The reasons why

As concerns about wealth and capital preservation and succession planning within family businesses continue to rise, wealthy families are increasingly evaluating the benefits of setting up a family office.

There are many reasons why setting up a family office makes sense, but at the root of these is the desire to ensure smooth intergenerational transfer of wealth and reduce intrafamily disputes.

This desire inevitably increases from one generation to the next, as the complexity of managing the family’s wealth grows. Without being exhaustive, the following points set out the reasons why a family office makes sense:

• Governance and management structure
  A family office can provide governance and management structures that can deal with the complexities of the family’s wealth transparently, helping the family to avoid future conflicts. At the same time, confidentiality is ensured under the family office structure, as wealth management and other advisory services for the family members are under a single entity.
• Alignment of interest
  A family office structure also ensures that there is a better alignment of interest between financial advisors and the family. Such an alignment is questionable in a non-family office structure where multiple advisers work with multiple family members.
• Potential higher returns
  Through the centralization and professionalization of asset management activities, family offices may be more likely to achieve higher returns, or lower risk, from their investment decisions. Family offices can also help formalize the investment process, and maximize investment returns for all family members.
• Separation
  Family offices allow for separation, or at least a distinction, between the family business and the family’s wealth or surplus holdings.
• Centralisation of risk
  Family offices allow for operational consolidation of risk, performance management and reporting. This helps the adviser and principals to make more effective decisions to meet the family’s investment objectives.
• Centralisation of other services
  Family offices can also coordinate other professional services, including philanthropy, tax and estate planning, family governance, communications and education, to meet the family’s mission and goals.

The cost of not creating a compass for your family is incredibly high; it can lead to additional family disputes and mismanaged expectations, loss of capital due to misaligned priorities within the family, slow decision making among the voting family members and even lawsuits. In some cases, ignoring this area could make the difference between a family sustaining wealth through the second, third and fourth generation.

Main types of family offices

Single Family Office (SFO)

In its purest sense, a single family office is a private company that manages the financial affairs of a single family. Typically, a fully functional SFO will engage in all, or part of the investments, fiduciary, trusts and estate management of a family; many will also have a concierge function.

Multi Family Office (MFO) – generational is a Multi Family Office (MFO)

A multi-family office will manage the affairs of multiple families, who are not necessarily connected to each other. Like a single family office, an MFO might also manage the fiduciary, trusts & estate business of multiple families as well as their investments. Some also will provide concierge services. Most MFOs are commercial, as they sell their services to other families.

A very few are private MFOs, whereby they are exclusive to a few families, but not open to other families. Over time, SFOs often become MFOs. This transition is often due to the success of the SFO, prompting other families to push for access. Economies of scale are also often easier to achieve through an MFO structure, promoting some families to accept other families into their family office structure.

Virtual Family Office (VFO)

Families looking to achieve the benefits of a family office managing their financial and other affairs, but who don’t want to set up an actual company to do so, can opt for a virtual family office. This can be achieved by outsourcing all services to external providers of services and consultants.

Why might there be doubts about setting up a family office?

The establishment of a family office is a big undertaking, and there have been cases when family offices have not met the family’s expectations. Some of the potential doubts and concerns about setting up a family office are:

• Cost
  The cost of regulatory and compliance reporting remains high, which means that the level of assets under management that a family office needs to underpin needs to be high in order to offset its fixed costs.
• Market, legal and tax infrastructures
  Family offices function better when operating from centres where there are sophisticated markets and legal and tax structures. The absence of these in emerging markets has undermined the development of family offices there. This has often meant that there has been little connection between the huge level of wealth in some emerging markets and the number of family offices. Much of the wealth in emerging markets is still controlled by the first generation. This has also inhibited the growth of family offices, because many are launched during a wealth transition from one generation to the next.

When considering establishing a family office, some can see potential positives as negatives. This tends to be particularly prevalent in the following areas:

• The preference for privacy
  Some families may be hesitant about consolidating their wealth information through a centralised family office structure.
• Trust of external managers
  Setting up a family office is typically contingent on the level of trust and comfort families have with external asset managers. However, trust typically stems from long-standing relationships with external managers.
• Expectations on returns
  Ultimately, family offices rely on their longevity through ensuring wealth preservation. This difficulty of securing market returns in recent years has led to some tension in this respect. Furthermore, during generational transitions, family office structures are tested, often to the point of destruction, as the next generation presses for different goals and objectives to manage the family’s wealth.

Family office services

At the heart of any multi family office is investment management, but a fully developed multi family office can provide a number of other services, ranging from training and education to ensuring that best practice is followed in family governance. This section looks at the full range of services a multi family office could potentially provide (refer to diagram on Home page). These include:

Financial planning

Investment management services

Typically, this will be the main reason for setting up a family office, as it is central to ensuring wealth preservation.

