How independent is your multi-family office?

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Imagine you’ve just landed in a country you’ve never visited before. You don’t speak the language, you don’t know much about the culture, and you didn’t have time to do any research before embarking on this trip because you were busy building a business and creating family wealth.

Now, however, you have the time to explore and relax. But because you don’t know much about where you are, everything seems a little overwhelming – the sounds of horns blaring, the smells of new cuisines, the sights of awe-inspiring landscapes.

Our clients tell us this is what it feels like after going through a significant liquidity event, such as selling their business or a high value property. It’s exciting. It’s scary.

In this situation, a family office solution can help you get acclimated and feel confident moving forward — so you fully enjoy your journey.

Navigating common challenges

When going through a significant liquidity event, clients are looking to preserve their wealth, generate tax-efficient cash flow from their portfolio to fund their lifestyle, and leave behind financial capital and a legacy for their heirs, beneficiaries and successors.

This creates some unique challenges:

• Shifting priorities and strategies: If most of your wealth has been tied up in the family business until now, you’re shifting from getting wealthy to staying wealthy. This new terrain can make it difficult to know who to work with and how to invest. Most often, business owners have more than 80 per cent of their family’s net wealth locked up in a single, illiquid strategy – their operating business.
• Uncertainty over financial advice: It’s vital to find a multi-family office (MFO) solution that has your best interests at its core. And it is so hard to know who that is. Their business and compensation model provides a clue.
• A complexity of needs: Inflation, market changes, spending needs, appetite for risk, return expectations – these are just some of the factors that affect your wealth portfolio. It’s important to look for a wealth management firm that has experience and solutions for the whole of your wealth management needs, not just one part.

Independence in the multi-family office

Wealth preservation and growth requires a very different set of strategies and skills than building and running a successful business, as our clients find out quickly. If you’re looking to generate wealth from new-found liquidity, the most important criteria when selecting a team of advisors is, unarguably, independence. They should offer professional, unbiased, objective and non-judgmental advice.

Independent MFOs do not sell proprietary products or strategies. They sell advice.

As a result, they offer advice and counsel that is separate from any products you may be buying. Independent MFOs conduct comprehensive asset, wealth and estate planning and create an objective wealth and asset allocation framework. They work with clients to understand their liquidity needs, risk appetite, risk aversion, return expectations and return needs to determine how to build a portfolio that can help them do what they want for the rest of their lives – and leave a positive, impactful legacy for their family and community.

Let’s get back to that vacation you were on. Say you want to drive through the snowy mountains. You’re likely going to need a 4×4 vehicle that can handle rugged terrain. However, if you go to a Ferrari dealership and all they have is a Ferrari SF90, that’s what they’re going to sell you, even though it’s not right for your needs. Think of the Ferrari dealer as an MFO that sells proprietary products and strategies.

An independent MFO, on the other hand, will provide guidance based on what’s best for the needs of you, your family and future generations, not based on what products from its shelf it must sell.

Diversification is at its core: the ability to offer advice about various asset classes – public and private, traditional and non-traditional – product offerings, fee efficiency, tax optimization and more.

How to determine the level of independence in a multi-family office

An independent firm will look at the whole picture, not just the investment portfolio. How do you determine which MFO to trust? These are the questions we recommend every client ask:

• What sort of due diligence do you perform when evaluating portfolio managers or other advisors you work with in a professional capacity? Independent MFOs have governance policies in place to ensure there is no conflict of interest between them and their partners. These alliances may include portfolio and asset managers, philanthropic advisors, family governance experts, accountants and lawyers. It’s vital that these relationships be at arm’s length. Truly independent firms have a due diligence committee to evaluate any advisors or other professionals they have a relationship with, and examine the history of credibility, professionalism, level of service and consistent delivery of results.
• What is your fee structure and business model? Independent MFOs typically provide solutions and have a fee-for-service business model. The key relationship person often acts as a trusted sounding board. On the other hand, traditional, product-based MFOs may be influenced by their compensation model of commissions or fees based solely on the size of the investment portfolio. Independent MFOs don’t have a financial incentive to recommend specific products or strategies. They have a fiduciary duty and a legal obligation to put their clients’ interests first. Always.
• What products do you sell? An independent MFO will have a short answer to this question: “We don’t sell any products.” If we go back to that Ferrari dealership example from earlier, you’ll recall that what you need most in this situation is advice leading to the right solutions.
• What other related services do you offer? When it comes to preserving and growing wealth from liquidity, the investment portfolio is only one piece of the puzzle. We find that our clients also seek help with tax optimization, cross border and international tax, philanthropy and governance, strategic life insurance solutions, multi-generational planning, asset allocation, and risk and volatility analysis. Clients are also looking for consolidated reporting and dashboards to help track and regularly monitor their portfolio in a format they understand.

An unbiased, objective wealth strategy for your future

Just like when you land in a country you haven’t been to before, it can take time to get acclimated to the language and customs – but you can do it much faster with a friend who has been there before and knows the best stops for everything. I’ve heard more than one client call us their sherpa.

Similarly, an independent MFO can go beyond asset management when you’ve undertaken a significant liquidity event and recommend strategies to prepare an asset, wealth and estate plan that takes the entirety of your family’s balance sheet into account.

You’ve worked hard to get to where you are. Isn’t it time to relish the rest of your trip?

Jeff Noble, CMC, FEA, is Director of Private Wealth Family Office at BDO Canada LLP. He is based in Toronto.

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