Family Offices: The STEP Handbook for Advisers

Family Offices: The STEP Handbook for Advisers

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Product Details

ISBN-13: 9781909416024
Publisher: Globe Law And Business
Publication date: 06/15/2015
Edition description: First Edition
Pages: 300
Sales rank: 648,450
Product dimensions: 6.30(w) x 9.30(h) x 1.20(d)

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Family Offices

The STEP Handbook for Advisers


By Clare Archer

Globe Law and Business Ltd

Copyright © 2015 Globe Business Publishing Ltd
All rights reserved.
ISBN: 978-1-909416-02-4



CHAPTER 1

What is a family office?

Ian Macdonald Wright, Johnston & McKenzie LLP Mark McMullen Smith & Williamson LLP


1. Setting the scene

At its simplest, a family office is the structure used by a family to manage the business of the family. On that basis, every family has a family office and, although family offices are normally thought of as the preserve of wealthy families because of the resources required to manage a complex family's wealth and the costs involved, it is instructive to introduce the concept by looking at how the management of any family's affairs might develop as its wealth grows and the numbers of family members and generations increase.

At first a family office is quite simple and is usually called 'Mum and Dad'. The parents will typically set the family's attitude and values on wealth, risk and investment allocation and will select advisers to help with technical structures. If Mum and Dad are not able to deal with all the administration themselves (often because they are too busy running the family business that is generating the wealth in the first place), they will usually use the resources of the business itself or delegate it to a trusted adviser.

Such early-stage family offices tend to grow in an unplanned way without the family having a deliberate objective for the family office or a shared understanding of what it is intended to achieve. In due course, one or more of three things will happen and force the family to consider a more structured way forward:

• The family wealth will grow beyond the ability and capacity of the people involved to manage it.

• Mum and Dad will grow older and less able to manage the family's assets directly and the next generation will want and need to become involved.

• Undue mixing of family and business matters will distract those working for the business or its advisers from what should be their primary focus – the business on which the family's wealth is based.


At this point, either as part of their estate planning strategy or through their wills on death, parents often simply divide the family's assets into pots of roughly equal value and transfer these to family members. The next generation then creates its own individual family offices. This approach has, however, several limitations:

• Some assets such as land, property, valuable collections and shares in the family business itself are not easily divisible, so the family members may need to remain connected with each other through shared ownership of these assets.

• The family might want to remain connected through shared ownership of other assets that are used in common or have sentimental value, such as the family home or estate or a holiday home.

• Dividing assets into separate pots reduces the family's buying power and is likely to mean that each branch will lose potential value and incur higher costs compared to keeping the assets and management together.


If the family does decide to combine the management of some or all of its shared assets, whether by choice or because the nature of the assets effectively forces their hand, the family will need to think carefully about why they are doing this, what assets they are going to include and how the assets will be managed. We will look at this process later in this chapter but the structure that is now emerging is more recognisable as what is called a 'family office'.

Larger single family offices are likely to have a separate legal personality from the family, with all or most of the family's specialist advisers employed directly by the family office. Equally, however, a single family office may just be a place where the family administers its affairs, or it may be a network of employees and advisers in a number of different places who work together to run the business of the family.

One other point to note at this stage is that this type of family office will normally develop alongside the founding family's business, but the concept is just as valid if the family office is completely separate from the family business, if there is no longer a family business or indeed if there never was one.


2. Is there a common understanding of what a family office is?

It is easier to identify and agree on the definition of a family office (in the sense that most people now understand the term) when it has been created by and serves only one family. The first family offices with their own infrastructure and professional and administrative staff were created in the 19th century by very wealthy industrial and banking families, mainly in the US. The US provided us with a statutory definition of a family office when the Dodd-Frank Act of 2011 created a new exclusion under which family offices are not 'investment advisers' subject to the stringent compliance requirements of the Advisers Act.

In summary, Section 202(a)(11)(G)-1 of the Advisers Act now provides that a family office is a company that:

• has no clients other than family clients;

• is wholly owned by family clients and is exclusively controlled by one or more family members and/or family entities;

• does not hold itself out to the public as an investment adviser.


