Functions of a Family Office

A key challenge facing many ultra high net-worth (UHNW) families, particularly in today’s volatile environment, is how best to maintain, grow and pass on family wealth for future generations. This article touches on the role a ‘family office’ may play in this endeavour.

The characteristics and qualities that have served one generation well are not always found in future successive generations. Eventually, there will come a time when family leadership and perhaps entrepreneurialism must pass to the next generation.

For the canny patriarch or matriarch, a family office can provide an optimal succession planning and asset management/protection platform. The family office can shepherd family members towards achieving their dual goals of enhancing wealth from an investment perspective whilst also ensuring that wealth is not dissipated over future generations.

Why Create a Family Office?

There are large differences between families in terms of their size, age range, scale of wealth, geographical spread, extent and nature of business interests and their attitude towards risk, philanthropy and privacy. The family office concept provides families with the opportunity to create a bespoke platform to govern the investment and administration of family wealth for current and successive generations.

It allows a means of expressing and putting into action families’ core values and goals, which are embedded through education of family members and enhanced through good communication. Control, governance and communication mechanisms within the family office are critical, both to assist with decision making and in terms of how the family can work best with external advisers.

Functions of a Family Office

In essence, a family office fulfils four primary functions, these being:

1. the investment function;
2. the trustee role;
3. the administration role; and
4. the financial administration role.

The Investment Function

The investment management function is arguably the core service of most family offices. Without doubt, one of the most advantageous aspects of the investment function performed by a family office is the development of an investment strategy/policy that covers the wide variety of assets often held by UHNW families.

The unparalleled bank of information that a family office may hold on family members means that the family office is ideally placed to analyse the family’s needs and to determine the best asset allocation for both individual members and for the entire family.

Often the complicated investment needs of the family result in multiple investment managers being employed, which can lead to them being entrusted with a modest portion of the family’s wealth. The end result can be an overall asset and risk allocation that bears little resemblance to what a single investment manager would have recommended.

By using either its own in-house Chief Investment Officer (CIO) and investment team or outsourced consultants/advisors, the family office can evaluate each investment and determine whether it fits within the investment strategy guidelines and identify underperforming investments and asset classes that the portfolio is overweight in. In producing a consolidated evaluation of the total portfolio, recommendations and prompt decisions (retention, disposal or addition) can then be made regarding specific investments.

One of the major investment difficulties for a family office is that UHNW families tend to hold a broad range of assets which include both traditional liquid assets (i.e. equities, bonds, derivatives) and illiquid assets (i.e. multi-jurisdictional property, artwork, aircraft and yachts). The family office investment advisors are more aware of the importance of such non-traditional assets in the wealth of a family (perhaps those likely to be retained in the family for generations) and can model policy around such exposures as appropriate.

When selecting a new investment manager, the family office can greatly assist in this process by providing detailed investment criteria and an holistic view of the family’s global asset allocation as well as a rigorous and objective assessment of each managers key strengths.

Most large families will have short, medium and long-term investment plans, performance benchmarks and liquidity requirements. The family office is often responsible for the development of the investment policy and the continual monitoring of the investment performance around these practical considerations to ensure that financial targets are met.

The family office, however it is constituted, is intended to support the family’s desire to provide an objective and disciplined control mechanism over the family’s affairs (during the patriarch or matriarch’s lifetime and, to an extent, from beyond the grave) and to enhance family wealth over future generations. The dynamics of the family and the size of their wealth will determine whether the investment function of the family office is managed by a private bank, a wealth management boutique, a specialist arm of a trust company or an office specifically created by the family or a group of families.

The Trustee Role

Irrespective of whether the family structure requires the family office or members of it to act as a de facto trustee or not, in many circumstances the family office will fill this role. Together with the family, the trustee function of the office is responsible for several roles, including:

• the implementation and development of the family‘s core values’ statement, its ethos and objectives. The mission statement may provide the process by which the family’s wealth will pass down through the generations. In some circumstances it may set out the roles and responsibilities of each family member as well as the minimum levels of experience and educational qualifications required by a family member to be appointed onto a family board or council. As part of its mission statement, large wealthy families often create family councils or boards to provide a form of representative government for the family unit. The family council provides a means by which family members can interact in an orderly manner, and establishes the procedures by which any grievances are aired and dealt with;
•           educating the family members in good family governance, succession and wealth planning techniques and investment strategies; and in mentoring the younger generation to ensure that there is a suitable pool of family members to succeed retiring family members from any internal boards or councils;
• creating checks and balances to ensure that there are no abuses or potential abuses of control/authority; and
• setting out and developing the families’ philanthropic goals.

Within the trustee function, the office plays a significant role in communicating with the family. In fulfilling this function, the family office acts as the coordinator in organising family meetings, implementing changes to the wealth structure and in introducing new family members to various family boards or councils that may have been created as part of the governance structure.

In organising regular family meetings, the family office may enhance family harmony and minimise disputes and disharmony by ensuring that all the family members receive the same level of information and access to the same group of advisors. Such meetings can reinforce the family’s mission statement and goals to younger generations.

In many ways, this function is a cross between an investment gatekeeper, a social worker and a circus ringmaster. The family office should be the first port of call for all professional relationships, effectively acting as a lynch pin between the lawyers, accountants, investment managers and other advisors in any project management affecting the family.

