The Evolving Family Office Landscape

As originally appearing at Introduction Capital’s 7th Canadian Alternative Investment forum, dated April, 2017.

The term “Family Office” has become almost ubiquitous in the Canadian financial services industry over the last few years – this within a country that is still relatively young in the context of multi-generational wealth transfer. As families struggle to manage the material wealth transfer that is set to take place over the next decade, not to mention the more complex tax and estate planning environment in which families find themselves, it’s not surprising to see the growing presence – and need – of both single and multi-family offices in Canada.

While dealing with the technical complexities of a financial estate is intricate, it’s really only part of the issue. For most families today, the more delicate issue is that of addressing family values and ensuring unity through the transition process. To help achieve success in this regard, families of significant wealth are increasingly seeking the support of external, trusted advisors who can aid in a smooth transition of their financial assets while at the same time ensuring the preservation of family values and adhering to their long-term investment goals. For many, these services are best addressed within the framework of a family office.

And from an investment perspective, today’s environment has become too complex to approach portfolio management from a traditional “siloed” approach to asset allocation. Over the past decade there has been a staggering pace of change within the financial markets: financial disintermediation, rapid information dissemination, more compressed investment cycles, and the commoditization of market beta which have all conspired to challenge traditional thinking. Specialist managers are making way for more generalist investment managers that can better address the inter-correlation between asset classes. At the same time, managers that are more “benchmark” focused are struggling to add value against low cost ETF solutions. Obviously the advent of cheap beta is helping encourage this evolution in the industry, but it does make the job of identifying those managers that can still add value more difficult.

Normally such a task would be complex enough, but against the backdrop of generationally low interest rates, families are being forced to reframe their investment expectations and to shift their attention away from potential returns and more towards the potential risks within their portfolios. The reluctance of taking on more risk to achieve historical market returns is also making way for the introduction of more non-traditional strategies within the investment framework. But while greater allocations towards private equity, real estate, and other illiquid diversifying income streams have helped boost diversification, such alternative strategies require significantly more due-diligence and ongoing administration. Typically, this is not something that a traditional investor is fully equipped to handle.

Recognizing the technical complexity of investment management and tax planning only serves to emphasize the need for families to take a proactive approach to their overall estate management. Addressing governance issues such as succession, family charter and communications, philanthropy and financial literacy have the benefit of both teaching and preserving key family values, and in arming multiple generations with the skills to make the right decisions in the future. Taking a reactive approach risks not only investment performance but also results in poor planning for both expected and unexpected life events within the family.

To be good stewards of wealth, families have significant responsibilities to ensure that the fruits of their labour have a positive and supporting influence on future generations. To be successful in this regard means having a comprehensive plan that addresses the financial, and emotional, aspects of sound estate management. Having a partner that can provide the necessary technical expertise as well as the ability to act as an impartial family advisor can go a long way in ensuring success.

Wealth and estate management is not a static exercise but one that requires ongoing monitoring and adjustment. Taking the time to fully consider the implications of one’s wealth, how to manage it today and how to constructively transition this across generations is just the starting point. Working with an independent and objective advisor is certainly part of the solution – and should be a component from the beginning, whenever possible. The growing presence of both single and multi-family offices in Canada is a sign of a nation that is slowly coming of age and demanding more choices and support for families seeking to preserve their hard earned legacies.