Episode 6 – Risk Management for Wealthy Families

On episode 6 of the Our Family Office podcast, host Adam Fisch speaks with Our Family Office Managing Partner Kevin Tran about risk management. Adam and Kevin talk about the unique financial and non-financial risks that the wealthiest families face. They cover the ways that families can come to rely on a key person and how integration with a family office can reduce the risk of that person no longer being present. They also walk through the topic of marital agreements, and how professionals can help families navigate these difficult conversations to ultimately foster better relationships.

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Disclosure: This podcast contains opinions and does not constitute the provision of investment, legal or tax advice to any person.

What is The Our Family Office Podcast?

Our Family Office is proud to announce the launch of the Our Family Office Podcast. Throughout the course of the inaugural season, host Adam Fisch speaks to various guests from across our firm, offering insights into the areas of focus for an integrated family office, and the ways that a Shared Family Office™ can help Canada’s wealthiest families.

Adam: 00:08

Welcome back to the Our Family Office podcast. Over the course of this season, we're exploring the areas of focus for a purpose built family office and the ways in which a family office can improve the lives and relationships of Canada's wealthiest families. On today's episode, we'll be discussing risk. I'm happy to be joined once again by Kevin Tran, our Managing Partner, Wealth Planning. Kevin, thanks for being here.

Kevin: 00:29

Thanks for having me again, Adam.

Adam: 00:31

So risk is a really broad topic. And as we were preparing for this episode, our conversation went in a few different directions. To start with, I'll open it up to you. So when you're working with one of our client families, how do you think about risk?

Kevin: 00:48

Yeah. That's a great question, Adam. And, it's, you know, it's such a broad topic like you mentioned. It really involves breaking it down into several categories. When you think about risk, there are different elements. But I'd say the different categories that we deal with on an everyday basis with our clients would be broken down as follows. Business risks, what happens if the key man or the business owner wasn't here anymore? Family risks, you know, are there any potential conflicts or, things that would not keep the family together or would cause conflicts within the family? Financial risks could revolve around liquidity, what happens when there are taxes due, incapacity, or even mortality risk. And there's some other factors such as reputational risks and tax risks as well that we also deal with. So that's how I would break it down.

Adam: 01:39

Yeah. And so I think it's also important to understand that these risks bleed into each other. Right? A lot of these risks can affect- some of them can affect the others. Right? So if you have a business failing, that might affect family dynamics as well.

Kevin: 01:58

For sure. And, you know, I'm glad you brought that up because, you know, in this category, and in fact, in a lot of what we do, it's holistic. Right? And there's relationships between each of these categories. These categories revolve around a lot of complexity.

Kevin: 02:13

It has financial components and nonfinancial components.

Adam: 02:16

Yeah. So let's get into a couple of them. So let's start with, you know, you talked about key man risk. And I think when we say key man or woman risk, that can be in the context of, you know, the primary the breadwinner of the family, the wealth creator, or in a lot of families cases, it can be maybe a key employee that they rely on for all of their, you know, their financial obligation looking after the family's assets and that kind of thing. Each of those carries its own sort of risks. Right?

Kevin: 02:48

For sure. For sure. And we see this a lot actually in what we do. And so within business risk, there is a key person risk. And, you know, this could either revolve around a business owner who's very heavily involved in the business, or maybe even is the business themselves.

Kevin: 03:04

This often happens in an operating company scenario, but not necessarily. We see situations where, there's a CFO or a CIO, and he's been in the business for a very long time. And perhaps he's running the passive investments or the holding company, And the family relies on this individual to do everything from the accounting, the financials, the taxes, and even run various aspects of their everyday lives that has to do with financial aspects or legal aspects. And the problem is, you know, what happens if these individuals aren't here anymore? This poses a significant risk, not just to the business, but to the family as well.

Adam: 03:43

Yeah. And and we've been in situations where we acted as kind of the the backup to that key person that if something happened to them, we're available, and we understand the business and the family that we can step in, not in an active operating business, but where it's more kind of passive assets, that we're in a position to backstop them if something were to happen to them or they were to decide to leave.

Kevin: 04:10

Yeah. I think there's there's two aspects to this, and maybe I could just start from the beginning on perhaps how this came to be. And oftentimes, when we're dealing with our families, they're very busy in their everyday lives. They're very busy in their business. And, you know, oftentimes, it's just an evolution of what takes place in their overall growth, both from a business perspective and wealth perspective.

Kevin: 04:33

And, you know, when they have individuals that they've relied on for a number of years, as their business and their needs grow, sometimes what happens is that we see that these individuals play multiple roles in a family's life. And so, you know, if the CFO has started and has always run their operating company, and all of a sudden they've decided to build their own single family office, it's very natural that they would lean on this person, because they trust them and because they've been in business for a number of years is to have them involved in other aspects in their lives, and that could be managing their wealth. But the problem is for this one person, they may or may not be well suited to do the task at hand. And even if they were, that's a tremendous amount of responsibility and a lot of work for a single individual or maybe even 2 or 3 individuals. And as a family's wealth grows, there are additional complexities. And with additional complexities, there requires an additional team and skill set to be able to deal with these things responsibly.

