Interview with Tom McCullough
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This interview touches on the distinctives of the Canadian family office market, finding talented staff, the benefits of MFOs and the non-financial goals behind good wealth management.
This interview was conducted by Peter Preller.
What’s your background in the family office world?
Tom McCullough: My father built his wealth over the years through real estate investments. I worked for over 20 years in senior executive roles in wealth management at a high quality Canadian investment firm. As we began to talk about family succession planning, I realized that there was a gap in the market for families like ours. Many families of wealth had accountants, lawyers, investment managers and bankers, but they did not have anyone to create a central strategic plan, tie everything together, and to make sure that the plan actually happened. So I started Northwood Family Office in 2003, with my co-founder Scott Hayman, to try and address this gap in the market (and solve my own family’s problems).
The best analogy I know to describe what a family office does is that of an architect/general contractor. When you build or renovate a house, you need to hire plumbers, carpenters, and painters, but most people still want an architect/general contractor to organize the overall process and coordinate the other trades. A family office is similar to the general contractor, but instead of building a house, we are overseeing a family’s integrated financial affairs. We coordinate all of the expert ‘trades’ (accountants, lawyers, investment managers) and make sure that the family’s financial ‘house’ is in order.
Does the Canadian family office market differ greatly from the US one?
TM: In many ways, yes. Even though family offices have been around for over a century in the US, they’re not nearly as well known or prevalent in Canada. Because of this, we thought there was a gap in the market and a real opportunity for us to develop a world class multi-family office in Canada.
Historically, the big six Canadian banks have dominated almost every aspect of the financial and wealth management in Canada—from brokerage to investment counselling right through to mortgages and mutual funds. In this concentrated market environment, independent firms can have a harder time emerging, whereas in the US the banking system is highly decentralized and independent firms are prevalent.
Did Canada’s banks suffer a loss of trust during the great financial crisis?
TM: No, the Canadian banks were extremely strong during the 2008 crisis and actually were recognized globally for their stability during this time period. I would say that the level of trust in Canadian banks remained steady or even rose during the financial crisis.
Banks generally have a good reputation in this country. Everyone uses them, and they are viewed almost as national institutions. Most people also know that they are product sales organizations and are rarely the best fit for ultra high net worth clients, but it can take quite a long time for people to come to this realization, so many clients use them as a default.
What benefits do you see the family office experience offering over a bank?
TM: Our family office relationships start with a conversation. We sit down with each family and talk about their hopes, their goals, the resources they have at their disposal, and the constraints and challenges they face. We also undertake a full net-worth review, including an appraisal and analysis of all key financial documents, so we can get an accurate picture of the family’s current situation. We then discuss what they are looking for from their family office and, together, we tailor a service plan that will work for them.
How are those plans put together?
TM: The services that we offer fall into four main categories:
First is integrated planning. This can include goal setting, cash flow planning, risk management, and tax and estate planning, among other topics. Our integrated approach helps clients see the big picture and allows us to manage all aspects of our clients’ net worth. As a family office, our breadth and depth of experience in all key financial disciplines means we are uniquely able to pull all the pieces of the puzzle together.
I should also point out that we don’t take away the job of the accountant or the lawyer that the family has historically worked with. These professionals still do their work (such as filing tax returns, drafting wills, and complex planning), and we work with them to make sure that each aspect of the family’s financial affairs are coordinated.
Second is investment management. We don’t select individual securities internally, but we do develop investment policy statements based on our client’s goals and objectives. We identify appropriate asset classes for clients to invest in and research, retain and implement best in class investment management mandates. Once the client’s investment portfolio is fully in place, we report on the performance of the portfolio on a quarterly basis and continue to monitor and evaluate all of the selected investment managers on an ongoing basis.
Third is administration and reporting. This means making sure the trains all run on time. It includes accurate and comprehensive quarterly reports of a client’s full net worth and investment portfolio. It also includes a full range of administrative tasks, from ensuring trust resolutions are completed on an annual basis, to making sure that tax installments are paid on time. There are countless examples of tasks that fall into this category, but really it consists of making sure that nothing falls through the cracks of our client’s financial lives.
The final area, and one that seems to be growing in importance for many of our clients, is family dynamics and governance. What I mean by this is all of the aspects of people’s lives that are generally non-financial. This includes organizing and facilitating family meetings, setting up a family governance structure, and doing the ongoing work of managing family dynamics and making sure families are able to have productive conversations. In certain cases, it might even involve helping a family to draft a family constitution that is meant to serve as a guide to future generations. The education of the next generation and the task of preparing them for wealth inheritance is also growing in importance as more and more wealth begins to transfer to the next generation.
