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Setting up a Family Office

Paul Douglas
Managing Director and Head of New Business Development, Investec Trust Switzerland


In an increasingly complex world of escalating costs, taxes, regulation, economic turbulence and litigation, family offices must adopt a more progressive approach to corporate governance and risk management to preserve their raison d’être.

Instilling corporate governance through the right structures

The world’s financial position is becoming more precarious. The failure to ring fence high-risk assets can cause contamination of other assets.

For example, falling values and tenancy defaults have triggered rigorous enforcement by some banks of loan covenants, resulting in the frequently inopportune forced sale of the assets pledged by way of security.

This is particularly true if basic precautions have not been taken, such as ensuring that assets are ring fenced structurally, for example using trusts and special purpose companies.

To the extent negotiable with a particular lender, limited recourse financing arrangements are prudent and preferable, whereas cross-collateralisation and guarantees should be avoided. However this alone will not necessarily protect the assets.

Governance within a family

Governance should also extend to within the family itself.

Family disputes commonly arise over the distribution of the wealth, investment selection, whether spouses of the bloodline are to be included in the business, etc.

The need for a family charter or written agreement between family members has never been more important. For example, this is often overlooked where a dominant entrepreneur has failed to consider the devolution of wealth after his or her demise.

Regulatory requirements – Making sure you are a step ahead

Governmental authorities are asking institutions and family offices to supply information on their clients. Part of the rationale for this is the need to capture greater tax revenues – which will in turn reduce state deficits.

Should the economic situation regress further, this pressure will only increase. Whilst tax compliance is essential, the need to maintain financial privacy must not be overlooked.

A well-advised ownership structure can meet both requirements. Similarly, the regulatory developments have had a marked impact on family offices.

Staying on top of these changes to avoid financial (or worse) penalties must now be considered as part of a day-to-day risk management strategy.

Recruiting the right people to manage a family office

The family office is typically born out of a wish to manage the assets of the individual or family using independent specialists who are employed directly by the family.

This in itself can pose certain risks. Retaining skilled personnel is commonly seen as the greatest challenge facing single family offices as individuals can easily feel disconnected from the rapidly changing investment environment.

Further, it is questionable whether their reporting is truly independent, given the inherent conflict of interest.

Having a team and the resources available comes with increasing costs. It is estimated that the cost of establishing a family office is in excess of $2m (Reference: book by Schwass, Hillerstrom, Kuck & Lief ‘Wise Wealth’, 2011 published by Palgrave Macmillan).

Finding the right mix of correctly skilled staff, modern infrastructure, geographic location and effective outsourcing arrangements can be a challenge.

Family offices in a globalised world

Nowadays with families located around the globe, tax considerations are not limited to merely creating efficiencies; one also has to grapple with multi-jurisdictional ramifications and instances where relief under Double Taxation Agreements (DTAs) is not available.

Family offices need to co-ordinate the legislative requirements of all relevant countries so that the overall burden and reporting obligations of the family are minimised to the extent allowed by law.

In an environment where interest rates are so low, the cost of overlooking this very important aspect can quickly exceed the investment returns.

As a result, some families are changing their “business model” from in-house, single family office to external multi-family and virtual family offices. For families with net wealth of between $30m-400m a multi-family office approach may, at the very least, be more cost effective.

A choice between Family Office and Trusts

Selecting the right multi or virtual family office also comes with its own challenges. Finding a provider who recognizes the risks and adequately provides for them is essential.

The provider must understand the particular nuances and needs of the family and must not adopt a modular volume approach to their business. They must be able to be agile and proactive in the management of the affairs of the family. They must have a network of professional advisors, investment managers and concierge agents to provide independent advice and service. Most importantly they must understand the fiduciary responsibilities and the governance issues.

Families are recognizing that certain trustee companies are ideally placed to offer such family office services. After all, trusts and private trust companies by their very nature provide an excellent framework within which all these issues can be addressed.

However, finding the right trustee to take the helm is no simple task. It is critical that the trustee has the appropriate infrastructure to provide these enhanced services and is familiar with the unique requirements of a family office in order to help the family capably navigate their wealth throughout its voyage notwithstanding generational changes and hazards.

Those family offices that implement a more independent, professional and informed approach to such challenges will be the ones to emerge from the current financial crisis with the interests of the family safeguarded.

A robust corporate governance regime needs to be adopted in the administration of such vehicles.

This article is for general guidance only and should not be relied up as constituting advice suitable to your particular circumstances. You should seek your own independent advice from a suitable professional before taking any action following this article.