'Family clients' includes present and former family members and key employees; 'family entities' includes trusts, foundations and companies for the benefit of family members or for charitable purposes; 'family members' includes lineal descendants of up to 10 generations from a common ancestor and the spouses of those lineal descendants. Thus, the official definition of family office is a wide one but it clearly only encompasses family offices serving a single family.

This is important because some entities set up as single family offices later branched out into providing family offices for other families who could not afford or did not want to set up their own. These businesses became known as 'multi-family offices' and that model was then adopted by private and international banks, investment managers and professional firms who used their own skills, resources and compliance structures to offer multi-family offices to a wider range of wealthy families. But are all these multi-family offices actually true family offices at all? To help us answer this question, we need to consider what range of services a family office can provide.

It is generally recognised that family offices will offer most or all of the following services although which services are provided and by whom and the scope of each will vary considerably from family to family – headlines are set out below and the detailed services are listed in Appendix 1:

• investment strategy;

• financial and tax planning;

• record keeping and reporting;

• family succession and estate planning;

• trustee and company management;

• philanthropy;

• risk management;

• lifestyle (generally non-financial) services;

• family governance;

• family education.


A bank or investment manager may provide integrated investment management and reporting for all the members of a family but that is not enough to allow it to call itself a family office. Indeed some are now recognising this and have started using the title 'family investment office' which is a more accurate description of the service they provide – very valuable to the family but limited in scope.

Equally, many professional firms who now wrap up their services to families under the family office banner do not offer services that go beyond investment management and tax and estate planning. It is the non-financial services listed above which mark out a true multi-family office, particularly risk management and family governance and education, without which the family office will lack the necessary foundations.


3. Historical development

Although there is good contemporary research, little effective historical research has been undertaken into family offices. This may be because many single and multi-family offices kept their affairs to themselves, for the obvious reason of wishing to keep the affairs of their client families confidential, and it was not possible to conduct anonymous surveys so effectively in the past as it is now.

Accordingly, a detailed historical study is not feasible; however, some broad themes in the historical development of family offices are set out below.

The very early single family offices included Joseph and his team in Egypt, offices of certain Chinese and Japanese dynasties, the heads of prominent Roman houses and some crusaders' trustees.

More recently, as described above, the single family office emerged in the 19th century in America as a natural extension of the chairman's office in many major corporations, looking after the private and family affairs of the key shareholders and their families.

In Europe, the industrial, banking and landed estate giants gave birth to a similar array of single family offices, including those established by the Medici, Rothschild and Fleming families. The chairman's office again extended into the private side, and in the landed estates the estate office adopted the twin roles of running the estate and the owners' family financial affairs.

The multi-family office is widely believed to have originated from requests to single family offices for provision of their services to other families. Sometimes this was the result of a deliberate strategy and at other times it resulted from an unsolicited approach from, usually, a contact of a satisfied family member. The main benefit to the original family was a sharing of costs, while secondary benefits included economies of scale, greater resources and an increased breadth of expertise.

More recently a new breed of multi-family offices has emerged. These provide services on commercial terms to a number of unrelated families. Some have their beginnings in single family offices and others in private banks and trust companies. There are many well-known examples, including national and multi-national names.


4. Trusted adviser

Most ambitious advisers strive for the key status of 'trusted adviser'. This status is a natural role for someone in the family office to fulfil. The role itself has many facets, which justify a book on this subject alone, and indeed there are several of these including one leading text that is referred to below. However, the characteristics of trusted advisers in a family office context are briefly summarised in the following paragraphs.

In families without a family office, the trusted adviser is typically a lawyer, accountant, financial adviser, investment manager, family business expert or land agent.

In a family office scenario, an individual within the family office will usually adopt the trusted adviser role. Some suggest that a trusted adviser can be a corporate but the authors' view of a trusted adviser is that this is an interpersonal relationship, so it will be an individual in the family office who interacts with one or more individual clients.

