Lessons from family offices

Almost 70% of clients have asked you about matters not related directly to their finances, finds an upcoming Investor Insights survey completed by Advisor Group. And, 87% of you said you see yourself providing more guidance in areas for which you are not compensated.

Clearly, clients are demanding more. A 2015 CSI-Investor Economics report also says the wealthiest want to deal with fewer advisors.

Yet “no one advisor can do it all,” says Karen Laprade, advisor and facilitator at Lead Family Enterprise Advisors in Vancouver. Family offices call her when they need backup. Under Lead’s umbrella, she maintains a roster of experts in areas such as trusts, investments and philanthropy.

An EY guide on family offices notes that outsourcing is wise if the task requires a specialist, or if having someone else handle it will cut costs through economies of scale (see “In-house or outsource?”).

“Any time you start doing things you’re not good at because your client asked you to, you’re going to end up doing them poorly,” says Joel Clark, CEO of KJ Harrison and Partners in Toronto. “It’s important for the client to know, ‘Here are the things we do because we’re really good at [them].’ ”

On the flip side, EY suggests keeping a task in-house if doing so would preserve your client’s privacy, would give your client more control or it’s within your expertise.

The CSI-Investor Economics report says advisors are most likely to outsource business-management related tasks, such as valuation, and least likely to outsource client relationship management and long-term planning.

Here’s how family offices serve their clients.

Be the director

When Shayne Stephens co-founded Richmond Hill, Ont.’s Landmark Advantage Multi-Family Office in 2001, she decided not to sell investments. Instead, the firm focuses on strategies for managing family business owners’ wealth.

“It was in response to what we heard [clients] needed,” she says. As clients became more successful, their lawyers and accountants were suggesting more complex ways of managing their affairs to minimize tax, for instance. Stephens says clients needed someone to oversee the implementation of their financial plans, manage them and report on the results.

She scrutinizes all aspects of each client’s financial life: bank statements, credit card bills, investments, businesses and more. From there, Stephens advises clients on legal, tax and investment strategies, but doesn’t implement them: “We have relationships with the other advisors, and we direct the process […] right through from discovery to review.” If a client doesn’t have an accountant or other specialist, Stephens will recommend someone.

When she first works with a client’s accountant, she compiles copies of the client’s financial statements, his previous-year tax return and all relevant documents from the past year. They also meet, with or without the client, to discuss what they each see as priority areas. From there, she and the accountant will check in regularly before year-end tax planning.

Similarly, if she’s working with a lawyer to draft a shareholders’ agreement for a client, she and the lawyer will meet to discuss the client’s circumstances and share information. Once she and the lawyer are satisfied, they’ll meet with the client and explain implementation. She updates her firm’s client information every six months if they have more than $5 million in assets, and 12 months if they have $5 million or less. As a result of this regimented process, when a client calls with an unexpected request, Stephens is ready.

In-house or outsource?

Joel Clark CEO of KJ Harrison and Partners	Non-investment advice Why he doesn’t do it: “Any time you start doing things you’re not good at because your client asked you to, you’re going to end up doing them poorly.”
Tom McCullough Co-founder of Northwood Family Offices	Hiring investment managers Why he does it: “We use the bulk buying power of all the families in our group to go out to investment managers and negotiate more attractive pricing.”
Shayne Stephens Co-founder of Landmark Advantage Multi-Family Office	U.S. property advice Why she does it: “We can write a memo within three hours that says, ‘Here’s the price, the benefit, the taxes, and the impact it’s going to have.’ ”

For instance, say a client asks whether she should buy U.S. property. Since Stephens already has data on the client’s cash flow, tax and investing situations, with her experts’ assistance, “We can write a memo within three hours that says, ‘Here’s the price, the benefit, the taxes, and the impact it’s going to have,’ ” she says.

“Clients are surprised, often, by how much the kids are going to get.”

Network of experts

Tom McCullough, co-founder and CEO of Northwood Family Offices in Toronto, takes a similar approach. He likens his job to a general contractor’s; it’s his responsibility to manage tradespeople to get the job done.

“We would talk to our network, interview professionals and then recommend one or two to the client,” he says.

That perspective means he can recommend solutions from multiple disciplines. “Families’ issues are integrated, and you often need somebody who understands some of [each] aspect and is not biased,” he says.

Something McCullough provides in-house is a will flow. His team converts complicated wills into flow charts to show how assets will be transferred through generations. “Clients are surprised, often, by how much the kids are going to get,” he says.

For instance, clients may not have considered that they would receive inheritances from their parents when initially drafting their wills, says McCullough. That means, when the clients’ children later inherit, it would be more money than the family had expected. In turn, they might revise their wills to give more money to charity. “We would do all the preliminary work, […] but then we would [say] to the lawyer, ‘Please draft this,’ and we’ll work with the lawyer to make that happen,” he says.

Another task his firm outsources is investing, but his team screens and oversees managers. They scour manager databases and ask for referrals from an international association of family offices they belong to. His team interviews more than 50 managers a year. They also determine clients’ asset mixes and instruct their managers to select appropriate securities.

They do this work in-house because all clients benefit. “We use the bulk buying power of all the families in our group to go out to investment managers and negotiate more attractive pricing for the clients,” he says.

Working with outsiders

Bringing on an outside advisor offers the opportunity to test each others’ assumptions before presenting a plan to the family, says Kyle Harrison, managing partner at Seymour Investment Management in Vancouver. He works with Lead when families need investment, education or governance help.

