Family Offices And Wealth Management In Switzerland

Switzerland is a competitive financial centre. It can rely on good infrastructure, stable growth, a solid domestic demand and a low public debt. Its currency (Swiss franc) is also considered as a safe-haven currency in times of crisis. For all those reasons, Switzerland has always been a prime destination for wealthy families and for family offices, which can also rely on a close network of qualified legal or tax advisors, private banks and wealth managers.

In recent years family offices have become increasingly active and important players in the deals landscape. According to a study, the total number of family office-backed real estate and direct investments within and into Europe in 2021 was 934, surpassing the previous record of 901 in 2019. The value of disclosed deals in 2021 involving family-owned businesses reached US$227.6bn. An explanation is that, whereas owning families have traditionally always wished to retain and pass their businesses to the next generation, the number of disposal during the year 2021 shows that selling family-owned businesses (even to other family-owned companies), for the right price, has become a more realistic option[i].

Such sales create opportunities and the creation of family offices becomes necessary to manage those new investment opportunities and assets.

Legal Structure And Types Of Family Offices

Swiss family offices are not subject to regulations, unless they are active in regulated fields (such as collective investment schemes). They are generally structured as a limited liability company and act either as multi-family offices (which serve a certain number of wealthy families) or as single-family offices (which serve a single family).

Single-family offices: Most Swiss billionaires and multi-billionaires have opted for a single-family office, which they often create at the time they sell the original business and therefore create a large amount of cash that needs to be invested and managed. However, several Swiss wealthy families, who still own the business having originated the wealth, have already created their single-family office. As the costs of creating a single-family office are high, only families owning assets yielding strong cash returns and in the magnitude of a billion or several billions should opt/have opted for this solution.

Typically a single-family office is formed as an independent company limited by shares and owned by some of the members of the family, employing qualified people to manage the family's assets. In practice, we see the creation of such family offices evolving over time as follows:

• The family usually forms a small entity as an emanation of their primary business. At the beginning, the staffing and the missions of the newly formed family office are limited to managing the non-business assets. Most of its activities are dedicated to facilitating the life of the family with missions such as tax compliance, payment traffic, managing houses and leisure assets (yachts, planes etc). At this stage, the asset allocation and investment management tasks are usually very limited.

 

• In the second phase, which happens at the time of the sale of the original business or when the business, having sufficiently grown, starts yielding dividends, the family office evolves to become the custodian, the asset allocator and possibly the asset manager of the financial assets or the entrepreneurial assets of the family, which are not part of the original business. These new functions require very specialised professional skills, which are not easy to find in Switzerland (like in most other countries, except for UK and USA). Therefore, in the second phase, we observe in Switzerland mid-size family offices, which use outsourced skills (such as Outsourced Chief Investment Officer (OCIO) services and independent financial advisors).

 

• Finally, when the external wealth of a family has grown to a higher level (starting in our experience between four and five billion), we see in Switzerland fully fledged family offices, which are capable of rendering all services the family may need: (i) private services (tax compliance, management of day to day life, leisure assets etc); (ii) asset allocation services (with a CIO and a team); (iii) best execution of investments and di-vestments (M&A groups etc); (iv) management of investments; and (v) a centralised treasury for the family. Typically, at that level of sophistication, the family office will be made of a Swiss holding company owned by the family and several subsidiaries located in different countries, with a strong US presence in most cases (because of the need to have access to the US investment world).

Multi-family offices: Multi-family offices, independently owned, are present in Switzerland too. While families generally prefer to own their family office, many of them have opted for becoming clients of a multi-family office. This often happens for cost reasons (because a single family office is very expensive) or for a lack of interest and appetite within the family for dealing with financial matters. Some Swiss banks claim to render family office services but they indeed never offer the full scope of services (in particular, the private life support services). Therefore, the most active and successful family offices are business entities, independently owned, which offer the full scope of family office services to numerous and diversified clients. These entities are particularly efficient for clients who have assets in excess of 100 million but less than a billion or two, a segment where Swiss banks are not very present (as family office not as banks) and where the creation of a fully-fledged single-family office makes little sense.

