Do I need a Single or Multi-family Office?

Do I need a Single or Multi-family Office?

An increasing amount of high earning business owners and families who have sold their businesses are turning to family wealth management offices to support them, instead of standard wealth management services.

When families weigh up the question of whether to set up their own single-family office (SFO) or use the services of an existing multi-family office (MFO), they often overlook the matter of the jurisdiction in which that family office should be. This is actually an essential element that deserves serious thought.

There are quite a few questions that need answering before deciding on the jurisdiction for a family office:

  • In which jurisdiction does the family need support?
  • What are the family’s goals?
  • What should the legal form be?
  • Which of the family’s (corporate) entities need to be managed, and by whom?
  • Which assets need to be preserved and protected?

All these considerations apply when establishing an SFO or choosing an MFO. You also need to select a country that is politically, economically and financially stable, provides easy access to financial service providers, and offers a sound infrastructure, and where staff is highly qualified and experienced.

A common mistake families make is to choose or create a family office in the same jurisdiction as where they live. Although this can be very practical, for example from a communication point of view, this is often not the best choice when examined from a wealth-preservation perspective. Because one of the primary roles of a family office is to safeguard assets, and to be able to assist the family under all kinds of circumstances.

A family office for wealth preservation

This means that the family office needs to be able to protect the family’s assets and interests against geographical, political, religious, personal and economic risks, while remaining fully operational under any circumstances.

Therefore, it is only logical that the family office should be located in a secure jurisdiction. Because unstable and unsafe jurisdictions outnumber the stable and safe ones by far, the majority of family offices will need to be located outside the home jurisdiction of the families they serve. This does not necessarily mean that the entire staff or all services must be located in a foreign jurisdiction; roles such as local secretarial support, lifestyle management services and local real estate management can be (partially) based in the family’s original jurisdiction.

In addition to providing stability and security, the jurisdiction of the family office must also:

  • Be easily reachable
  • Be tax-efficient
  • Allow the office to manage the family’s entities efficiently (holding companies, trusts, foundations, etc.)

Finally, most family offices prefer to be located in a jurisdiction known for having a reputable financial centre. It considerably simplifies the activities of a family office when it is in the vicinity of stable private banks and financial specialists with solid reputations and lots of experience.

All the essential requirements highlighted above ultimately limit the number of best possible jurisdictions to only a few and that is exactly why you find so many SFOs and MFOs in Switzerland.

Switzerland, the traditional safe haven

Switzerland is politically, economically and financially stable. It has been a neutral country since 1815 and has not been involved in any war since 1848. As Switzerland’s political regime is a so-called direct democracy, it is one of the few countries in the world where the population can have direct influence on all (proposed) federal and local legislation.

Switzerland’s economy is extremely stable. Thanks to broad diversification and strong domestic demand the Swiss economy has been growing steadily and has not been particularly weighed down by the worldwide economic and financial crisis. Thanks to its constitutional debt brake, the Swiss government has been able to produce a budget surplus every single year since the start of the financial crisis in 2008 and as a result Switzerland nowadays has one of the world’s lowest government debt ratios and is one of the few countries left with a AAA rating.

Swiss financial infrastructure

As mentioned, close proximity to solid private banks is key, as one of the primary tasks of a family office is to manage your wealth.  Swiss banks have been world leaders in the wealth management industry for a very long time and some of the best-capitalised banks in the world are located in Switzerland. A Swiss private bank stands apart from local private banks thanks to its expertise and experience in investments and investment classes from around the world.

A Swiss private bank is not only knowledgeable about the securities traded on your local stock exchange, it also advises you on the securities traded on all other international stock exchanges (contrary to, for example, US-based banks).

Switzerland also has a very attractive corporate income tax system. Rates are relatively low and Switzerland has signed agreements for the avoidance of double taxation with many countries. On top of that Switzerland is also a signatory to the Hague Trusts Convention thereby recognising the existence and validity of trusts. All this is backed up by Switzerland’s reputable, trustworthy and solid legal system and its topflight specialists such as tax advisors, law firms, wealth planning specialists, notaries, audit firms, etc.

Moreover, the infrastructure in Switzerland is world-class. Geneva and Zurich have highly developed airports with flight connections worldwide, many direct, and both city centres can be reached within twenty minutes from their respective airports.

Family office staff

Last but not least, highly experienced, motivated, reliable and educated staff with financial experience can be recruited or found in Switzerland. But even more importantly, when you intend to establish a SFO, such staff currently located elsewhere in the world can also be persuaded to relocate to Switzerland as it is considered one of the best countries in the world to live in, due to its very high living standards.