Adam: 05:45

Well, and even in the best case scenario, that person won't be around forever. Right? So what is what is the institutional framework that's being built, to support that person when they're no longer around?

Kevin: 05:59

Because, you know, people retire, people move on to different roles, people pass away, And, you know, there are back bad actors.

Adam: 06:09

Yeah. And and, of course, you know, we we talked about a key employee, but when you move to the key person being a family member, there's additional complexity there. Right? Because it's a family relationship as well. So if that family member that is kind of the primary breadwinner, the primary person who's responsible for the family assets, if that person, you know, passes away or becomes incapacitated, the rest of the family is not only trying to figure out how the assets are going to be properly stewarded, but they're also dealing with their own grief and their own emotional, connection to that person.

Kevin: 06:46

It's a difficult situation. I think we talked about before as well as, you know, whenever you're in a difficult family situation, it's hard enough to deal with the emotional aspects of someone not being there anymore or maybe, you know, being incapacitated. But it's even harder picking up the responsibilities that this person had, either in the operating company or even in the, you know, everyday holding company. And it's better to think about these things and have a framework in place to answer questions that are key, such as what happens to the business, who continues operating it when mister so and so or missus so and so isn't around anymore, so that it can continue being successful.

Adam: 07:28

Yeah. And that goes back to our earlier discussion, around family governance, right, where the better that you can define roles and who's going to do what, as time goes on, the less mystery there is and the less room there is for conflict. Again, people may not always like the the decisions that are made, but at least there's the opportunity to understand it and explain it in advance rather than when you're in that moment and emotions run so high, and you have this financial side to worry about.

Kevin: 08:03

Well, it's funny you mentioned that because that's often where the conflict comes from is a different level of expectation that wasn't communicated, right, and people having different thoughts coming from different perspectives and doing it in a time frame that's not very convenient where decisions need to be made. So oftentimes, we find that by having and we're not gonna have all the answers right away. But the idea is we have this conversation and put together a framework where we mitigate and minimize the family conflict so that, at least, generally, everyone knows what's going on or there's a contingency plan in place.

Adam: 08:43

And the reality is these are not easy decisions. It's not an easy topic to discuss. No one likes to face their own mortality. We understand that. But, you know, I think everyone understands the importance of having insurance policies in place.

Adam: 08:58

Everyone understands that wills are important. But I think having family governance documents in place is an area that a lot of families may overlook and may not realize how much that can complement the more traditional or the more common, risk mitigation tools that people talk about.

Kevin: 09:21

Yeah. I mean, you know, I could we could say this actually about the overall area of risk is it's probably one of the more overlooked areas of what we deal with. And it's simply because of the fact that there's either a lack of awareness or people are too busy, and so a lot of these risks aren't identified. And if they're not identified, they're not discussed. We can't put potential solutions in place to resolve them.

Adam: 09:47

Yep. I want to talk about another area of risk. And as we talk about, you know, how these conversations not always being easy, One area that we deal with, and I know you can speak to your experiences in the area of marital agreements. Right? That's when we talk about preservation of family assets, that's, you know, that's a natural area where people are concerned. People with family wealth are concerned. Talk about how you've navigated some of those conversations.

Kevin: 10:19

Sure. I can definitely share a little bit with you. And, you know, maybe I can start off with how it normally comes about.

Adam: 10:26

Sure.

Kevin: 10:26

So how it normally comes about is, you know, our clients tell us that one of the kids is getting married and the marriage is coming up probably in a year's time or perhaps even less than that. And so, you know, this topic isn't a comfortable topic to begin with, but in such a short period of time, and, you know, having planned a wedding myself, it's difficult to do. You know? There are a lot of things to think about, and,

Adam: 10:54

It's a stressful time.

Kevin: 10:55

Exactly. And talking about a marriage contract while doing all that, it's difficult to do. And so I think that's where a lot of the problems happen, but I think a better way to do it is discussing the topic when there isn't the need yet.

Adam: 11:12

Right. In other words, when there isn't an engagement, there isn't an upcoming wedding, when it's not such a hot button issue. It's just another time.

Kevin: 11:25

Yeah. And I think parents can feel, generally, when a relationship is heading towards a certain direction, they're via, you know, what they hear from their kids, or their relationship, or a length of period of time. They know it's coming up. It's not normally a surprise.

Adam: 11:40

Sure.

Kevin: 11:40

And I think the better way to go about this discussion is first having a discussion around the overall wealth of the family. And for some individuals, that could be a difficult conversation if the family isn't used to having dinner table discussions around financial elements in their lives. Right. For other families, it's easier. It just depends on the family.

Kevin: 12:06

But I find that once everyone has an understanding of the overall financial aspects or the wealth of the family, they begin to understand why it's important to have a marriage contract

Adam: 12:18

Yeah.

