What Is a Family Office?

What is a family office? A family office is a private wealth management advisory firm that exclusively serves wealthy investors.

Some groups in Canada have attempted to define family offices with limited success. Since, there is no consensus about what family offices are and which services they provide. Adding to the confusion is the fact that many investment advisors are masquerading as family offices.

But, by identifying the unique attributes of a family office, investors can determine who’s a true family office, and who’s an impostor.

As we identify who the true family offices are, we will also uncover the core benefits of having a family office. And in the process, determine why family offices are so valuable to wealthy investors.

Before we begin, let’s put your financial knowledge to the test. Try out our free financial literacy quiz and see how you stack up!

Ten Domains of a Family Office

According to the UHNW Institute, there are ten domains of a family office. This is a good place to start when determining what family offices are. Because, considering the list provided, we can quickly rule out many family office impostors. The ten domains are:

1. Financial & Investment Management
2. Estate Planning & Legal Issues
3. ESG Impact & Philanthropy
4. Risk Management
5. Health & Well-being
6. Family Dynamics
7. Learning, Development, and the Rising Generation
8. Leadership & Succession
9. Governance & Decision Making
10. Family-Advisory Relationships

Notice that financial & investment management is only one of ten domains. This is an important distinction because investment management tasks are only a small part of what family offices do. And, family offices often outsource many investment management functions. Most of what a family office does is outside the domain of investing.

What Services do Family Offices Provide?

As anyone familiar with the financial issues of wealthy investors will know, the most important financial topics are rarely those about whether to choose stock A or stock B. Rather, they focus on the family office domains that support living a purposeful financial life; including philanthropy, social and environmental impact, meaningful relationships with friends and family, and gaining the skills necessary to lead and take responsibility for wealth.

A true family office will deliver services that cover most, if not all, of the domains identified by the UHNW Institute. And, investor clients of the family office will be willing to pay for these services regardless of investment outcomes. Its not enough to provide a financial plan to a client for free to entice them into using investment services. For a true family office, the financial plan must be so valuable that a client is willing to pay for it as a stand-alone service. Put another way, family meetings provided by a family office must be so useful, that investors are willing to pay for the experience on its own. Not as a fringe benefit for investment services provided.

If you have any questions, contact us or fill out this free assessment questionnaire to determine if our family office services can help you efficiently manage your wealth!

Critera for a True Family Office

A family office typically meets the following criteria:

• Serves Wealthy Investors exclusively
• Serves clients with Generational Wealth
• Works for honour, not profit
• Is a personal CFO, not an investment advisor

Next, let’s examine these points in more detail.

1. Serve Wealthy Investors Exclusively

Although many investors may find the services provided by most family offices valuable, they frequently cannot afford them. Because the cost of delivering those services far outweighs a reasonable amount the average investor should pay. That’s partly why investment advisors, insurance advisors, accountants and lawyers exist. They can deliver the specialized services that most investors need at scale for a fraction of the cost of a family office.

But, once investors reach a level of wealth where family office services can be delivered at a reasonable cost, the benefits of a family office may be captured. When this might happen and at which level of wealth are key considerations. The investor must be wealthy as will be described further.

So, who is a wealthy investor? Someone who generates more than enough income from their passive investments to satisfy their expenses. In other words, someone who lives from the income of their investment portfolio alone without being employed or running a business. By this definition of financial freedom, the calculation required to determine whether someone is wealthy becomes easy to do.

Wealthy Investor Definitions

Let’s say you’re spending $120,000 per year on expenses. This means your portfolio needs to generate at least $120,000 of after-tax income each year for you to live from the income of your investment portfolio. If your tax rate is 30%, then you’ll need to generate at least $170,000 of annual income from your investment portfolio each year to meet your requirements. With a yield of 3%, you’ll need a portfolio worth at least $5.6 million to be considered financially free. Obviously, the lower your expenses, the lower wealth is required to sustain your financial freedom.

Investors who can afford a family office should probably be earning much more than a few hundred thousand each year. This is because the cost of family office services adds to overhead. And so, an investor will need more income to pay for the expense of their family office.

Individually Tailored

Not all investors need a full suite of family office services. Some just need bookkeeping and consolidated reporting. Others also need some tax prep and help managing their professional advisors (investment advisors, lawyers, accountants). Others have private foundations, but like to outsource all the foundation’s administration to their family office. So, complicating the matter, each suite of family office services is highly tailored for each wealthy investor.

To put this into perspective, depending on the type of services provided, the costs for family office services can range from tens of thousands of dollars to hundreds of thousands of dollars each year. So, let’s assume a $30,000 suite of family office services, for a $6 million-dollar investor. This represents 0.50% per year as an expense ratio. And, this is a high fee for this level of wealth that will severely cut into an investor’s financial returns. And so, its foolish for an investor with a $6 million portfolio to be using $30,000 worth of family office support.

