THE FAMILY OFFICE

IN PRIVATE WEALTH MANAGEMENT

 

Many wealthy families are disappointed to find their family business or hard earned assets dissipating over succeeding generations rather than, as they had hoped, consolidating and growing to provide a secure and lasting foundation for their children and grandchildren.  In the USA and among the old European families, the family office is a familiar concept and their use is now becoming more prevalent among the asset rich families of the emerging economies.

 

What are the common problems a Family Office can solve?

 

·       Increasing lack of focus

 

During the creation of wealth, the establishment of a family business or the development of a significant investment portfolio, there is always a clear aim and a common purpose. 

 

Typically, the wealth creator is a successful entrepreneur or business professional who has, or is in the process of, building up a successful business.  It may be an inherited family business or a public company but during the course of his (or her) career he has probably assembled around him a team of advisers and trusted employees with whom he works closely.  Their special skills and attributes have been selected to further the interests of the business but, as our entrepreneur’s active wealth building starts to bear fruit and it moves into a more mature ‘husbandry’ phase, while their knowledge and support may remain important, the skills of those early advisers may become less relevant.  As time goes by, and as children and grandchildren start to enjoy their share of the family wealth, the focus may shift from the phase of expansion and growth, through consolidation to consumption and, unless timely steps are taken, ultimately to loss.

 

·       Lack of control

 

The founder of family wealth will be used to being in charge and to being able to rely on a trusted team.  As new skills are required and new advisers are brought in, scope for the familiar ‘hands on’ approach will be reduced.  Sensible tax and succession planning measures may also demand that control and management of assets is placed in the hands of trustees or investment managers.   This sometimes results in a blurring of reporting lines and accountability, leading to :

 

·       Lack of information

 

As the family wealth increases so it should diversify, and during this process the founder and other members of the family may feel that they no longer know everything that is going on around them and cannot gain the clear overview that an active CEO used to expect.  This can, in the worst case, lead to distrust and resentment and a feeling that people are deliberately ‘keeping things from me’.

 

Where there is no clear aim, no common purpose and no overall control, tensions can arise between the family and advisers.  Those advisers may develop a ‘silo’ mentality – not sharing information with each other and jealously guarding their own territory.  The result of this is frustration on the part of the family, duplication of effort and cost and an increase in entropy where as things change without extra energy being added, they gradually grind to a halt and eventually cease to exist.   

 

 

SUCCESSION PLANNING

 

Planning for succession in business needs to take place long before the founder reaches retirement age and planning for personal succession is a reality we all have to face up to.  Most people understand the need to make a personal will to order the inheritance of their assets, but there are many other ways of securing an orderly devolution of wealth and control with somewhat less finality.

 

The Family Business

 

Let us imagine that our wealth creator is still running a successful business which is mature, but not ripe for sale.  He is now entering late middle age and is considering how to plan for retirement, perhaps gradually over a number of years, and how to pass the responsibility for the business on to more junior members of the family.

 

A family office, guided and supported by the senior members of the family, can play a very useful role in the running of multi-generational companies, particularly where some of the family shareholders are more active in the business than others.  There are a number of structures that can contribute to the successful continuation of family businesses into the second, third or more remote generations.

 

·       A Family Council can provide a forum for discussion and communication among family members at a strategic level.

·       A Family Trust or Holding Company can own some or all of the shares in the operating company and concentrate family control so de-risking the investment of outside, non-family capital in the business as it expands and develops.

·        A Family Investment Company is a structure that can run in parallel to the family business and manage assets outside the family company, such as real estate, securities, cash or other fungible assets.

 

This is a typical arrangement:

 

 

In this scenario, the Family Office (which can take many forms: a group of individuals, a company, or a limited partnership are just some examples) in addition to its administrative functions, can coordinate the family’s main roles while its members still own the business :

 

 

The Family as Owners

 

A family office can provide stewardship of the family’s underlying wealth: for example, defining and monitoring the investment guidelines for the operating company and working with the management and board of directors to clarify and present the shareholders’ expectations by way of return – either on equity or through assets.  Those guidelines and return expectations need to be communicated to the board which must transmit them to management.  The Family Office can also decide which family members will best fill board seats.

 

The Family as Employees

 

The Family Office can determine rules of entry for family members seeking to join the business, as well as organising the kind of training and development programmes that the business should provide for those who have management aspirations.

 

The Family as Family

 

How can the family preserve its identity and heritage; maintain communications and resolve conflicts?  How, if at all, will it support less productive, or even profligate family members and under what circumstances?  One option could be a family bank where debits and credits are recorded, or the Family Office could create and hold a fund to invest in start up business ventures created and managed by family members outside the mainstream family business.