Is there a demand for concierge services?
TM: We don’t offer traditional concierge services, such as travel bookings, personal shopping and household staff management. It’s talked about all the time, because there’s a narrative that a person de confidence looks after every little aspect of a family’s life, but we have found there is limited demand for it amongst our client base. Having said that, we have provided hundreds of unique, bespoke services for clients over the past 15 years. We offer to help out wherever we can.
How do you find new employees and bind the talent you have or would like to have?
TM: It’s very challenging to find the type of advisor that can manage all of the different kinds of work that we do for our client families. Our staff needs a wide range of knowledge, significant experience and the right temperament. As a result, finding and recruiting staff remains one of the most important challenges that we face.
Our approach has been to hire smart and credentialed younger professionals (CA, CFA, MBA, CFP), and then build up their integrated skill sets over time. This has worked well for us and it has created a very cohesive team with a long-term focus. When you have employees who are invested in the long-term success of the family office, it makes succession planning and continuity of service for our families much easier.
What would you say to a “next generation” member of a family office who says, “This is all fine and good, but I think I would like to found my own family office.”
TM: I’d certainly encourage them to remember that running a family office is like running a business. Sometimes people think “I’ll just hire a few people to help manage our affairs,” but really you need to decide whether you want to spend time hiring and managing employees and dealing with HR related issues. I find that most people—maybe it’s different for younger people, but certainly older people—have already done that in their careers and often don’t want to go through the hassle again.
The second and bigger question is how much money do you have? Setting up your own single family office can be a very expensive proposition and you should make sure that you actually need one before undertaking this process. There are actually a lot of good arguments for using a multi-family office, beyond the lower cost and ease of management. Because they serve multiple families, MFOs see a wide variety of family situations, choices and issues. These learnings can benefit other families as well. MFO clients also benefit from the economies of scale and attendant cost savings that come from the combined asset pool of multiple families. I think every family should at least consider the MFO option before going down the path of building their own SFO. They should never come at this decision from the perspective of, “Asset managers and private banks didn’t do a very good job, so my only other option is to set up my own SFO.”
Do you see a trend here?
TM: I think there’s an ongoing shift from SFO to MFO, primarily because of the cost savings from moving to an MFO, and also because of people’s desire to be freed from the administrative tasks of running their own SFO. Some families will always want the control that comes with an SFO that works exclusively for one family, but I think the benefits (information sharing, economies of scale, and ease of management) still make MFOs the best options for most high net worth families considering a family office.
You offer “family dynamic services.” How important are these?
TM: This has been a major growth area in our practice over the past five or ten years. Wealth typically adds complexity to family relationships, so ensuring good communication and decision making becomes essential. For instance, if we are trying to have a discussion with a family about their trusts, and two of the trustees aren’t speaking to each other, then that is a family dynamics issue and we will work to solve it.
The same concept applies to asking a client: “What are the things that keep you up at night?” In some cases, it might be the condition of the market, but in other cases, it’s that their son still lives in their basement and has trouble getting motivated. Another common concern is the effect that a large inheritance will have on a next generation family member’s motivation and desire to find their own path in life.
These are the types of concerns that we hear from clients on a regular basis, so it is incumbent upon us to provide, or find, solutions for our families. In some cases we provide the advice and counsel ourselves. In other more severe cases, we bring in family psychologists, counsellors or communication specialists.
Does it make the family office function better?
TM: The best thing it does, in my opinion, is that it helps clients realize that most of the things that are important to them are not necessarily financial. Developing an investment strategy, tax and estate planning, and governance are only tools which can be used to help them achieve the things that are most important to them.
The work we do on family dynamics is central to our overall role as a family office. Most people would prioritize having strong healthy relationships with their family members over a higher investment return.
Even though the investment performance is important at the end of the day.
TM: Yes, it is critical. For most families, investments are what fund their goals and so good, risk-adjusted returns are extremely important. The problem is that most firms prioritize investments over all other aspects of what a family needs. I can understand why this happens. In fact, clients also want to talk about investments before anything else. At Northwood, we resist that temptation. Our process begins with fundamental questions like: “What is the money for?”, “Who is it for?”, “When will it be needed?” and “How high a priority is the particular goal?” Only once we have clear and detailed answers to these questions can we move onto the implementation stage of our process, including investments. These can be hard questions to answer, but it is worth the effort. They are the critical foundations of a goals-based wealth management philosophy and to making sure we help families accomplish what is most important to them.