Most Ultra High Networth (UHN) families desire to preserve their wealth, however, not all realise that wealth preservation requires a similar level of commitment as wealth creation. Statistics show that 70% of UHN families lose their wealth by the 2nd generation and 90% by the 3rd generation– the first generation makes the wealth, the second spends it and the third is right back in shirt sleeves. A key driver for the retention and successful transfer of wealth is succession planning and families that do maintain their wealth nurture this principle through generations. This is where the UHN family can leverage on the family office’s function and capabilities.
A family office is a privately-held wealth management advisory organization that manages the totality of investments and wealth for UHN individuals with the goal to effectively grow and transfer wealth across generations. Although a significant number of family offices began informally with the employment of an investment manager, a family concierge or both, and the inclusion of other staff as needed, the UHNI may choose to be proactive in establishing a family office. Families who chose to do so, place a strong emphasis on privacy, trust, control and perfectly personalized services that add value to the family, creating time for other profitable activities.
Below are the key factors to consider in determining the office framework that would best serve the family’s needs and goals.
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FAMILY OBJECTIVE
The decision to set up a family office must be preceded by a review of the peculiarities, needs and objectives of the family. Factors ranging from life cycle of the family (wealth creation or preservation phase), types of assets owned, children’s age, jurisdiction where family assets are located, and the family’s level of sophistication are to be considered in deciding on the scope of services.
Scott D Gardner classifies the scope of services within three buckets: Type A family offices provide comprehensive financial services and manage other professional services entities e.g. accountants, law firms, private banks, where these services are outsourced. They also handle non-financial aspects of the family’s lives, for instance, travel plans, communications and reputation management and the education of the younger generations; Class B family offices mainly provide financial services. With the exception of a few inhouse hires, they manage the services outsourced to other professional entities, and Class C family offices provide basic estate services and are typically directly run and managed by the family with existing in-house staff.
Understanding with clarity the specific benefits the family office would provide is key to its success and would help to define the expectations of family members. Principals may choose to discuss these key points multi-generationally as well as with key representatives across branches of the family to ensure that the needs of all family members are accounted for and realistic objectives set.
TYPE
Family offices are predominantly categorized into two, based on the number of families served; Single-Family offices (SFO) – offices that serve one family and Multi-family offices (MFO)- serving several families at once.
SFO services are typically broader and more customised than its counterpart’s as they develop gradually in response to the unique requirements of the family served. Thus, they are more likely to handle non-financial services such as household arrangements, education, and leisure activities. MFOS, on the other hand, offer select service packages which can be customised to fit the needs of client families.
In considering what family office model is most beneficial, families may ascertain how much control the Principal desires to have over the policies, practices and systems guiding the family office; has the family delegated important family matters to external professionals previously, if so, what were the outcomes? Are there special family dynamics or personal circumstances – e.g., health, within the family need to be factored into planning for a family office? Are there personal safety or security concerns? Generally, the more privacy, control and customised services required by a family, the more suitable an SFO model might be.
COST
The cost of running a family office depends largely on the scope, scale and size of the office. Family offices that perform a wide range of services and on a larger scale will have more costs as compared to burgeoning family office with sparse staff. These complexities are more present with SFOS unlike MFOS which provide more streamlined services.
As a rule of thumb, it costs an affluent family, $1 million to $2million per annum to run a family office, and according to a report by Citibank over half of this sum is paid to professional services providers. The cost of professional services is driven by the number of tax jurisdictions and residences, the size and complexity of the invest
ment portfolio, investment vehicles, legal and compliance requirements for the family’s assets. Outsourcing to qualified, reputable persons may provide more cost-effective solutions than hiring staff to the family office. Functions typically outsourced by the family offices over the years include tax services, trust and estate planning and investment management. Specifically, families are encouraged to outsource tasks where there are diseconomies of scale and specialized skills or high-cost technology solutions are required.
In a large family, multiplicity of harmless, regular expenses e.g. the cost of wire transfers for each family member rack up significant costs over time. Families are encouraged to do a thorough cost analysis of current expenditures as well as cost factors that will influence the continuity of the family office. Ultimately, the family must evaluate for itself the value it aims to obtain from the family office and the most cost-effective route to it.
JURISDICTION
Affluent families, especially those with residences, interests and investments around the world, may choose one or more locations for its family office. In deciding on the location, the family should critically examine the regulatory landscape – trust, tax, civil law, regulatory and fiduciary requirements of each locale and its impact on the family’s assets. Also, for the Principal who would prefer to exercise more control over the family office understanding how regulated the family office sector is in each location is vital to knowing what he can do.
The scope of services expected from the family office and the location of family members around the world is also relevant. Families may choose a main location, usually in the country where the family business is domiciled, and a satellite office that is central to all family members. Another factor that may affect the family’s decision is availability of qualified staff in the desired location. Many jurisdictions who, in a bid to attract investment have enhanced their regulatory laws may not have eligible staff or may have in such small numbers that finding a replacement, when needed, becomes a problem. While the territory may be conducive to the family’s needs, due consideration should be given to the cost implications of importing staff and this becomes even more critical where the staffing needs of the family are peculiar.
GOVERNANCE
The family should aim to select a governance structure that ensures accurate, timely communication between the family, the office management and staff, as well as a clear chain of command and responsibility among the staff. Governance models are formed through one of, or a combination of these organs:
(a) family assembly: this is comprised of all members of the family including those who have an interest in the family e.g. in-laws and is a general meeting for discussing issues or concerns
(b) family council: this is comprised of representatives across family branches and generations who share the decisions of the larger family
(c) board: this is comprised of family representatives, members of the family office and also persons who are not family members. It functions similar to a company board.
The family may choose a governance structure comprised of whichever organs best suits its needs. Whichever model combination is chosen, the family should bear in mind that the governance structure is not a permanent edifice and must evolve with the due regard with the family’s needs, objectives and goals.
CONCLUSION
Given the myriad of options outlined here, it is clear that there are no basic templates for setting up a family office and each UHN family can effectively choose a structure that best meets its needs. These planning insights should act as a useful starting point for Principals considering a family office.
