Weathering the storm

Thursday, 01 April 2010
How the economic crisis of 2008/9 has affected family offices.

It almost goes without saying that 2009 was, from an economic perspective, something of an eventful year. This is equally true for the world’s richest families, many of whom have decided to reassess their established arrangements as confidence in their tax status, structures and investments has been thrown into stark relief by the recent financial crisis. In October 2009, the Family Office Channel1 undertook a survey of over 100 family offices, private banks and wealth management professionals, examining the experiences of the world’s wealthiest families since the start of the recession. The results are indicative of a significant shift in both the priorities and mindsets of these families, as they continue to weather the financial storm.

Systemic risk

One key consequence of the financial crisis has been the erosion of confidence. The combination of poor investment performance together with the fallout from the Madoff and Stanford frauds quickly led to widespread concern over the reliability of established wealth management relationships. 92.1 per cent of respondents to the survey reported that their level of trust in institutions and investment advisors has been affected, with the well-documented frauds being viewed as systematic failings. As one respondent put it: ‘so many large players have opined on the appropriateness of Madoff and been proven wrong, it has hurt the sector’s overall credibility.’

For the private client advisor, this means that many wealthy families are now keen to adopt a more hands-on role in their decision making. They also want to see evidence that their advisors share their risks, so private wealth management firms with, as one advisor puts it, more ‘skin in the game’, may well be viewed more favourably at this time.

Tax investigations

Governments on both sides of the Atlantic have focussed their attention on addressing what they consider as tax evasion in recent months. A US Senate subcommittee sent shockwaves through the wealth management industry in July 2008 when it released a report highlighting that LGT, a bank owned by the Liechtenstein royal family, ‘fostered a culture of secrecy and deception’, whilst the world’s largest wealth manager, UBS AG, was deemed to have ‘opened thousands of accounts in Switzerland that are beneficially owned by US clients, hold billions of dollars in assets and have not been reported to US tax authorities.’

In the wake of declining tax revenues, governments have been particularly keen to ensure that all of those who had, even unwittingly, underpaid taxes were brought to account. Various countries (including the UK, US and Italy) each introduced tax amnesties that effectively provided the last chance for those with undeclared tax liabilities to come forward and receive a degree of lenient treatment. According to the survey, over 50 per cent of wealthy families across the globe have been prompted to review their tax position by these events.

A new wealth management landscape

The wealth management landscape has changed significantly in recent months. Faith in established structures and arrangements has declined dramatically, with the emphasis now very much on transparency, independence and the development of long-term relationships.

Both single and multi-family offices may be well placed to capitalise on this change in approach. Family offices can offer the benefits of a stable long-term relationship and a more responsive, tailored service, whilst allowing the families themselves to be involved to a greater or lesser degree as they wish. However, Family Office Channel research demonstrates that family offices are still somewhat hampered by a number of perceived weaknesses. In particular, the concentration of information within a family office, the related concerns over the confidentiality of such information (especially in a world where the finances of wealthy families are ever more tightly scrutinised) and the running costs (particularly of a single-family office), which may be so high as to erode potential returns completely.

A new future?

The financial and wealth management world has undoubtedly been transformed by the global recession, with wealthy families becoming increasingly concerned with the credibility of global financial systems and institutions. As the majority of such families look more closely at their existing arrangements, family offices (and in particular multi-family offices) have seen a range of opportunities opening up as people begin to question their own reliance on large corporate wealth managers. For those family offices seeking to expand their offering and capture a wider section of the wealth management market, a continued focus on addressing the negative perceptions of the family office model itself is key, and is something that the information and advice available through initiatives such as the Family Office Channel may help to achieve.

  • 1A new, not-for-profit online information resource supported by 100 international partners from leading organisations, such as Withers Worldwide.
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Sarah Cormack, Patricia Milner

Sarah Cormack TEP is a Partner, International Wealth Planning. Patricia Milner TEP is a Partner, Family and Business Planning and Head of Family Office Group at Withers Worldwide.

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