In one case, a family needed to decide the fate of its business. The founders were concerned about their health and wanted to retire. The children, who were in their 40s, had to decide whether to take over.

50

The number of managers that advisor Tom McCullough interviews each year.

Lead brought in specialists in business strategy, life insurance, trusts, psychology and financial planning. First, Laprade, Harrison and an insurance expert interviewed the family members individually. Then, the experts met for a full day to discuss the family’s situation.

They examined how important the business was to the family and whether it was well run. The experts also discussed how to sell the company and what to do with the potential proceeds. The legal expert looked at trust structures, while the insurance advisor examined policies that could be used to transfer wealth between generations. Lead’s Laprade, whose background is in psychology and conflict resolution, suggested bringing a family systems therapist to family meetings to illustrate the emotional and psychological effects of selling the business.

“When the advisors all put ideas forward, the others can stress test them by asking questions,” Harrison explains. “For instance: ‘I don’t know if these life insurance policies are the best, given the cost, versus what you can do through an investment portfolio.’ Or ‘I don’t know that an estate freeze is the right thing to do.’ ”

The experts agreed on a plan, wrote a report and presented their recommendations to the family. The family decided to keep the business. Lead’s team suggested a five-year plan to professionalize it and make it more attractive to buyers. In response, the owners scaled back one founder’s workload because of her health. They also created formal job descriptions (there were none before), and hired staff to take on some of the owners’ duties.

Lead’s team also recommended that the eldest son, who was expected to take over the business, go to a leadership coaching and counseling retreat. Often, children who work in family businesses don’t get to choose how they’re involved with the company, says Laprade—they’re simply told what to do.

The son came back with a greater sense of purpose and a renewed interest in the business, says Harrison. Since working with Lead, the family’s company has gone on to win small-business awards in Vancouver.

Concierge services

Sometimes, an advisor’s relationship can shift beyond the original terms of engagement. A client calls and asks the advisor to buy a piece of art, hire a personal assistant or pay country club fees.

“We call that scope creep,” says McCullough. He says he’s been asked to do all those things and more. Once, he helped a woman, whose purse was stolen while she was travelling in Africa, get her passport replaced. Another time, he helped clients choose a retirement home for their parents. And not only has he vetted charities, but he’s also a director of some clients’ foundations.

If someone with less expertise can handle the task, EY says to consider whether the benefit to your client relationship is outweighed by the cost of helping.

McCullough says he can help clients in a bind, like the woman whose passport was stolen, because his firm has copies of their important documents, from passports to powers of attorney. So, the firm is often clients’ first call for help. One of his partners faxed the woman a copy of her passport, and was her guarantor when the Canadian embassy called to verify her identity.

“Because we have everything and we know them so well,” he says, “we can just pull out all the stops and make it work.”

How to get paid

It isn’t always easy to be fairly compensated for these myriad services.

At KJ Harrison, clients pay either a percentage of their assets, plus a performance fee, or a flat fee. Clark says that, without the fees, it would be difficult to be profitable.

87%

of you said you see yourself providing more guidance in areas for which you are not compensated.

“If you’re not managing the money, it’s going to be challenging,” he says. “My advice to anyone would be to ensure the investment management component is part of your value proposition.”

When Stephens decided not to offer investment management, she embarked on a long journey to profitability. Landmark advisors are compensated either by fees or with a percentage of clients’ asset size. She says, in the early years, it was difficult to get clients to accept a fee-only model, so they added the asset-size option. Historically, “Canadians don’t like writing cheques, and people would say to us, […] ‘We get this advice for free with our current financial advisor,’ ” she says. She tells clients that fee-for-service lets them choose how much work to give Landmark, and ensures they pay for only the services they value.

Now, the rest of the industry is catching up.

“We’re getting five or six referrals a month—a good pace,” she says.

They also have more revenue with 30 clients than when they had 100, because clients give them more work. But, she warns, “Don’t expect a great payoff for two or three years.”

She also finds administrative work begets more complex projects. For instance, when she saw a business-owner client’s insurance documents, she realized he was paying unnecessary premiums.

Years before, an outside advisor had suggested he transfer a personal whole life policy into his company. The policy was transferred, but the company hadn’t taken over the premiums. So Stephens helped the owner recoup the costs: “We went back and were able to get a $50,000 to $60,000 shareholder advance.”

Like Stephens, McCullough charges a fee on investable assets because it’s a common compensation style.

But for clients who have few liquid assets, he’ll work on retainer. “We do everything as part of that fee,” he says.

Since he doesn’t charge by the hour, he estimates how much work he’ll be doing for the family. The firm holds weekly meetings where staff can assess how much time they’ve spent on tasks, but they don’t track hours strictly since they have a small number of clients.

In rare cases, they may renegotiate terms. “In some cases we’ve lowered fees, and in some cases we’ve raised fees based on the amount of work,” he says. For instance, one client started a foundation, and a Northwood staff member was heavily involved in administering it.

Another client started a business, and Northwood helped set it up and arrange for bookkeeping, among other things. In those cases, “we’ll just go to the client and say, ‘This was not part of the original scope,’ and usually the client agrees,” says McCullough.

In another case, the firm lowered fees when a client decided to close the family foundation. “It’s really a conversation about what’s fair for the work being done.”