131126 setting up a sfo

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Lessons learned in setting up a single family office - SFO.
Key Messages
Key Challenges
Defining the Family
What do Family Offices do?
Organisation and Tasks
The In-sourcing vs. Outsourcing debate
Governance & Policies
Information Technology
Investment Management & Reporting
Managing Non-Financial Assets
Structuring International Wealth for Future Generations

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131126 setting up a sfo

  1. 1. SETTING UP A SINGLE FAMILY OFFICE Sharing a few lessons and experiences 2011-2013 © Geoffroy Dedieu
  2. 2. Legal disclaimer This publication is intended for information purposes only. It should not be construed as advice of any nature or an offer or recommendation or solicitation for sale, purchase or engagement in any transaction and was drafted solely to provide informative material on the subjects addressed and for educational purposes only. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but all material is provided without express or implied warranties or representations of any kind and no liability is accepted. Opinions and comments therefore reflect current views of the author only and are subject to change without notice. This document is not intended to be a comprehensive statement, nor a study, nor to provide strategic, financial, legal or tax advice and it should not be relied on or treated as a substitute for specific qualified advice concerning individual situations. Readers should consult competent professional advisors before adopting or drawing inferences from - any of the suggestions or ideas expressed in this publication. The author and publisher assume no obligation or responsibility for any loss, risk or liability incurred as a consequence of use and/or application of any of the contents of this publication with or without proper independent professional advice. Laws and regulations of various countries may also restrict the distribution of this publication. Persons in possession of this document should inform themselves about possible legal restrictions and observe them. Subject to copyright with all rights reserved. 2 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  3. 3. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 1 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  4. 4. KEY MESSAGES (1) CAN WE / SHOULD WE? Why set up a Single Family Office? • Despite the media and political (somewhat demagogical) perception that wealth is passed on from a privileged few to their privileged descendants, the reality is that 95% of family businesses do not survive the 3rd generation of family ownership and a majority of FO’s have typically served no more than 3 generations. • So Family Offices endeavor to : • better manage the multitude of risks associated to great wealth; • cover the full wealth / asset spectrum, of which financial assets are only a part; • in-source key skills & capabilities to be leveraged by the family. How should a family take this decision? • Just like any other business decision: draft a business plan and calculate precisely costs, benefits and savings. • Ultra-High Net Worth families (UHNW) made their fortune in business, so they have the skills and ability to make their own decisions when it comes to setting up a family office. • They need an adequate Governance structure, experienced people, standard processes and specialised information systems... just like any business. Beware of temptation to avoid Governance, controls and policies! • Controls & Compliance make sense for the family as “investor”, do not trust people who tell you that they are unnecessary administrative chores. • Have strong internal controls and processes to ensure the interests of the family are safeguarded. • Make sure your board is on top of the control/compliance agenda. • Remember: you are likely to be considered a “sophisticated” or “accredited investor” in several of your banks’ jurisdictions. Hence you get little regulatory protection against inappropriate sales pitches. • Use industry standards, there is no need to try to reinvent the wheel! • IFC Family Business Handbook, UK Combined Code on Corporate Governance, United Nations PRI, CFA-Institute Asset Manager Code of Professional Conduct. 4 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  5. 5. KEY MESSAGES (2) STAFFING AND OPERATIONAL PLATFORM. Use scenarios and precise financial models to compare costs of a SFO vs MFO’s or banks • Key distinction: Single FO’s are cost centers, all the rest are profit centers. They are businesses selling something for a profit so there is always some form of conflict of interests. You can find the right talent in London, New York, Singapore etc.