 

The Family as Part of the Community

 

A family office can also be a conduit through which the family can discretely direct its philanthropy.  It can also identify opportunities for family members to involve themselves directly in charitable work.

 

Family offices are particularly useful during times of family and business transition.  Where the only ‘glue’ holding the different generations of a family together is the business, shareholders may cling to it to preserve family identity and closeness.  But that may mean passing up opportunities to expand, evolve or sell.  By providing another organisation around which the family can unite, a family office enables the family to base decisions on commercial principles, not emotions.

 

 

Personal succession planning

 

Personal succession planning is a difficult and emotive subject at the best of times and the cause of more family friction that almost anything else.  Once we accept that we are all mortal, there are three key questions to be answered :

 

o      Who do I want to inherit my estate?

o      How can I pass on my wealth through many generations?

o      What will the taxman take?

 

Getting some or all of these wrong can cause serious rifts within the family and the fragmentation of its wealth.  The answers to all these questions will depend a great deal on personal circumstances and inclination, but some may also be influenced by where the testator and his family are resident and domiciled.

 

·       Lifetime gifts

 

“How sharper than a Serpent’s tooth it is

To have a thankless child …”[1]

 

In some civil law countries, gifts inter vivos can only be made by way of contract; in countries with forced heirship laws all lifetime gifts (and the reason why they were made) have to be disclosed to determine the rights of the forced heirs.  There are always risks in giving a share of wealth away during one’s lifetime: first, that the recipient may want the rest sooner rather than later and a bitter struggle breaks out between parents and children or between siblings; second, that wealth too great, given too soon, can be morally destructive and third that the donor may experience an unacceptable sense of loss of control.

 

·         Gifts on death

 

Countries such as England and Wales (but not Scotland, or Jersey) leave people domiciled there largely free to leave their estates as they please.  Although, leaving one’s entire estate to the local Dogs’ Home may result in claims under the Inheritance (Provision for Family and Dependants) Act 1975 (as amended) being made against the estate by an aggrieved family.

 

Civil law countries, which include most of Europe (and Jersey, where local customary law is based on the Norman-French code) give people freedom to leave a certain proportion of their estates as they wish but the remainder is subject to the rights of forced heirs (typically children) while the rights of surviving spouses may be protected by the rules of community of property.

 

Middle and Far Eastern countries have laws of succession determined by religious decree and interpreted by ecclesiastical courts.

 

As if that were not complicated enough, succession may be different for moveable and immoveable property and the tests for domicile and residence may be different too.  It is not impossible to have a situation where there are competing succession laws or where the laws of no country apply at all.

 

·       The use of trusts

 

In common law countries it is possible to create a trust where the legal title and the right to dispose of property is held by one person (the trustee) and the right to benefit from that property, now or in the future, is vested in another (the beneficiary).  Trusts are sophisticated and subtle instruments.  They can have a significant role to play in the preservation and distribution of family wealth and are now being recognised in wider jurisdictions.  The subject of the development and use of trusts is so wide as to rightly deserve an entire article of its own.  Jersey has recently revised and updated its Trusts (Jersey) Law 1984 among other changes, to permit trusts of unlimited duration and reserve power trusts, and to give judicial protection against foreign law claims in trust disputes.

 

Civil law countries have other concepts which achieve similar ends to a trust but in a different way :

 

o      A foundation

o      A usufruct[2]

o      A prescribed substitution[3]

 

The latter two tend to be of little practical use these days, but a foundation is a widely used structure throughout Europe and its introduction is now being developed in Jersey.  It is a legal entity like a company (a trust is not) and has a separate legal personality able to contract in it own right.  A foundation is set up to fulfil a purpose (whereas trustees must simply act in the best interests of the beneficiaries) and that purpose can be as wide or as narrow as the founder wishes.  A foundation is a very useful vehicle, but it may be subject to forced heirship claims.

 

The ratification by Switzerland of the Hague Convention of the Law Applicable to Trusts and on their Recognition[4] will shortly introduce the Anglo Saxon trust model into the heart of Europe’s civil law jurisdictions and will open many new routes to wealth management.  The Convention seeks to harmonise the private international laws of its signatories relating to trusts. The key provisions of the Convention are:

 

o      each signatory recognises the existence and validity of trusts.  However, the Convention only relates to trusts with a written trust instrument.  It would not apply to trusts which may arise (in certain circumstances) in common law jurisdictions without a written trust instrument

o      the Convention sets out the characteristics of a trust (even jurisdictions with considerable legal history relating to trusts find this difficult)

o      the Convention sets out clear rules for determining the governing law of trusts with a cross border element.

