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Wealth Strategy: The Single-Family Office

By: Karen E. Treml

Managing several million dollars of private wealth can be demanding, but when the wealth grows to hundreds of millions or even billions of dollars, managing it has unique challenges and complexities. As a result, when the pool of investable wealth grows so large that management of it becomes a business in and of itself, many ultra-wealthy families set up what is known as a 'single-family office' (SFO).

Boardroom meetingEssentially, an SFO is a private organization that is exclusively focused on the management and administration of one family's wealth, thus allowing for intricate customization relevant to the specific needs and long-term objectives of the family. Some SFOs are informal setups wherein they are simply an 'office' administering a whole host of vehicles. Other SFOs are set up more formally and may employ a CEO, a CFO, and a CIO, and may have 10 to 12 people on staff. As such, SFOs typically involve families that have $250 million or more in investable wealth.

The whole underlying concept is, when you cannot do it alone out of your study on a Sunday morning anymore, you set up a single-family office, says Michael Nairne, president of Tacita Capital Inc. "With SFOs, you are in an environment where not only are taxes paramount, but you are dealing with multi-family members, wealth transfer to the next generations, and lots of administrative burden. Some single-family offices are seven generations old and are literally writing cheques out to 50 or 100 family members," says Nairne.

Another emerging aspect of SFOs is the multi-family office (MFO). MFOs are, in essence, SFOs that have branched out to administer the financial affairs of other ultra-wealthy families that do not necessarily have the $250 million threshold to set up their own SFO. Below this threshold, the financial efficiency of an SFO is lost as a result of the sizeable operating expenses incurred by SFOs. Thus, MFOs are an effective, cost efficient alternative.

Because of the scope and the complexities of ultra-wealth families, the key is integration, says Nairne. "Managing substantial wealth involves a number of moving parts. Therefore, SFOs are staffed by full-time professionals, often combining investment, tax, accounting, and legal expertise, who take an integrated and multi-generational approach to the management of the family's wealth." In contrast, he adds, many wealthy Canadian families still work with their advisors in a fragmented silo fashion. Unfortunately, with this approach it happens where investment advisors implement strategies that duplicate assets held within life insurance policies overseen by the client's agent or recommend investment plans that fail to capitalize on tax planning opportunities suggested by the client's accountant. Fragmented wealth management breeds needless costs, risks, and taxes.

Economic Impact

From a North American perspective, Nairne believes SFOs in Canada have fared better through the financial turmoil of recent years than have individual investors, if only because there has been more thoughtful diversification. "In 2007, when we were talking to clients, we used to take them back to 1973/74 in terms of the asset mix of their portfolios to show what the portfolios would do under a deep, deep bear market as a result of a shock – it was an energy shock then – and the 50 per cent loss was very similar to the 50 per cent loss in 2008/09. That kind of thoughtful risk-oriented thinking provided people with portfolio solutions wherein they were more aware of the risk/return dimensions. Secondarily, if you were using a portfolio in 2008/09 that had government bonds and some gold, managed futures, and low directional long/short funds, then that generally weathered the storm. The most important element was having the discipline and having a thoroughly understood strategy that meant you did not pull the plug in February 2009 as many people probably did in a panic.

SFOs and MFOs have a little bit more of a buffer from the economy than the average investor, he says, because they have the ability to endure the cycles more easily – much of their wealth is surplus to their lifestyle needs. Nairne cites the example of Berkshire Hathaway – Warren Buffett's massively diversified multi-asset portfolio. If you go inside it, he says, it is a combination of private companies and large, astutely bought ones. As well, some of his derivative debts are distress buying and he uses leverage. At the bottom of the cycle, he is actually using his liquidity to further his wealth. So to that regard, SFOs and MFOs can use that strategy to put themselves in a better position.

Evolving Trends

And certainly, one of the biggest trends for SFOs is the increase in attention to risk management, says Nairne. It is no different than institutions as a group because the financial aspects of 2008/09 really tested those primers. "In the discussions I have had with the SFOs, people are paying attention to risk. While nobody believes that a global disaster has a pre-ordained outcome, certainly people are trying to calibrate their downside and make sure that the risks they are taking are ones they can live with if we slip back into a severe recession globally."

A second trend for SFOs is the evolution from SFOs to MFOs. Canada is just at the starting stage of multi-family offices (MFOs). "We are years behind the U.S. in that regard, largely because of the licensing requirements in Canada. It is harder to get your portfolio manager designation in Canada than in the U.S., which is required for MFOs. So, simply, there are more barriers, but we are seeing a trend toward more MFOs in Canada," he says.

"I think if you walk ahead 25 years, the SFO/MFO structure will be a much better understood part of the landscape and many of the families in the $5 million to $100 million range will be within MFOs – largely because a lot of people want independence," says Nairne. "It is one of the reasons we set ours up. When we looked around, you could not get a multi-disciplinary integrated solution. And nearly everything was being done on a proprietary basis – here are my investment managers, here are my credit facilities, here are all those things. Independence lies at the heart of these because these ultra-wealthy families are looking to have an objective assessment."

SFOs and MFOs are certainly reserved for the ultra-wealthy. Offering financial independence in an intricately customized solution based on family needs and goals, these private family offices not only offer wealth management, but also a buffer from the economic cycles.

Karen E. Treml is Private Wealth Canada's staff writer (karen@powershift.ca)

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