they outgrow their ability to confidently manage assets. Appointing a custodian early on allows them to establish an investment and reporting framework now and for the future.”

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.