When do You Need a Family Office?

Despite all of the challenges of the past year, 2020 was a year of continued growth for us at Northwood Family Office, with the addition of a number of new families who chose Northwood to manage their integrated financial affairs. This got me thinking about what things typically lead a family to search for a family office and eventually end up knocking on our door. As I look back over the different reasons new clients have joined over the last few years, most of them fall into one or more of the following three categories:

1. New-found liquidity
2. New stage of life
3. New awareness of family offices

Let’s look briefly at each of these categories:

New-found Liquidity

The number one reason why people end up in our offices is new-found liquidity. This might be from the sale of a family business, an inheritance, or even a significant lottery jackpot. The most common of these is a business sale. Many of these families have had many years of experience in managing a complex family business, but have little to no experience in managing liquid family wealth. The CEO of a family business has a diverse set of skills, but they may not necessarily be relevant to the job of CEO of the family’s new-found liquid wealth. Whereas before the CEO had to manage the Finance, Sales, and Manufacturing departments, now they have to think about investments, tax planning, and philanthropic endeavours. This new level of liquid wealth and the effective management of it can be daunting and often leads people to seek out a family office.

New Stage of Life

Another change that brings people to Northwood (and to multifamily offices in general) is entering a new life stage. Maybe they have decided they want to stop spending so much time worrying about their financial affairs and focus on what’s really important to them. Or, their children may be reaching early-adulthood and the need for family education, financial literacy and succession planning may be at hand. Or, they may just be thinking about their own mortality and what will happen to their family in the event of their sudden death. All of these things can cause people to start thinking about the big picture and how they can set themselves and their family up for success in the long run. Working with a family office can provide people entering a new stage of life with peace of mind, and can help save them time, money and headaches, now and in the future. Many of our clients have managed their own financial affairs for decades, but at a certain point realized that all of the important information was in their heads and had not been shared with anyone else. They engaged us as their family office to help bring their spouse and adult children up to speed, and to ensure that their affairs are in order.

New Awareness of Family Offices

In Canada, multi-family offices remain an enigma to much of the country and even to many wealthy families. The dominance of the big six Canadian banks over the past half century, has left many people unaware of independent partner-owned companies like Northwood. In the US, the banking industry is much less concentrated and the multi-family office industry has been around for decades in most major cities. In Canada, Northwood is the most well-known multifamily office and we have only been around since 2003. To this day, we meet with prospective clients who confess to us that before their friends recommended Northwood to them, they had never heard of a family office. In the last few years, we have noticed that this situation is slowly changing. It is increasingly common for prospective clients to find us on-line from a Google search and contact us directly. On top of this, our now 18-year track record (and the work we have done with our long time clients) is making a larger group of people aware of what Northwood offers. These clients and their related advisors know us and have confidence in the work we do, and they are increasingly making referrals to new families who could benefit from the services of a family office.

Criteria

So the next question is; what type of families are candidates for family office services? Although each family is different, we believe that the services of a multi-family office really only begin to make sense at a net worth of $10M or more. A second common criterion is the level of complexity of the family’s affairs. Complexity can be driven by a number of factors including the size of the family, how many generations there are, the citizenships of the family (US citizenship increases complexity), and the family’s goals. Complexity usually also increases as a family’s wealth grows over time, but a family office can simplify the management of it significantly. Finally, the more liquid assets a family has (as a percent of their net worth), the more a family office can do for them based on its expertise and objectivity in planning, investing and risk management. For instance, if 90% of the family wealth is tied up in an illiquid business which the family is running themselves, a family office will make less sense – until they begin to build up liquidity from earnings or decide to sell the business.  The decision to engage a family office and the timing of this decision will depend on different factors for every family. I hope that this article has given you a better idea of some of the variables that can influence this important decision.