The term ‘family office’ has become a label for the management of a client’s affairs. However, it’s not an entirely helpful expression. There are many different interpretations of what it may mean, depending on whom you speak to. Moreover, some organisations that are described as family offices can be flawed, in that they may not provide the expected clarity, efficiency and cost-effective approach to the client’s affairs.
In the wealth management industry, a family office may take on a range of functions, whether a company is established to look after the assets of one individual in a family or a multi-family office exists to provide a service to more than one client. Banks and wealth management companies have also set up family office divisions to provide strategic investment allocation or investment advisory and management services.
Trust practitioners and the fiduciary sector sit somewhere alongside these. Trustees are not investment managers, legal or tax advisors: their role is to be aware of all of these specialisms and work effectively with these third parties. At one end of the spectrum the fiduciary provides trustee and administration services for a trust structure directly to an individual and their family while liaising with the respective advisors, probably on a less complicated and smaller value basis. Furthermore, the fiduciary will set great store by building knowledge and awareness of the family, and maintaining and developing the relationship for the genuine benefit of the beneficiaries.
The fiduciary taking up the middle ground provides trustee and administration services to an ultra-high-net-worth individual, typically with a range of international assets or investments. They will have a primary household that needs running, as well as property elsewhere, and possibly their own private office or business back in another country. They are likely to have a personal assistant (PA) who administers all their affairs. The fiduciary will offer an extended service, performing a pivotal role in liaising with all other advisors and facilitating action. For example, they may assist the PA and help facilitate concierge-style tasks, such as recruiting household staff, making visa applications or chartering flights and other facilities.
On the asset
Whether in or outside the trust structure, the fiduciary may facilitate the appointment of specialist legal, tax or investment advisors, lending arrangements with banks, acquiring assets and liaising with the advisors on the overall asset allocation. These functions may fall outside ordinary administration and are evidence of the enhanced trusted relationship role the trustee plays and how important they become to the overall family and business lives of the client.
The other end of the spectrum is where the client, their family, assets and investments are of a sufficient value and complexity, and likely to be of an international nature, to warrant the establishment of a dedicated private family office. This can be as small as a few key individuals or as large as 30 people or more, established in a jurisdiction of their choice.
Coordination and reporting
The family office is the central coordination and reporting for the family’s entire personal and business affairs. Typically headed up the client’s trusted advisor or personal representative, it undertakes all concierge-style and personal duties for the family members as well as being responsible for looking after all the personal assets and toys, such as houses, aircraft and superyachts. The family office can involve dealing with various areas – notably the investment wealth management and asset allocation. It can be responsible for the overall investment strategy, asset allocation and appointment of investment advisors or managers, or in some cases be the investment advisors or managers themselves. This covers a wide range of investments such as commercial property, property development, hedge funds, private equity and bond portfolios, as well as actual businesses or the family business.
The fiduciary liaises closely with the client, their personal representative and the family office, and is involved so far as any assets fall within the trust structure they administer. In addition, they liaise with other parties such as legal and tax advisors; proactivity and willingness can often lead to this role being extended to a wider mandate, as stated in the previous scenarios above.
While the role of the fiduciary is that of an external service provider, like a lawyer or investment manager, it is also able to work in partnership with the family office and become part of the inner circle – of greater value than a standard service provider. For example, the investment advisor in the family office should focus on strategic asset allocation; they should not do all the administration and reporting, since that is the role of the fiduciary, bringing practical, commercial and knowledgeable expertise to the table.
Perception versus reality
There’s a perception that family offices are organised and structured, but the reality can be different simply because of the way things have evolved. In some cases the ultimate client or family office may struggle to be fully aware of all that is owned and where or how it is held. Furthermore, there can be ineffective reporting to the family office and the client may not benefit from the structures in place as much as they could.
The family head, or principal, of a family office may have been involved in business for many years and their arrangements may have become complex, particularly where cross-border transactions are involved. Here there is an opportunity for the fiduciary to add value for the direct benefit of the family and the family office.
The family head, from the Middle East for example, receives numerous invitations and opportunities to become involved in diverse global business opportunities and investments. Historically, each time an investment is made it is likely to have been through a corporate structure, so there are many assets and investments all over the world held directly in the family head’s name through banks and custodians or each in a different company, potentially in different jurisdictions administered by different service providers. Over time, with so many parties involved, it can be difficult to determine exactly what the family owns and to report effectively on it.
By reviewing the above, fiduciaries are just one of many service providers. They can take on the role of coordinator and facilitator and be responsible for getting the client’s house in order. This does not mean running all the structures but collating everything under one umbrella or trust structure, thus allowing for an overview of the full picture, common and clear reporting across the portfolio, efficient administration and, ultimately, cost savings and added value for the client.
In this way it is possible to create a matrix of different types of assets and jurisdictions and to create a trust structure chart, reflecting underlying holding entities with appropriate groupings such as personal assets, commercial, residential and development property, hedge funds, business interests and so on, ensuring that each area is structured correctly, and administered and reported efficiently. Some clients may have hundreds of investments in different structures across many different banks, custodians and jurisdictions; it simplifies things to consolidate, where appropriate, from a jurisdictional, tax and legal perspective. The cost savings, by removing unnecessary layers that have accumulated over the years, can be phenomenal.
By thinking, rather than processing, and working in partnership with a family’s own private office, the trustee can become less of a service provider and more of a partner at the table. This is achieved through an active relationship and high-level involvement, based on experience that can be brought to the table, together with excellent technical administration that challenges the way things are done. This adds value through the decisions made and expertise provided, and also by introducing cost, administration and time efficiencies.
Catharine Bell outlines how to determine whether a family office is needed.
- Costs: If a family is spending a lot through multiple service providers then it makes sense to streamline this to a single coordinating entity.
- Confidentiality: A family office can help maintain a family’s confidentiality with proper procedures (e.g. confidentiality arrangements with staff).
- Independence: The ultra-wealthy almost always require advice from financial professionals who are remunerated through financial product sale and therefore have a conflict of interest. In-house professionals by definition have no such conflicts when reviewing financial performance and making recommendations, although they can become entrenched in their views. Therefore the monitoring, review and, where necessary, refreshment of key personnel is important.
- Integration of functions: If a family has or wishes to set up complex trusts and company structures with no one point of reference or reporting, a family office should be considered to serve as one centralised administrative portal with regular reporting to family members. This is particularly important for families with best practice family and corporate governance systems and policies in their business and wealth structures that need to be run properly.
- Multi-generational planning: If a family has dynastic goals, a family office is crucial. The office can form a centralised hub of information disseminating a family’s aims or culture to ensuing generations in a financially efficient way and helping to fulfil the purposes of the dynastic structure. The family office can also act as a databank, storing records of the achievements, experiences, events and recommendations of family members. It can also organise an annual family meeting. This all helps to promote the collective responsibility and cohesion of the family in relation to the management of the family wealth, which helps avoid the emotional and financial cost of family conflict.
- International connections: International elements add another layer of complication and demand further coordination between family members and structures.
- Rapid decision-making: A family can often speed up decision-making and implementation processes for significant and time-sensitive family decisions (such as when to buy or sell a particular investment) through the centralised forum and logistical capacity of a family office.
- Jurisdiction: Thought should be given to the parameters of a family office’s proposed activities and the jurisdiction(s) from where it will carry out such activities from a tax and regulatory perspective.
- Structure, ownership and funding: Thought should also be given to how the family office would be structured and owned (particularly from a succession, control, confidentiality and tax perspective), as well as to how it would be funded.
About the author: Catharine Bell TEP is a Private Capital Partner at Lawrence Graham LLP in London.
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