This trusted adviser in a family office would typically: put the client first and make them feel important;

• be a person who understands business and also is worthy of the client's confidence;

• behave like a fiduciary;

• look to the very long term (certainly 10 years but perhaps up to 200 years forward);

• be discreet;

• have chemistry with the client, and relate to him or her;

• deliver reliably and with the highest quality;

• be independent;

• be rounded, well read, financially mature and able to talk around the issues;

• think about the client and be proactive;

• stand up to the client and, if he or she doesn't agree, offer another solution;

• have wisdom.


The trusted adviser should communicate by using these strategies:

• connecting effectively (ie by being a good listener and responding with insight);

• being available (eg providing a mobile and home telephone number);

• understanding if the client prefers the phone to e-mail;

• speaking to each client at least every month;

• returning e-mails and calling the same day;

• remembering clients' key issues;

• remembering clients' personal details, such as birthdays.


From the perspective of the family office itself, the trusted adviser should:

• excel at client care, including outside his/her own area;

• be commercially aware;

• exceed expectations;

• manage the relationship, including fees;

• share information;

• make sure the whole team (especially the key roles of the secretary and the front-of-house staff) cherish the relationship.


David Maister (a well-known adviser to professional services firms) Charles Green and Robert Galford wrote The Trusted Adviser, which was originally published in 2000 (an updated edition was published in 2002). This book provides a very insightful analysis into the attributes of a trusted adviser and the benefits to client relationships that result.

The book's thesis is that the development of trusted adviser status follows the progression of the depth and breadth of the adviser's role in the client relationship from technical adviser to trusted adviser. The level of trust is measured by a combination of credibility, reliability and intimacy as moderated by self-orientation (ie, is the adviser looking to maximise the benefit for the client or for himself?). This measurement takes the form of an equation that adds together credibility, reliability and intimacy and divides the sum by self-orientation.

There are risks for the family office in being a trusted adviser. These include:

• failure to perform to expectation;

• having the wrong person as trusted adviser;

• loss of client relationship (if the individual trusted adviser leaves).


However, the risks are usually outweighed by the benefits which include:

• additional work from the client;

• internal and external referrals;

• high level and quick communication;

• less pretence and a more honest relationship.


5. Single family offices

Family offices come in all shapes and sizes, just like families. They range from one-person advisers to large units. Structure and regulation are dealt with in other chapters.

In the United States, the Securities and Exchange Commission, in its notes accompanying the proposals to the Dodd-Frank Investment Advisers Act amendment mentioned above, commented that:

'Family offices' are entities established by wealthy families to manage their wealth, plan for their families' financial future, and provide other services to family members. Single family offices generally serve families with at least $100 million or more of investable assets. Industry observers have estimated that there are 2,500 to 3,000 single family offices managing more than $1.2 trillion in assets.


The single family office has, at least at the time of its commencement, a single family as its client. As the family grows, the single family office may find itself looking after many different family units, which usually have common ancestors. Eventually, as wealth is dissipated throughout the succeeding generations, the minor family branches may migrate to other advisers, unless new wealth can be generated, which often has the effect of binding the extended family together.

The market perception is that the number of single family offices worldwide, currently thought to be several thousand, will increase as new wealth is generated and as existing wealthy families explore the benefits that such an office can bring.

Although the Securities and Exchange Commission refers to $100m investable assets as a minimum for a single family office, other commentators believe that $30m is a more appropriate minimum.


6. Multi-family offices

As described above, multi-family offices have many different antecedents.

Multi-family offices have their own minimum criteria for joining, which is usually in the range of $5m to $250m of investable assets.

Their major distinguishing point is that they can offer an independent and holistic advisory service which gives their clients better risk management, governance, education and financial management than alternative providers, without a product push. In part this is supplied by the availability of greater resources and in part by the exposure of the multi-family office to more different and varied scenarios.

It is estimated that there are 150 multi-family offices in the United States and in total several hundred worldwide. The total appears to be growing, albeit at a slower pace than the number of single family offices.


