Fam­ily Of­fice ap­proach a great way to in­vest

Suc­cess­ful model pri­or­i­tizes best in­ter­est of in­vestors, writes.

Calgary Herald - - FINANCIAL POST - Martin Pel­letier

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.

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