One of the best locations for a family office

All these elements make Switzerland one of the best locations to use a multi-family office or to establish your own single one. Because a family office is not only there to manage your wealth, but also to safeguard and protect it when your home country turns out to be less stable than you had hoped or expected.

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These archived articles are written by authors no longer participating in the Family Matters On Line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

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The History of the Family Office

The History of the Family Office

It is often assumed that the acclaimed American family, the Rockefellers, pioneered the family office in the late 19th century. However, history suggests otherwise. While today’s family offices are a modern phenomenon, they have always existed in various shapes and forms since ancient times.

The discussion around family offices has intensified over the last decade as an increasing number of affluent families take a structured approach to their wealth management. Yet, we are not likely to ever find a uniform definition that encompasses everyone’s notions of what these offices should do or entail. To gain a better understanding of the variety of services that exist and are likely to emerge in the coming years, we must first examine the earliest manifestations of family offices.

The Family Office in History

In the distant past, wealth and possession were almost always connected to rulers and the ruling class because they were the only ones with the power and means to amass vast wealth. But what is often forgotten is that their fortunes needed the kind of management and stewardship that we can see today.

A good example of this is Emperor August Caesar, who ruled the Roman Empire from 27 BC-14 AD. Considered to be one of the wealthiest people that ever lived, he ruled an empire that generated approximately 25% of the global GDP. A great portion of the empire’s assets was directly owned by Caesar or by members of his inner circle, including Marcus Licinius Crassus, one of Rome’s leading politicians at that time.

But Caesar is just one of a long list of extremely wealthy rulers that include Emperor Shenzong (1048-1085) of China’s Song Dynasty, Alan Rufus (1040-1093) the first Lord of Richmond, Mansa Musa (1280-1337) the king of Timbuktu who became unbelievably rich from the gold production in Mali, and Akbar I (1542-1605) the greatest emperor of India’s Mughal dynasty.

Though these figures hail from different times and lands, they are united by one common trait – they shared their wealth with a trusted inner circle comprised of high-ranking officials and local representatives, who took on roles that are reminiscent of family office staff members today. This inner circle managed his estate, industries and businesses within his jurisdiction, the military, as well as the ruler’s lifestyle through a well-organised group of appointees.

Due to their position of power, most of these close confidants were also able to amass great wealth for themselves, and they in turn employed a number of people to care for their family and possessions. The head of such a team was often referred to as a ‘majordomo’, the highest (major) person of a household (domūs) staff.

In modern terms, these arrangements could be referred to as ‘embedded single-family offices’, in which family business staff members also help to manage the private wealth of the family. While these set-up’s are clearly not exactly comparable to today’s modern single-family office, the structures and motives are not dissimilar. The differences chiefly exist in what made people wealthy and the strategic allocation of their assets.

The Turn of the 19th Century

American industrialist, philanthropist, and private entrepreneur, John D. Rockefeller Sr., is often referred to as a crucial figure in the history of family offices. As co-founder of the Standard Oil Company, he controlled approximately 80% to 90% of the worldwide oil industry by the end of the 19th century. His fortune stood at $1.4 billion at his death in 1937, accounting for more than 1.5% of the US economy. Equivalent to approximately $255 billion today, Rockefeller’s wealth is considered to be one of the greatest in history.

In 1882, Rockefeller established an office of professionals to organize his complex business operations and manage his family’s growing investment needs. This office would manage his wealth as an investment portfolio instead of singular business entities, and his assets were consolidated under the Standard Oil Trust. This institutionalised set-up is generally considered to be the first modern single-family office, although at the time it was never referred to as a ‘family office’.

Generational planning formed an essential part of Rockefeller’s wealth management, as did his enormous engagement in philanthropic causes. Most of the family assets were over time organised under trusts, of which the majority still exists today.

Although other well-known names in U.S. history soon followed his example, it was only in the late 20th century that single-family offices grew in number and multi-family offices began taking shape. It was also around this time that the institutionalised single-family office concept crossed the Atlantic and appeared in Western Europe. Today, the spread of family offices have reached developing markets throughout Asia, Russia, and the Middle East.

The Problem with a Uniform Definition of the Family Office

As the interest in both single- and multi-family offices increases, the importance of understanding what they are and what added-value they bring are naturally on the rise. Surprisingly, a great number of affluent families and financial services providers alike struggle to define what a family office is and what type of services it offers. The global financial services industry has also yet to provide a uniform and comprehensive designation.