Kevin: 12:19

Because, you know, there's an inherent responsibility to protect what earlier generations have built and to ensure that it goes to the next generation.

Adam: 12:27

And I like to think that having that conversation gives the next generation a bit more of a sense of ownership over the wealth. Right? You've been let in. You've been shown what there is.

Adam: 12:41

Maybe, you know, ideally, there's been some discussion about how it was earned and that sort of thing. And you start to- then it becomes more concrete, more tangible for the next generation where, you know, when you're young and you're you know, if you have a family that doesn't really talk about money, you sort of know you have it, but it feels more amorphous, less real. So you don't feel as much need to protect it the way you do when your parents sort of show you that respect to say, here's what's here. Here's how it was earned. We wanna make sure that it stays in the family.

Kevin: 13:18

Yeah. But, you know, not just that. Coming at it from the angle of the individual who needs to have the discussion with their fiance. I think it's an easier discussion when they really understand the importance, the responsibility, and the overall purpose of having a marriage contract because oftentimes there tends to be a negative connotation to it.

Kevin: 13:44

But it doesn't have to be. I think when it's done in the right way and when it's communicated in the right way, in the way that we talked about, it can be an easier conversation. And that's how we've really tried to position it when we work with clients is that, you know, it's not supposed to be confrontational, it's not supposed to be argumentative, but, you know, it's a sit down conversation, and we can't have this conversation on that person's behalf. They have to have it. Right? They have to have it. But before they can have it, I think they it's important that they be equipped with why it's important to them and really understand that. Rather than, well, you know, mom and dad, they're making me put this together, and we kinda have to sign it. You know, that's not really the way we go about it.

Adam: 14:25

Yeah. And what do you think about the idea of it being sort of a family practice. Maybe it's part of a family constitution that everyone is expected to have marital agreements. I think the way I see it is, you know, it can make it feel sometimes a little bit less personal if it's not you know, you're not directing it to your child and your child's future spouse, but instead saying, well, this is just something that we do as a family, and it's expected.

Kevin: 14:56

And going back to the point where we said everything's interconnected, this is a perfect example of that because setting clear expectations, starting with that family governance, and fairness because everyone in the family, all of your siblings are required to have the same thing. You're not treated any differently.

Adam: 15:16

Right.

Kevin: 15:16

This is what we do as a family. Why are we doing it? to protect the family's wealth. And I think by doing so, you're setting that expectation so that there are no future conflicts or at least minimizing the future conflicts going forward. So that's definitely a great starting point. I love that idea.

Adam: 15:32

Yeah. And I think that's where again, as you said, we're not having the conversations on their behalf, but we can be in the room for a lot of these discussions to help, you know, facilitate it, help it go smoothly, help stay focused on ultimately what we're trying to accomplish, and kind of reduce what can sometimes be a real emotional moment.

Kevin: 15:59

Yeah. And I think just to add to that, I think oftentimes, and it's not always the case, is when lawyers start getting involved, depending on how it's positioned, it can be a little bit more confrontational just because of that. But I find that when a family office is involved and when we're involved, the conversation is softer. It starts from a little bit more of a purposeful place. And it's less confrontational. And by the time we're done going through the main points, lawyers or whoever's involved in drafting the legal documents simply put the intention on paper. And when it comes to signing a document or reviewing the document, it's a much smoother process.

Adam: 16:47

Yeah. I think that's a great point. You know, when there's common understanding of why it's being done and what everyone is trying to do, then I think that alleviates a lot of that opportunity for conflict down the road.

Kevin: 17:03

Absolutely.

Adam: 17:04

And the lawyers can sort of work out the details, but we all know what destination we're trying to get to together.

Kevin: 17:10

Yeah. And the most important part is while doing this and getting the solution done is making sure that everyone's getting along, making sure that nobody's fighting, and making sure that, you know, what gets done gets done.

Adam: 17:26

Yep. Well, thanks for the conversation, Kevin. You know, I know we talked before, and we could go on for hours about this. I'm sure that, we'll have plenty of future episodes about any number of these topics because risk is a broad category, but it's an important one. So thanks for being here.

Kevin: 17:45

Yeah. Thanks so much.

Adam: 17:47

I hope you enjoyed today's conversation. Thank you so much for listening.

Adam: 17:51

Our Family Office is Canada's 1st purpose built shared family office, and the Our Family Office podcast is produced by Henry Shew. Please visit ourfamilyoffice.ca for more information about our firm, and don't forget to rate, review, and subscribe so you don't miss an episode. See you next time. The information in this podcast is presented as a general educational and informational resource only. While certain participants in this podcast may be registered to provide investment advice as a representative of Our Family Office Inc, itself a registered firm in certain Canadian jurisdictions, this podcast does not provide individualized investment, financial planning, legal tax, or insurance advice, nor is it meant as a recommendation to any listener to buy or sell any specific securities or otherwise take any other investment action.

Adam: 18:37

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