 

·       Death and Taxes

 

The contemplation of personal succession is all fairly depressing and, where many wealthy families have adopted an increasingly international lifestyle, it can be pretty complicated.  The use of companies, trusts and foundations in tax planning will be familiar to most people these days and tax advice should certainly be sought before these structures are formed.  More often than not, family offices are established for reasons of family governance rather than pure tax planning and tax mitigation is a welcome coincidence rather than a primary aim.  The harmonisation of taxes across Europe is going at a steady march and Jersey, which once held itself out as a tax haven, is concluding exchange of information protocols and seeking double tax agreements with many countries, confident that its appeal as a well regulated and highly skilled jurisdiction will outweigh the loss of old-style business dependent upon secrecy.  The intelligent use of tax treaties and asset protection in a transparent environment still offers considerable scope for saving wealth from the impact of unnecessary taxation.  Issues of residence and domicile, political stability and financial sophistication need to be carefully considered in determining where a family office should be established.

 

 

The Family Office

 

Family offices originated in the USA where the first generation of industrial plutocrats founded dynastic empires and their families still benefit from the organisation of their wealth and, it is fair to say, the US is still leading the way in their development.  Nowadays, Europe and the UK are catching up fast.  The late 19^th and early 20^th century family solicitor or advocate, who provided ‘cradle to grave’ services to his clients; was privy to their business affairs and personal lives; and dealt with all aspects himself, is probably the most recognisable prototype model for the modern family office for most English law clients.  

 

The Shape of a large Family Office

 

Family offices come in all shapes and sizes.  There can never be one, definitive model as the needs and expectations of every family are different and so are the solutions, so to be asked to describe what a family office is, requires a different answer each time.

 

In the early days, our family wealth creator probably had one personal assistant, a secretary  or homme d’affaires, who ‘ran the family’ and well as his private office.  He or she did everything, from booking plane tickets and paying the children’s allowances, to attending business conferences and handling financial and legal resources.

 

At the next level, a simple family office might include a small staff located in an estate office or from within professional firms, usually including a lawyer, an accountant, an investment manager or stock broker each of whom was able to provide or outsource financial services.

 

The ultimate family office may be a fully fledged legal structure: a private trust company, limited partnership or a holding company that might itself hold some shares of the family business not owned by personal shareholders.  It can also provide all the usual professional services plus sophisticated asset management, legal services and even such things as private jet and yacht brokerage.  Private trust companies, which provide fiduciary trustee services to one or more related family trusts are simple to establish and administer within a regulated environment such as Jersey.  Ownership may be held by a charitable or non-charitable purpose trust for complete security.

 

The FO can be within an MFO

 

Some or all family office functions can be outsourced to a multi-family office (‘MFO’) service provider.  MFOs tend to be organised by lawyers or accountants or by professional wealth managers offering a range of services to a number of high or ultra high net worth families.  These families enjoy the services of a family office without the expense of operating one individually.  The services provided tend to be of the more sophisticated professional sort, such as investment and financial management, rather than the personal ones such as property maintenance or security.  Discretion and confidentiality are key components in an MFO, particularly where families may be inter-related or acquainted and may be exceedingly sensitive about the preservation of business or personal information.  ‘Chinese walls’ are essential and larger organisations such as professional trust companies are best able to keep these secure. 

 

The FO can even be in a VFO

 

A growing number of moderately high net worth families are looking to the virtual family office (‘VFO’) as a lower cost alternative to the traditional ‘bricks and mortar’ model.  VFOs may differ greatly in many respects and may offer highly bespoke services but, through the use of increasingly sophisticated emerging technologies, can provide all the core wealth management capabilities while at the same time help the FO and MFO to cut costs.

 

VFOs are family offices without actual, physical offices.  They are able to dispense with face to face meetings, if necessary, and use various forms of information technology such as telephone, video and computer links to maintain contact between clients and their network of advisers.  In some virtual models, technology can also include web based accounts aggregation and provide repositories for static documentation such as trust deeds and wills.  VFOs tend to outsource expertise in the form of legal advice, investment management or estate planning more widely than FOs and MFOs.  A VFO is an FO where the experts are able to work together from different offices in different time zones.