There are basic definitions of the family office that are commonly used but oversimplify the complex reality of the industry, such as:

  • A structure that manages the investments of an affluent family.
  • An entity that supports affluent families with everything.

In reality, family offices and the families they serve are much more multifaceted and diverse in their typology. There are also considerable differences between single- and multi-family offices, which further complicate the possibility of one overarching definition.

What is a Single-Family Office?

Single-family office activities are, in most cases, much broader or considerably different from the two basic definitions mentioned above. They generally develop over time in response to the unique and particular needs of the founding family. Their support can stretch far beyond just managing the investments of the family, but, due to the costs involved, there are almost no single-family offices that support their founding family with all their needs. Quite a number of family offices support the family only with their non-financial needs, such as tax and legal services, philanthropy or lifestyle management.

Interestingly, single-family offices often do not carry the title of ‘family office’ and it is not uncommon that a family does not realise that the services they have lined-up fall under the umbrella of family office services. This includes business-owning families that require one or more members of their corporate staff to support them with a wide range of personal matters.  Such an ‘embedded single-family office’, without a dedicated structure, one nowadays especially finds in emerging markets.

It is just as difficult to assess the total number of single-family offices as it is to define what they are. Most global statistics do not account for embedded single-family offices nor do they count single-family offices that operate without an investment license, resulting in wildly different estimates that range from the thousands to over ten thousand.

With so many interpretations and types in existence, the only inclusive definition of a single-family office is the following:

  • A single-family office is a privately controlled (group of) staff employed within or outside a dedicated structure that supports an affluent family with the organisation, management, and maintenance of all or parts of their assets, needs, and wishes.

What is a Multi-Family Office?

A strong multi-family office trend exists today, with new providers opening up almost weekly around the globe. One would think that the services offered by a multi-family office would be similar to those provided by a single-family office, with the exception being that the same services are offered to a number of families as opposed to one. However, the more important difference is that multi-family offices are almost always commercially operated companies that aim to generate profit for themselves in addition to the families they work with.

Today most jurisdictions neither protect nor regulate the use of the title ‘family office’. Any company can call itself a multi-family office and offer multi-family office services without having any specific qualification or experience. In most cases, services offered by multi-family offices are strongly tied to the backgrounds and expertise of the founding partners. A former tax lawyer setting up a multi-family office will most likely focus on structuring assets, while a multi-family office established by former bankers will probably provide investment services. And although these two are drastically different, both can call themselves a multi-family office.

Taking these variations into consideration, we can propose the following definition of the multi-family office:

  • A multi-family office is a privately controlled and commercially operated organisation that employs staff to support a number of affluent families with the organisation, management, and maintenance of parts of their assets, needs, and wishes.

The Future

Now that we have a better understanding of how family offices are classified, what developments in this industry can we expect in the coming years? All wealth reports predict that global wealth and the number of Ultra High Net Worth individuals will increase considerably in the coming decade. Single- and multi-family offices will continue to grow in number, not only because there will be more affluent families, but because families now want to exert more control over their wealth. Succession and next generation planning will also become important topics of discussion, especially in emerging markets, meaning that also those families will begin to look for a holistic approach to wealth management.

Although many service providers might start calling themselves private investment offices or family business advisories, they will ultimately be offering the typical family office services outlined above. As a result of the growing popularity of the concept, a number of jurisdictions will begin to introduce regulations. Those will probably only be covering financial consulting and trust services.

Just like the family-owned business that they serve, family offices are unique organisations that are distinct from one another. At the same time, they all aim to deliver similar types of services to the same type of clientele. They may develop over time and maybe even adopt different names, but they are and will continue to support affluent families with managing and maintaining their wealth for future generations. https://www.linkedin.com/in/jan-van-bueren-0a522111

These archived articles are written by authors no longer participating in the Family matters on line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

CONTACT US

How to select your Multi-Family Office

How to select your Multi-Family Office

The constantly increasing number of wealthy families has, over the past years, had a strong effect on demand for wealth management services like Multi-Family Offices. Ever more wealthy business owners and families that have sold their businesses are considering a family office to support them with their wealth management, instead of standard wealth management services.

What is a Family Office?