7. Comparing single and multi-family offices

Each family will have its own unique set of circumstances (both financial and human) and its needs, aspirations, risk tolerance and ideas will differentiate that family from others.

Whether a family is best suited to a single family office, a multi-family office or to managing its own relationships with its different advisers will require careful thought and evaluation by the family as to how best its requirements can be met. There is no magic bullet or template providing a single solution.

A family considering setting up a single family office will usually draw up a business plan with professional help, review the feasibility of the plan and its projected outcomes and then decide the correct way forward. Examples of what might be included in a business plan are set out in Appendix 2. If it is to set up a single family office, the family would normally employ an expert in implementation in order to negotiate the complex demands, which include structuring, staffing, regulation and technology.


(Continues...)

Excerpted from Family Offices by Clare Archer. Copyright © 2015 Globe Business Publishing Ltd. Excerpted by permission of Globe Law and Business Ltd.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

What is a family office? 7

Wright, Johnston & McKenzie LLP Ian Macdonald

Smith & Williamson LLP Mark McMullen

Establishing the family office 21

Barbara R Hauser, LLC Barbara R Hauser

Choice of structures 29

Baker & McKenzie LLP Imogen Buchan-Smith Ashley Crossley

Recruitment and talent management strategies 43

The Rankin Group LLC MJ Rankin

Management of the family office 57

AH Loder Advisers Ltd Sandy Loder

Investment 81

SandAire Charles Peacock Alex Scott

Families working (well) with outside lawyers 95

Withers Bergman LLP Joe Field

An adviser's view - private banker 99

JPMorgan Chase NA Samy Dwek

JPMorgan Paul Knox

An adviser's view - accountant 103

Dixon Wilson Jonathan L Sutton

Family offices and technology: the challenge, approach and opportunity 107

Summitas William S Wyman

Family office risk management and insurance 117

Crystal & Company Linda Bourn

Family values, mission and vision and the family office 129

Tamarind Partners Inc Kirby Rosplock

Culture, communication and conflict 139

Familydr Limited Ian Marsh

The journey towards governance 153

Independent adviser Dennis T Jaffe

Family office governance 167

Independent family business adviser Håkan Hillerström

Withers Consulting Group Ken McCracken Amelia Renkert-Thomas

Philanthropy and the family: improving social equity and creating family legacies 179

Dana Philanthropy Gina M Pereira

The five challenges for wealth inheritors to develop a positive wealth identity 195

Independent adviser Dennis T Jaffe

The golden rucksack - insights from qualitative research among wealthy heirs 203

Guidato Family Office Raimund Kamp Marijke Kuijpers

Next generation wealth and the future of the world 223

Pervin Family Business Advisors Inc Aron Pervin

Nexus Global Youth Summit Jonah Wittkainper

The life cycle of the family office 237

Pitcairn Leslie C Voth

Part II

Australia 245

Drewery Consulting Pty Ltd Keith Drewery

Canada 261

Miller Thomson Mary Anne Bueschkens

Beard Winter LLP Lucinda E Main

The Gulf region 277

Barbara R Hauser LLC Barbara S Hauser

Hong Kong 289

Family Legacy Asia (HK) Limited Christian Stewart

India 307

Association of International Wealth Management of India Aditya Gadge

Israel 317

O Ephraim Multi Family Office Services Ori Ephraim

Aronson, Ronkin-Noor, Eyal Law Firm Lyat Eyal

Alon Kaplan Law Firm Alon Kaplan

Netherlands 337

Guidato Family Office Raimund Kamp Marijke Kuijpers

Russia 349

ALRUD Law Firm Maxim Alekseyev Kira Egorova

Switzerland 361

Baker & McKenzie, Zurich Robert Desax

Boston University School of Law Anne Gibson

Baker & McKenzie, Zurich Marnin Michaels

United Kingdom 371

Farrer & Co Grania Baird Marianne Kafena Alison Springett Sarah von Schmidt

United States 385

Independent adviser to families Mary K Duke

About the authors 399

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