Family Office approach a great way to invest

Successful model prioritizes best interest of investors, writes.

Navigating the intricacies of the investment world can be rather difficult, especially when it comes to choosing who to help manage your family’s money.

Part of the problem is that the investment industry in Canada is highly concentrated among the self-regulating Canadian banks. Not surprisingly, they have had little interest in taking on the liability associated with shifting their commission-based advisers from the current suitability standard toward a more stringent fiduciary duty, not unlike what professional accountants and lawyers have.

Consequently, we have an industry characterized by advisers or brokers who are compensated on their ability to sell financial products instead of managing them on behalf of their clients, who have become “distribution” channels.

According to a 2016 SIPA report, about 96 per cent are registered as a “dealing representative,” which is a salesperson without a requirement to look after a client’s best interests.

This isn’t to say there aren’t investment professionals out there who have chosen, themselves, to operate under a full fiduciary duty, but it isn’t a uniform standard or requirement unless managing money on a discretionary basis.

It also isn’t the norm: Only 4,076 persons in all of Canada are registered in the categories involving a true fiduciary responsibility, as compared to 118,126 financial salespeople, or dealing representatives, according to SIPA data.

Our oligopolistic market has also resulted in Canadians paying among the highest investment fees globally despite the proliferation of ETFs. This is because these advisers have yet to reduce their fees while only passing along the fee savings on the types of investment products being sold.

Unfortunately, we don’t expect this to change unless Canada opens up its market to more competition, which is unlikely anytime soon.

But there is a model that is working exceptionally well in the U.S. and Europe that Canadians could look at replicating to help them better manage their wealth and avoid a lot of the aforementioned problems — the Family Office model.

A Family Office involves having an in-house lawyer, accountant and investment professional who are all conflict-free working in the family’s best interest. However, because of the associated costs, most families will require substantial assets, often over $100 million, to set up and run their own office.

This doesn’t mean one can’t replicate the model, though, by ensuring one’s lawyer, accountant and investment professional are all conflict-free and in communication with one another.

In particular, we would recommend your investment professional be viewed as your family’s chief investment officer working with you to derive a family plan with specific goals such as funding retirement, multigenerational wealth preservation, and/or charity planning. Once a plan is drawn up, it can be shared with one’s lawyer and accountant to address any potentially missed details, and then put in place the appropriate structures for estate and tax planning purposes.

The final component would then be the formation and implementation of the family’s investment portfolio, designed to match their family plan.

In this regard, we are a big fan of institutional pooled funds, as they are also predominantly utilized by family offices. Again it’s important to ensure there is no compensation or incentives attached to the types of investments being recommended in order to remove any potential conflicts, such as choosing an in-house fund versus an external one.

When it comes to fees, the larger the portfolio, the lower the cost.

For example, those with a $1-million portfolio should be paying no more than 1.0 to 1.5 per cent all-in, including both their adviser’s fee and the fund fees, with some of this being tax deductible if in a discretionary account.

The benefit of choosing a family chief investment officer with a larger book of business is that they will likely be able to get substantial fee savings on the managers they are using, which will be passed along to you. They will also be open to exploring new investment opportunities by acting as your gatekeeper.

While the Canadian investment industry is taking its time catching up to other jurisdictions, it doesn’t mean the way your family’s wealth is being managed has to as well.

The benefit of choosing a family chief investment officer ... is that they will likely be able to get substantial fee savings.

Martin Pelletier, CFA, is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgarybased private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.