 

And finally, there is the VMFO

 

Here, the ever advancing tide of technology allows the MFO service provider to assemble a high level portfolio of independent experts from many disciplines who provide the whole range of FO services from the concierge to the trans-jurisdictional, multi-generational wealth management demanded by the ultra high net worth family.   Bridging physical distances by technology can bring the most up to date legal and investment expertise together in a way that most in-house lawyers and advisers would struggle to match.  The other great advantage of the VMFO is its relatively low cost, as economies of scale can enable it to provide the skills of the assembled team to 20 or 30 families, in a wholly secure and confidential context, at a fraction of the cost to just one.

 

The Family Wealth

 

Family offices are more than simple investment management service providers, though many investment managers offer them as part of their services.  In order to fully manage the family wealth, as well as taking part in the governance of the family business, the Family Office must be able to provide a raft of different financial services and products for the family, such as investment and asset management, insurance, personal lines of credit, business and personal travel and legal services.  A family office’s concierge services can harness the family’s combined purchasing power enabling it to negotiate better prices and terms for goods and services than individuals could negotiate for themselves.  The professional staff at some family offices may be able to review and advise on business plans developed by family members attempting to launch new business ventures of their own.  Access to a managed venture capital fund could offer scope for the development of a new generation of entrepreneurs and add new wealth to the family.

 

One of the more confidential roles the Family Office can play is in sponsoring educational programmes on topics like personal finance, technology or career planning for younger family members and, in cases where families are large and members may be highly mobile, it can even help to connect disparate relatives and keep them informed about the business, family wealth and other issues.

 

There are clearly many benefits but there are also some obvious caveats to the establishment of a Family Office:

 

Over Dependence

 

The family, particularly the second and third generations, may come to depend on the personal services provided by the Family Office to such an extent that they either never learn, or cease to be able, to take care of themselves.  Good finishing schools still offer training in the basic things, like reconciling a cheque account or understanding a simple contract.  Some families institute their own programmes of instruction for personal or business development.  There is a fine line to be drawn here, a family office should be neither a nanny nor a tyrant and one of its responsibilities ought to be to ensure that the family educates itself and its young to make them more, not less, empowered to deal with the complexities of real life.  It should be a convenience, not a life coach.

 

Whatever the family expects of its Family Office needs to be set down in writing and reviewed regularly.

 

Some high net worth families, particularly those with a strong moral or religious tradition, have taken the informed view that, without guidance, the burden of significant wealth can be destructive of character and they try to ensure that only so much is given to each beneficiary as he needs and merits.  Sufficient to enable a beneficiary to do anything, but not so much that he does nothing.   Where investments are unitised and held in family owned companies, additional shares are ‘awarded’ to recognise a life stage completed or a special contribution made.

 

Quis custodiet custodientes?

 

A family office is a closed circle that runs the risk of becoming self sustaining, organised more for the benefit of the advisers than the advised.  When second or third generation family members depend on a private family office staffed by long standing people who simply take care of everything without the discipline of a regular audit, they risk being exploited.  It has been known for staff to take advantage of their privileged position to manipulate, overcharge or simply justify their existence.  Using the services of a professional service provider, in a regulated jurisdiction, can offer greater protection and peace of mind.

 

To introduce some checks and balances of their own, some families have turned their family office into an MFO by providing its services to several other business families and, at the same time turning it from a cost to a profit centre, enjoying even greater economies of scale and the increased buying and investment power that this brings.

 

Who needs a Family Office?

 

Anyone who is concerned to safeguard family wealth and provide a support network for the next generation certainly ought to consider a family office.

 

Anita Lovell

 

Nigel Harris & Partners specialises in making Family Offices work and can tell you where to begin, how to set one up and how to make it run successfully.

 

Rathbone Trust International is an international business specialising in the provision of trustee, corporate and family office services from offices in London, Jersey, Geneva, the BVI, and Singapore with affiliated offices in New Zealand and The Netherlands and partners and associates in other jurisdictions.

 

The aim of Rathbone Trust International is to provide high quality trust and tax services for private individuals.

 

Rathbone Trust International is professionally based with all of the client-facing directors and many other senior staff being lawyers, accountants and members of the Society of Trust and Estate Practitioners in a culture of integrity, quality and expertise.

 

Services – both advisory and administrative in relation to :

·       Trusts and companies – their establishment and administration

·       Trust and tax services internationally and in the UK – predominantly for private clients, but with a growing commercial element

·       The rights and duties of trustees, protectors, beneficiaries and company directors

·       Foundations, vista and reserved power trusts

·       Family offices

·       Corporate services

·       Expert funds, limited partnerships and other structures for investment or co-investment.

 

29/05/2007