… and you can afford it! • Recruiting the right people can be done with specialised FO consultants and FO head-hunters. • Define robust incentive plans for employees, avoid conflicts of interest => no carry, no shares, deferred bonuses (3 years), claw-backs. • Not everybody wants to spend their whole career in a bank! Family offices, especially from Emerging Markets, offer fascinating challenges for dynamic executives. You can build a better IT platform than most banks. • Close to 60% of the code lines used in banks’ IT backbones dates back to the 1980’s…. • Most private banks still use black-screen, green cursor systems … forget the mouse. • Family offices can start from scratch and buy a best-in-class system. There are several IT platforms specialised for Family Offices. You can deliver better reporting on assets, performance and risks than most banks and fund managers. • Family offices using their own IT systems and accounting can report according to international best-practices: IFRS and GIPS. Most banking statements are not GIPS compliant. • A FO that manages its own fund will have the unique advantage of delivering to family members and trustees a set of audited statements. Bank statements are NOT independently audited. • A FO equipped with industry-standard portfolio management software and a proper accounting package will rapidly realise that financial complexity is pushed by banks and results in high costs and lower performance*. * For a statistical confirmation, read: “What Drives Financial Complexity?”, Claire Celerier & Boris Vallee, 2013 5 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  6. 6. KEY MESSAGES (3) INVESTMENTS AND RISKS MANAGEMENT If you setup a family office with the right talent pool and operational platform, you do not need to delegate portfolio management to costly “asset managers”. Have clear investment beliefs and processes • Describe what you fundamentally believe in and write it into the investment guidelines. • What is your World outlook? • What is your perception of asset management? • What are your key strategic beliefs? • The same beliefs can guide investments in financial securities, real estate, new businesses, etc. • There are broad industry standards that you can use to set up your FO: ESG, UN-PRI. Do not hesitate to develop clear product biases (and tell the banks and asset managers!) Have a risk and return targets • Example of an absolute return target is the USD 6M LIBOR rate + 2% • Example of an adequate return level is twice the target: (USD6M LIBOR + 2%) x 2 • Beyond this level of return, at any point during the calendar year, the Investment Management Committee is entitled to cut all positions and switch to cash and equivalent. • Example maximum tolerable loss is 5% in any calendar year. • Monitor VaR and Sharpe Ratio : Sales people (MFO’s, banks, fund managers) sell on promised returns, not on risks. Any product sales pitch which would not contain a full risk analysis should be rejected. Don’t worry about the jargon • This language can be learned, most terms we use are on Wikipedia… • And if you still do not understand something … do not invest in it, when banks push complex structures, its is usually to costs less transparent. 6 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  7. 7. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 2 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  8. 8. THE No 1 CHALLENGE OF WEALTHY FAMILIES IS … “DEMOGRAPHICS” (1) • UK and USA show signs of severe demographic strain on younger generations • The USA are helped by immigration inflows from the South. • In Singapore, demography will be driven mostly by immigration. • Population of 3.2 mio in 1995 and 5.8 million in 2012. 8 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  9. 9. THE No 1 CHALLENGE OF WEALTHY FAMILIES IS … “DEMOGRAPHICS” (2) At the family level: The entrepreneurs of the 70’s and 80’s were often baby-boomers of the late 40’s to mid-50’s age classes. The same are now pappy-boomers. • American and European pappy-boomers will reach their sixties in the next ten years. • Asian and African tycoons are slightly older than boomers. • At the “enterprise” level: Experienced executives aged 50-60 are “reservoirs” of resources and expertise, especially valuable to younger entrepreneurs aged 25-50 for them to develop their businesses. • Looking at data from Norway: 60% of sales are lost and 17% of jobs cut during the first 4 years after the death of a founding entrepreneur (2013 research from Warwick University & University of Bergen). • In 2050, there will be 1M people aged 100+ in the USA, over 275M aged 55+ in the EU, over 400M aged 50+ in China, ... • Demographics will soon have a serious impact on businesses and private wealth in Asia. Financial Times 12 March 2013 9 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  10. 