Activities And Perspectives Of A Swiss Family Office

As per UBS Global Family Office Report 2022, Swiss family offices have a strong home basis, with approximately 60 per cent of their investments in Western Europe and 28 per cent in the US. In terms of source of return, private equity stands out as the only asset class where the number of family offices making allocation has risen steadily year after year. It represents a core class asset for 89 per cent of Swiss family offices. A favoured approach is the direct investment in private businesses (to create income) and the spreading of the risks through funds (42 per cent of family offices are following this strategy)[ii].

Family offices usually have to liaise with professional service providers such as banks, insurance companies, law firms and accountants to receive good advice. Most family offices invest funds on behalf of the family members but there is a trend away from the family office providing discretionary investment services in traded securities towards providing advice on fund management services. They might act as a fund of fund or only advise on the selection of third party fund managers. As per PwC Family Office Deals Study 2022, the year 2022 marked a turning point with family office-backed transactions accounting for 10 per cent of the worldwide deals market, with the most favoured sectors being real estate, healthcare and biotech. Therefore, will the family offices become businesses themselves?[iii] If it is a risk for a family office to evolve in a field that is better suited for other providers, their organisation could also reach a level where it can develop its own commercial value. It was recently noted[iv] that family offices could become a competitive force in private equity, doing their own deals. Their main advantages are their possibility to work with much longer time horizons and drawing on deeper expertise, as well as a long-term reputation (not limited by the duration of the funds).

Wealth And Succession Planning Structures In Switzerland

In Switzerland like in most other countries, wealth planning typically includes the following activities:

Marriage contracts: In the case of marriage, attention must be given to the matrimonial regime chosen by the spouses, as the default regime is the participation in acquired property and not the separation of property, usually preferred by wealthy couples. The election of regime is set out in a marriage agreement (notarised), which more generally deals with the attribution of wealth in case of divorce or death. Pre-nuptial agreements aiming at ruling the consequences of a possible divorce are recommended but not automatically recognised by Swiss courts.

Wills and “pacte successoraux”: Long term wealth planning necessarily implies the execution of a will and/or a “pacte successoral” (which is a binding agreement between the deceased and his heirs), possibly associated with lifetime gifts depending on the situation. The limits of the wills are the forced heirship rules, which give the descendants and the spouse a protection of their minimal share. A revision of Swiss law will enter into force on 1 January 2023. It will reduce the reserve of the descendants to half their statutory succession right (instead of three quarters) and remove the forced heirship share of the parents.

Gift and inheritance taxes are levied at cantonal and communal level, at the domicile of the deceased/donor. However, in direct line and between spouses, inheritance and gift taxes are at zero in most cantons.

Power of attorney: It is now common practice for wealthy people to execute a long lasting power of attorney for the case of incapacitation. It is foreseen in Swiss law and offers a good protection in case of incapacitation.

Trusts: Even though there is no Swiss domestic law on trusts (it is currently being discussed before Swiss Parliament), Swiss courts must recognise a trust validly incorporated under foreign legislation in application of the Hague Trusts Convention (since 2007). As a result, any settlor, irrespective of his residence, may establish a foreign trust. The tax treatment of trusts in Switzerland is however complex and varies depending on the type of trust. In any case, the attribution of assets to a trust during the lifetime of the settlor allows him to define in advance who will inherit of his/her assets and to set up a structured governance over the assets for generations to come.

Charitable foundations: Swiss tax law has a favourable tax regime under which charitable foundations can be exempted of taxes at federal and cantonal levels. Furthermore, attributions to such charitable foundations are tax exempt.

Conclusion

Switzerland is a privileged destination for wealthy families and therefore has a solid basis already well-implemented for family offices. As in most countries, the election of a family office type solution is strongly related to the size of the assets under management. Single family offices rendering the full scope of services are usually reserved to families owning assets of several billion (usually more than five billion). For families owing assets of a less important size, there are a variety of solutions oscillating between multi-family offices and single-family offices with outsourced service models.

 

Footnotes:

[i]   As per PwC Family Office Deals Study 2022 and our own experience (all paragraph).

[ii]  As per UBS Global Family Office Report 2022 (all following paragraph).

[iii] Question asked by Iraj Isahani and Carl Sjöström in their article "Single-family offices in the 21st century – remaining fit for purpose", published in March 2021 – www.globelawandbusiness.com.

[iv] Cf. Footnote n°3.