However, consider a wealthy investor with the goal of an 0.10% expense ratio for family office services. In this case, the investor must have at least $30 million in their portfolio for the same $30,000 suite of family office services.

Costs matter since they eat into returns and decrease the value of using a family office. So, to make the most economic sense, an investor who’s considering a family office needs to put the costs and benefits into perspective. Generally, our family office will only consider working with investors who have more than $100 million in their investment portfolio.

2. Support Generational Wealth

If an investor’s estate plan is simply to give their wealth to charity without any further administration required after their death, then a family office has a lot less value compared to an investor who plans to transition responsibility for their wealth to the next generation.

Think about it from the family office’s perspective. Family office staff can choose to work for a variety of clients including those with large pools of capital and those whose main challenge is transitioning wealth to future generations. There is a lot more value that a family office can provide by coordinating plans between generations and using philanthropy for a family focused on multi-generational wealth transfer compared to one whose wealth management journey ends at the end of their own life.

Just as wealthy investors want to create meaning and purpose behind how they invest. So too do the staff at a successful family offices. Since, competent professionals have career goals as well, and they often include exploring the deep reaches of finance between generations. Not simply to maximize wealth for consumption during their own lives.

3. Work for Honour Not Profit

Most family offices should be operating like utilities rather than profit-maximizing businesses. This will help reduce the conflicts of interest that typical family offices encounter. Wealthy investors should prefer a system where staff are working in their best interest, rather than maximizing their own economic advantage.

Therefore, some family offices are owned by the investors who they serve, others are owned by outside professionals, and some are a mix of both. The bottom line is that incentives of staff must be aligned with those of the investors being served. Otherwise, conflicts of interest will erode the family office’s effectiveness.

4. Personal CFOs

A true personal CFO should fill the gaps where other professionals can’t operate. But whenever possible, its often in the investor’s best interest to use outside professionals to provide specific services. This includes accountants for tax advice, tax compliance, and sometimes bookkeeping. It involves using investment managers instead of making investment decisions internally. And it often means using private banking and trust company services instead of giving internal staff authority over accounts.

What’s left after all the other professional advisors have provided their services should be the core competency of a family office. Including coordinating the team of advisors themselves. Oftentimes, all a personal CFO will do is co-ordinate the team of service providers to ensure standards are being met.

Think about it this way. As a wealthy investor, its often burdensome to do all the tasks that successful wealth management demands. Consider how most investors scramble each spring to gather their tax documents when personal tax filings are due. Just think how nice it must feel when a family office takes care of this task on an investor’s behalf.

Or, consider how most investors are flying totally blind when it comes to whether their investment advisors are performing well or not. Most clients simply trust and like their investment advisor, and that’s good enough. But when using a family office, investors know exactly how their returns stack up against benchmarks and the alternative choices that they can make.

What are Fees Based On?

A true family office does not sell investment products. This is what investment advisors are for. There are many great investment advisors available nowadays. And, they come in all shapes and sizes including catering to all types of investors and goals. So, its naive to assume that internal staff are the best positioned to provide investment advice.

However, there are lots of investment services that family offices should provide. These include drafting investment policies, providing consolidated reports including benchmarking, providing manager search and selection services, providing impact investing services (like impact measurement and reporting), and the list goes on.

Family offices should be careful about providing investment services in-house. Because once they charge a fee based on assets under management (“AUM”), the incentives begin to shift against the investor and toward the staff of the family office. This is because when a family office charges a fee based on assets, they become incentivized to acquire additional assets (clients). Or, to take unnecessary risks to achieve higher incentive fees.

Many family offices get around these conflicts by charging a flat fee for the services they provide. They may be provided with an incentive payment structure that makes them agnostic towards the type of investment products used. Other family offices invest alongside their own clients in an attempt to become partners.

Understanding the True Value of a Family Office

Navigating the landscape of family offices in Canada requires discernment to differentiate between true family offices and those merely posing as such. By understanding the ten domains outlined by the UHNW Institute, investors can gain clarity on what a genuine family office encompasses—far beyond mere investment management. True family offices are dedicated to serving wealthy investors exclusively, supporting generational wealth, operating with honour rather than profit as their primary motive, and acting as personal CFOs to navigate the complexities of wealth management. This comprehensive approach to wealth management not only ensures that the unique needs of affluent families are met but also aligns with the principles of long-term, value-driven investment strategies that eschew unnecessary complexity for simplicity and clarity.

As we delve into the essence of what makes a family office truly valuable, it becomes apparent that the distinction lies in the holistic, bespoke services they offer, which are tailored to the intricate dynamics of wealthy families. This holistic approach not only covers financial planning and investment management but extends to fostering family governance, philanthropy, and ensuring the successful transfer of wealth across generations.

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