10. THE No 2 CHALLENGE OF WEALTHY FAMILIES IS … “FAMILY DYNAMICS” (1) Wealthy families, like most families have to face daunting challenges posed by the interaction of emotions and psychologies between different generations. • Read Family Business on the Couch by Manfred Kets de Vries, Randel Carlock & Elizabeth Florent-Treacy. http://www.youtube.com/watch?feature=player_embedded&v=Tde7Y36RNQE • According to Mosby’s Medical Dictionary published in 2009, family dynamics is defined as “…the forces at work within a family that produce particular behaviors or symptoms…” • It is the way in which a family lives and interacts with one another that creates the dynamic. • That dynamic, whether good or bad, changes who people are, it forges their individual psychology, ultimately influencing how they view and interact with the world inside and outside of their family. 10 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  11. 11. THE No 2 CHALLENGE OF WEALTHY FAMILIES IS … “FAMILY DYNAMICS” (2) Wealthy families are often multi-cultural, international: they have face both cultural challenges and generation conflicts. • The concept of family is eminently culturally dependent. Anthropologists have defined many models of family: matrilocal (a mother and her children); conjugal (a husband, his wife, and children; also called nuclear family); and consanguineal (also called an extended family). All of these models are evolving and they are not necessarily compatible. • Example*: “… the family, a natural society, exists prior to the State or any other community and possesses inherent rights which are inalienable.” The historical (Western) model of family faces severe sociological pressure. • Wealthy families are no exception to these mega sociological trends. • The Divorce to Marriage rate in the UK is 47% and USA 53%**. • The 1960 United States Census reported that 9% of children were dependent on a single parent, a number that has increased to 28% by the 2000 US Census. * The Charter of the Rights of the Family of the Vatican (1983) ** Source: Wikipedia Family Dynamics in wealthy families present challenges due to psychological pressures, cultural divergence between generations and sociological trends … wealth alone will not solve these issues. 11 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  12. 12. THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE … OFFSHORE STRUCTURES (1) For decades many international families were lured into complex, shady structures with a view to hide their assets or evade taxes: that was the wrong way to structure wealth and manage succession. • KYC rules were developed initially to use the international financial system (banks) to fight Money-Laundering and Financing of Terrorism. • Since the early part of the decade, KYC rules were greatly boosted and banks and service providers now have detailed records and data on client families, their assets and business activities. • Since 2005 banks have been used by OECD countries (higher-tax jurisdictions) to fight tax evasion. • Families need to use robust structures with clear objectives and strong tax compliance. 12 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  13. 13. THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE … OFFSHORE STRUCTURES (2) There are right ways and wrong ways to use certain international structures for specific – well defined – purposes, including in low-tax jurisdictions. What is “offshore” ??? • An offshore company, corporation or trust is an entity or trust recognised by law in its home jurisdiction. If a company / corporation, then it is as a separate "entity" with limited liability. As such the company has the option to sell shares, the right to sue and be sued, and has perpetual existence. • An IBC (International Business Company) is the most popular type of offshore corporation for asset protection and privacy purposes. • An IBC is usually a tax-exempt corporation that can do business all over the world except in the country where it has been incorporated: that is what defines an “offshore” structure. • Popular IBC jurisdictions include the British Virgin Islands, Anguilla, Mauritius and the Seychelles. • Trusts are often created for good succession & wealth planning reasons and not necessary in “offshore” jurisdictions. Mr & Mrs Wise Settlors Trust Deed and Letter of Wishes include specific conditions for distributions Independent Tax & Legal Advisor 13 Setting up a Single Family Office Sharing a few lessons and experiences Mr & Mrs Wise Beneficiaries ABC Trust Children Mr True (as trustee) OR (more often) Others ABC Trustee Company 123 Company Ltd Bank A Portfolio Beneficiaries as Named from time to time Potential Cash Distributions (regular or from time to time) • Deed signed by settlor(s) & trustee(s) Transfer of Assets & Properties Most often the term “offshore” is used erroneously or without proper definition. What does a trust really look like? SubTrust Other Properties (Real Estate) Purpose Trust or Charity ABC Trustee Company Business Holding Company © Geoffroy Dedieu 2013