A family office is normally set up as a privately-owned legal entity (or structure) and supports wealthy families with the management, organisation and maintenance of their global wealth. Although a family office can be used or established anywhere in the world, you will find them primarily in Europe (mainly in Switzerland, Monaco, Luxembourg and London) and the United States. Families can decide to set up their own single-family office (SFO), or make use of a multi-family office (MFO):

  • An SFO supports only one family, its legal structure is owned (or at least controlled) by that family and its services are made to measure to meet the needs of that family;
  • An MFO comes in all sizes, serving any number of families, ranging from only a couple to over a hundred. The legal structure is in most cases owned by the partners who manage the MFO, and it is also they who decide which services the MFO offers.

As an SFO is not economically feasible for most families, the majority of families end up opting for MFO services. Generally it can be said that for an SFO to be viable, family assets totalling at least $ 200,000,000 are required.

Recent trends for multi-family office services

As demand for MFO services increases, it could easily be concluded that the growth of the MFO industry is the automatic result of that; however, the supply side of this development should not be underestimated. Due to, amongst others, regulatory developments, the consolidation of the private banking industry, overall cost pressures on wealth managers and the “general hype” around MFO services over the last years, quite a few providers are entering or have already entered the MFO market with the aim of getting in on the action. So it is clearly not only demand but also supply that is feeding this trend.

While a large number of providers is generally considered a good thing in a free-market economy, given that this generates a variety of benefits – such as decreasing prices and a more competitive choice for consumers – the same does not automatically apply to the MFO industry.

What range of services is offered by a multi-family office?

There is no industry standard for what range of services an MFO should offer, and most MFOs tend to operate discreetly, off the high street, without giving an insight into their activities and what they actually offer clients. Moreover, the use of the term “family office” is, in almost all jurisdictions, neither regulated nor supervised, and even when it is, only lightly. Lastly, MFOs originate from very diverse backgrounds and tend to offer completely different ranges of services as a result.

Most MFOs only provide a small core of services in-house and coordinate a small number of other services on your behalf. Almost no family offices provide a very wide range of services. For these reasons, the MFO industry is very opaque, which is especially problematic for families looking to use MFO services. Or, as it is also sometimes put, “If you’ve seen one family office, you’ve only seen one family office”.

How to select your Multi-Family Office

It is therefore important for families who are considering using an MFO to compare providers carefully. An important starting point in this process is the origin of the MFO and its founders. Although this does not apply to all MFOs, the majority of them tend to focus on one or a limited number of services, which are closely related to the background of the founders. When the needs of the family are as closely related as possible to the main competencies of the MFO’s founders, the chances of a successful relationship are at its highest.

In this respect, several main types of providers can be defined:

  • Former wealth managers. This type of MFO focuses primarily on asset management, asset allocation, consolidated reporting, risk management and managing relationships with banks. These are often established by a small number of former bankers, and more recently there have even been smaller private banks repositioning themselves as MFOs.
  • Law firms/lawyers. Generally, these focus on estate planning, succession planning, family governance and a wide range of legal issues. Their services are often also related to the structure of the family business. Asset management is mostly outsourced, but monitoring of banks and provision of consolidated financial statements is regularly provided in-house.
  • Tax consultants/tax lawyers/accountancy firms. These focus on tax-efficient structuring, establishing and managing international structures for family businesses and real estate, international relocation, estate and succession planning, and audit and administration. Asset management is mostly outsourced, but monitoring of banks and provision of consolidated financial statements is mostly provided in-house.
  • Private banks or MFOs owned by private banks. These have a strong focus on asset allocation and asset management.
  • Trust providers/trustees. These focus primarily on setting up and administering structures such as trusts, foundations and holding companies, and providing audit and administrative services; some of these MFOs also focus on issues related to yachts and aircraft. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is almost always provided in-house.
  • A Single-Family Office opening up for other clients. This is a difficult category to define, as the services offered are often closely related to the original needs of the founding family. Most of them have a focus on asset management, consolidated reporting and risk management, combined with a limited number of other activities, such as real-estate or private equity investments.
  • Others. The final small but broad category, which includes MFOs founded by real-estate or private equity experts, asset allocation experts, former investment bankers, or for example, by people with a focus on lifestyle management.

What questions to ask when selecting a multi-family office

As every wealthy family has distinct needs, families should carry out proper research on the providers they visit and ask the right questions to get the necessary insight into what they are offering. Otherwise, there is a significant chance that, further down the line, they will not be satisfied with the services their MFO of choice is providing them with. In another article we will deal with some of the practical questions that families should ask when searching for the right MFO. https://ch.linkedin.com/in/jan-van-bueren-0a522111