These services will include:

• Evaluation of the overall financial situation
• Determining the investment objectives and philosophy of the family
• Determining risk profiles and investment horizons
• Asset allocation — determining mix between capital market and non-capital market investing
• Supporting banking relationships
• Managing liquidity for the family
• Providing due diligence on investments and external managers

Philanthropic management

An increasingly important part of the role of a family office is managing its philanthropic efforts. This will include the establishment and management of a foundation, and advice on donating to charitable causes.

These services would typically involve:

• Philanthropic planning
• Assistance with establishment and administration of charitable institutions
• Guidance in planning a donation strategy
• Advice on technical and operational management of charities
• Formation of grant-making foundations and trusts
• Organizing charitable activities and related due diligence

Life management and budgeting

Some of these services are typically defined as “concierge” in nature, but they are broader in scope, inasmuch as they also include budgeting services.

Services under this heading will include:

• Club (golf, private, etc.) memberships
• Management of holiday properties, private jets and yachts
• Budget services, including wealth reviews, analysis of short- and medium-term liquidity requirements and long-term objectives

Strategy

Business and financial advisory

Beyond the asset management advisory, family offices will also provide advisory services on financing and business promotion.

These will include:

• Debt syndication
• Promoter financing
• Bridge financing
• Structured financing
• Private equity
• Mergers and acquisitions
• Management buyouts
• Business development

Estate and wealth transfer

Family offices will be involved in business succession and legacy planning, enabling the transfer of wealth to the next generation.

These services will include:

• Wealth protection, transfer analysis and planning related to management of all types of assets and income sources
• Customized services for estate settlement and administration
• Professional guidance on family governance
• Professional guidance regarding wealth transfer to succeeding generations

Training and education

Much of this revolves around the education of the next generation on issues such as wealth management and financial literacy, as well as wider economic matters.

These services will include:

• Organizing family meetings
• Ensuring family education commitments
• Coordination of generational education with outside advisers

Governance

Reporting and record keeping

The maintenance of records and ensuring there is a strong reporting culture is another core part of a family office’s services.

Key to these services is:

• Consolidating and reporting all family assets
• Consolidating performance reporting
• Benchmark analysis
• Annual performance reporting
• Maintaining an online reporting system
• Tax preparation and reporting

Administrative services

Administrative services, or back-office services, are essential to the smooth running of a multi family office.

These services will include:

• Support on general legal issues
• Payment of invoices and taxes, and arranging tax compliance
• Bill payment and review of expenses for authorization
• Opening bank accounts
• Mail house (electronic and post)
• Bank statement reconciliation
• Employee management and benefits
• Legal referrals and management of legal firms
• Public relations referrals and management of public relations firms
• Technology systems referrals and management of these vendors
• Compliance and control management

Succession planning

Ensuring a smooth succession and planning for future generations is integral to the long-term viability of the family office and the family it serves.

These services will include:

• Continuity planning relating to unanticipated disruptions in client leadership
• Evaluation of the strengths, weaknesses, opportunities and threats (SWOT analysis) of senior executives both within and outside the family
• Re-evaluation of family board regarding roles of non-family directors
• Structuring of corporate social responsibility platforms and programs
• Development of formal knowledge sharing and training programs
• Implementation of intergenerational estate transfer plans
• Adoption of a family charter, specifically aiming to:
  • Formalize the agreed structure and mission of the family business
  • Define roles and responsibilities of family and non-family members
  • Develop policies and procedures in line with family values and goals
  • Determine process to resolve critical business-related family disputes

Advisory

Tax and legal advisory

Tax, in particular, has become a much more important issue for family offices in recent years and as such has assumed a more important part of the functions of a family office. Legal matters are also important. A multi family office will typically engage a general counsel, estate planning lawyers and/or a chartered (CA) or certified accountant (CPA).

These professionals usually provide the following services:

• Construct a tax plan to best suit the family
• Design investment and estate planning strategies that take into account both investment and non-investment income sources and their tax implications
• Ensure all parts of the family office are tax compliant

Risk management and insurance services

This is a service that has assumed a more important role in recent years because of the global financial crisis (GFC). It will be a crucial service for multi family offices in the future as well.

These services will include:

• Risk analysis, measurement and reporting
• Assessment of insurance requirements, policy acquisition and monitoring
• Evaluation of existing policies and titling of assets
• Evaluation of security options for clients and property
• Formulation of disaster recovery options and plans
• Protection of assets, which could involve the use of offshore accounts
• Development of strategies to ensure hedging of concentrated investment positions
• Physical security of the family
• Data security and confidentiality
• Review of social media policy and development of reputation management strategy

Get in touch today