  14. 14. THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE … OFFSHORE STRUCTURES (3) In the 21st Century, tax evasion is simply no longer an option. Using an offshore entity /shell to simply hide assets or revenues will lead to failure. International family-office or family-trust structures must be created with clear objectives and robust tax and legal structures. Consequences of Tax Evasion Global Offshore Centers Map • Using offshore structures purely for tax evasion or to hide assets results in fragile structures that are easily attacked by tax authorities, creditors and disgruntled family members. The map below* includes jurisdictions with true IBC models i.e. “offshore” as per our definition and countries that simply have a lower overall tax levels than OECD countries. • Such structures lack robustness. • A family needs to define their objectives and rationale for each international structure. • Use structuring with parsimony. Example in the UK. • Tax evasion is a crime, so anything to do with evaded taxes is MoneyLaundering. • Handling that money is a criminal offence (POCA 2002): • Concealing, Acquiring, Possessing and Assisting - 14 years prison. • Tipping Off – 2 years prison. • Generally, any failure to comply with ML Regulations – 2 years prison. 14 Setting up a Single Family Office Sharing a few lessons and experiences * Source: OCRA 2012, www.ocra.com © Geoffroy Dedieu 2013
  15. 15. WHEN THE STARS ALIGN: PAPPY-BOOM, PARIS HILTON SYNDROME, SHADY OFFSHORE TRUSTS Over the next 50 years, the world will see the greatest transfer of wealth in its history … but … • … 80% of Asian wealth will transfer to the 2nd generation from 2005 to 2020*. • Yet it is estimated that 70% of cross-generational transfers of wealth in the USA have failed to achieve their desired objectives**. • Likewise, among HNW families in Asia, 70% of parents thought that they had done a good job of communicating issues surrounding family wealth. Only 20% percent of their children agreed.*** Some recent family successions in Asia have turned into major family fights, with lawsuits, wealth destruction, business paralysis and major public embarrassment. • The main catalyst of this increase in family issues is again, DEMOGRAPHICS: more successions. • But the causes of failed cross-generational transfers are largely PSYCHOLOGICAL – family fights – and • LEGAL – shady, fragile legal structures result in family fights and public embarrassment: the truth always comes out! The stars are aligning: Refusal to plan, poor next-generation mentalities, cheap ill-adapted legal structuring. 15 Setting up a Single Family Office Sharing a few lessons and experiences * Source: PwC Jan 2007 ** From Strategy for the Wealthy Family by Mark H. Daniell *** 2002 JP Morgan Survey © Geoffroy Dedieu 2013
  16. 16. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 3 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  17. 17. SOME DEFINITIONS …WHAT IS A FAMILY NOWADAYS? There are as many types of family offices as there are types of families. The definition of a family is highly dependent on culture, religion and position in the wealth cycle. • In human context, a family (from Latin: familia) is: A group of people affiliated by consanguinity, affinity, or co-residence. In most societies it is the principal institution for the socialization of children. • Anthropologists classify family organization in various ways as there are numerous models in the World. • The family is also an important economic unit. Economic aspects of family are the subject of the family economics branch within economics field. • The systems of interaction between family members are called family dynamics. • The concept of the family is more and more commonly defined in terms of strongly supportive, long-term roles and relationships between people who may or may not be related by blood or marriage. • The conceptual frameworks developed by family therapists, especially those of family systems theorists, have been applied to a wide range of human behaviour, including organisational dynamics. • Laws applicable to family relationship and family members vary per jurisdiction Examples • Divorce laws; • No concept on a Patriarch or “family head” in most OECD countries since the 1980’s. Source: Wikipedia 17 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  18. 18. SOME DEFINITIONS …WHAT ARE FAMILY OFFICES? Family offices are dedicated structures set up by ultra high net worth (UHNW) families to manage their assets. • There is no “official” definition of UHNW. Most banks place the bar at USD 50 million. We found that most FO’s manage assets above USD 100 million. These figures are for “investible” assets, i.e. money managed by financial institutions. • