The term ‘family office’ has been part of the vernacular of international wealth advisers for several generations. However, it has only recently started to be used noticeably in a New Zealand context. It is not a term of art, can mean different things to different people, and is often misunderstood and misused.
To some extent, all wealthy families in New Zealand have a platform to manage and administer the property and activities of family members. In some cases, the platform will be managed and administered by family members and in other cases external functionaries such as employees of the family business, bankers, book keepers, accountants, lawyers, executive assistants, financial advisers and trustees will have defined roles to play in the system.
These types of arrangements, while essential to the preservation and enhancement of private wealth in New Zealand, are not family offices in the sense generally used in more mature private wealth markets such as the United States, Europe and the United Kingdom.
There is much literature available about family offices in a global context. However, the New Zealand private wealth sector is nascent and operates in a quite different eco-system to other developed countries. It is also changing rapidly both in terms of an increasing size and scale and the way in which the market is being serviced and wealth is being structured. New Zealand is also very different to many other developed countries in that – at least for the time being – capital is not typically subject to taxation on gains made, and there are no wealth taxes or inheritance taxes.
Advising wealthy families is a niche specialism in an ever-changing and complicated legal, regulatory and fiscal environment. It requires technical skills and experience that are not widely available in New Zealand.
Types Of Family Office In New Zealand
The main family office archetypes familiar to global readers are also present in New Zealand:
There are various sub-categories of the SFO. These are far more common in New Zealand and include:
The family offices that exist in New Zealand are most commonly either embedded family offices or virtual family offices.
There are very few pure SFOs in New Zealand and they typically maintain very low public profiles. This is perhaps because historically New Zealand was a very egalitarian society where it was considered unedifying to celebrate and promote success, let alone wealth. Arguably, that is changing but it remains part of New Zealand’s cultural identity.
There are a few family office service providers and networks in New Zealand, some of which are within the major banks or connected to organisations that run from Australia, Asia or the United Kingdom. There are very few genuine MFOs in New Zealand and genuine expertise in this regard often needs to be procured from Australia or further afield.
The family office advisory sector in New Zealand is also very nascent and largely influenced by advisors who have global experience.
Why Have A Family Office?
There are many reasons why an individual or family in New Zealand may consider setting up a family office. These include:
What Does A Typical New Zealand Family Office Do?
A family office can provide its clients with a broad range of different services. Family offices typically deal with asset management, family governance, financial education, philanthropy, and succession planning.
As a family’s wealth grows, the family office may become involved in lifestyle management. In particular, assets such as holiday homes, farms, horses, art, boats and even aircraft may become the responsibility of the family office. Family members may also use the family office to arrange travel, pay tuition fees and otherwise act as an executive assistant.
Arguably, the two most important functions of a family office are wealth management and succession planning.
In a New Zealand context a family with a net worth of NZ$100 million may be able to establish an SFO of some type.[i] Families with a net worth of NZ$50 million may be best served by joining an MFO or operating an embedded family office or a virtual family office. Other aspiring families can procure certain aspects of a family office arrangement from a third party (e.g., a bank, trust company, law firm or accounting firm) with experience and expertise in advising wealthy families. In due course those families may transition to an SFO or MFO structure.
In all cases, many of the principles and concepts explained in this article will still be relevant and applicable, albeit the level of investment by the family in advice, infrastructure (physical and legal) and process should be tailored accordingly.
Many families and advisers in New Zealand are cost conscious and mistakenly view the family office as a cost centre. This perspective overlooks the opportunity cost or ‘value leakage’. The risk of value leakage increases as more assets are acquired and especially where the family is relying on third parties to manage those assets. Value leakage can occur at all stages of the family supply chain – from the operating business (e.g., leasing arrangements, asset financing and legal and accounting fees) to lifestyle assets (e.g., berthage, fuel procurement and insurance) to real estate (e.g., property management fees) to financial assets (e.g., treasury, custodian, management and brokerage fees). A well-structured, professionally managed family office can more than cover its overhead costs by being a price setter rather than a price taker, negotiating preferential rates with vendors and monitoring expenditure in a way that most families would not normally have the systems and processes to do.
Traditional Wealth Planning In New Zealand
A unique aspect of the New Zealand private wealth sector is the lack of independent governance of the structures that hold family wealth. In many cases this will be a family trust which is being governed and administered as if it is the personal property of the people who set it up. There is often very little (if any) process to support the structure. In many cases people have overestimated the level of risk to their private wealth and there is too much structure for the type and value of assets held and the needs of the family.
Globally, there is an entire industry dedicated to the independent governance of private wealth. However, in New Zealand advisers (erroneously) tend to conflate the provision of two very distinct functions: professional advice and fiduciary services.
In each case the providers of those services require different skills and have duties which are owed to different classes of people. As the value of the New Zealand private wealth sector has grown exponentially over the past 30 years due to underlying asset inflation, this approach is not working as effectively for many wealthy families and opportunities to aggregate and create inter-generational family wealth are being compromised. A problem is that there are very few qualified, regulated and experienced fiduciary service providers in the New Zealand market. Until that situation changes, this problem is unlikely to be properly resolved.
Historically, in New Zealand this peculiar way of doing things was probably of only academic relevance, given that the size of the private wealth sector is modest in global terms and the interests of the beneficiaries and the trustees were generally aligned while the second generation was young and uninformed. However, the traditional approach to asset planning in New Zealand is starting to present issues. This can have a catastrophic effect on family wealth, wellbeing and relationships. Furthermore, families are now more likely to be blended and living across borders, creating additional complexities (such as reporting under the FATCA and CRS global tax information exchange regimes).
Family offices are emerging as the last outpost of private capital in the world. Increasing numbers of wealthy families around the world are setting up family offices. This trend is making its way to New Zealand where the private wealth sector is growing exponentially due to underlying asset inflation, foreign investment, migration, and (at least for now) a relatively benign fiscal environment.
Some families are disintermediating third-party service providers by performing many of the roles traditionally fulfilled by lawyers, bankers, investment managers, property managers, travel agents, accountants, quantity surveyors, investment analysts and other professionals and financial institutions. This consolidation and institutional approach to family wealth is a paradigm shift from the traditional lawyer/accountant led approach to asset planning for wealthy families in New Zealand.
When properly implemented, managed and administered, a family office can be mutually beneficial to the family concerned, the local community in which the family lives and carries on business, and the wider New Zealand economy.
[i] At the date of publication USD 1 = approximately NZD 1.52.
Henry heads New Zealand’s Private Wealth team, advising high net worth individuals and families, family offices, athletes, entrepreneurs and captains of industry to structure their wealth. Henry heads New Zealand’s Private Wealth team, advising high net worth individuals and families, family offices, athletes, entrepreneurs and captains of industry to structure their wealth.