The Administration Role

The family office counsels the wealthy entrepreneur and implements their decisions. To accomplish this, the office is typically led by an ‘homme d’affairs’ and staffed by a group of advisors that may include an investment manager/financial analyst, trust administrators, lawyers and accountants. Within the family office an individual will be appointed as the main point of contact for the family. They are also responsible for keeping the family informed and updated about various family office projects.

Without a doubt, the key to a successful family office is efficient administration. There are a multitude of ‘off the shelf’ or bespoke technological software packages that can provide the administration office with the IT platform to run the office. However, whatever IT platform is used, the administration team must be able to:

1. provide administrational support to the family as cost effectively and as simply as possible. As part of the administrative role the office must be able to provide the family members and trusted advisors with consolidated reporting, accounting facilities, key document storage and, above all, an encyclopaedic knowledge of the family’s affairs;
2. deal with routine issues that affect large, mobile global families, such as employment contracts for staff, immigration issues and visa applications. Effectively, a family office must be able to access the right professionals to assist them with every eventuality that may arise;
3. collate and store, both physically and electronically, key family documentation which may include the family mission statement and goals, records of internal family meetings, wills, property title deeds, trust and company documentation, accounts, tax returns, and CDD documents. In holding such documentation, family members are relieved of the administrational burden that attaches itself to such dynastic family structures;
4. in certain circumstances, provide a full blown concierge service whereby the office acts as PA to the family. Typically, such services will include booking and organising foreign travel, business appointments and social/charitable events;
5. administer any charitable function of the family. Family offices are often used in coordinating the family members’ charitable gifting. From a practical viewpoint, this can be to ensure that the gifts are made as tax efficiently as possible or, alternatively, to ensure that any publicity is balanced correctly between the family’s desire for discretion and the benefit of publicity for the charitable organisation; and
6. collate and process various reports, such as risk profile reports and consolidated investment reporting, with live feeds in from the various investment houses. For the UHNW family with possibly hundreds of millions of US dollars to invest, there is a pressing need to receive up-to-date reporting. The extreme volatility of the markets over the past 18 months has underlined for many family offices the importance of having a clear, up-to-date view of their market exposure and structure risk at all times.

The Financial Administration Role

The family office will be expected to co-ordinate the investment allocation and investment type, i.e. distributor or non-distributor funds, with any tax advice that may have been given. The family office can play a pivotal role in determining the form and frequency of the investment report. Determining the layout of the investment reporting not only makes it easier for the family office to produce consolidated investment reports, it makes it easier for account preparation and the filing of any tax returns.

UHNW families often attract interest from people who are vying for their time and, ultimately, for access to their wealth. The family office often acts as the buffer that insulates family members from such unsolicited attention. However, a fine judgement needs to be made to ensure that good investment or business opportunities are not dismissed out of hand.

The family office was once the preserve of only a few UHNW global families, but due to the rise in popularity of multi-family offices their numbers have increased dramatically over the last two decades and they are now a useful planning platform for many families. Irrespective of the type of family office, single or multi, the ultimate goal of a well-run office is to enhance and simplify the family members lives whilst concurrently increasing their global wealth and reducing family discord.

Recent Changes Affecting Wealth Management in Jersey

Many families and their advisors are looking at fresh ways to administer and control assets through new structuring vehicles in low-taxed, secure and well-managed offshore jurisdictions such as Jersey.

To add to its fleet of wealth structuring vehicles, Jersey has recently introduced new foundation legislation. Foundations now sit alongside existing vehicles such as companies, trusts and limited partnerships for use in financial planning and private wealth management strategies. For those clients from civil law jurisdictions, or jurisdictions where the concept of trusts is alien to them, Jersey foundations can provide a viable alternative in a white-listed jurisdiction.

In the Mubarak Case, the Royal Court of Jersey’s clarification of its jurisdiction in relation to how Jersey trusts interact with the orders and judgments of the English Family Courts in matrimonial proceedings has strengthened confidence in Jersey’s position in the offshore world. Whilst it is difficult to quantify the impact on new business levels, new clients are certainly less concerned about asset protection in Jersey than they had been before the ruling.

Jersey’s up-to-date legislation relating to limited partnerships, together with the UK legislative changes to the way in which UK domestic trusts are taxed, has seen the previously little-used vehicle of family limited partnerships become a hot topic for use as a vehicle not only for wealth management structures but also for commercial use.

Finally, as a jurisdiction, Jersey has, along with the rest of the offshore world, come under increasing scrutiny as governments and global organisations such as the G20 focus their attention on offshore jurisdictions.

Despite adverse publicity in the press, Jersey has been established as the highest rated offshore international finance centre in the competitive ranking Global Financial Centres Index, published by the City of London. In the International Monetary Fund’s assessment, Jersey ranked higher than the UK on standards of regulation and supervision.

Looking to the future, Jersey, with the amendments to the company’s law, the introduction of foundations and its wealth of expertise in administering sophisticated offshore structures, is well placed to remain an attractive jurisdiction from which to service wealthy families.

Ogier
British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey, London, Luxembourg, Shanghai and Tokyo.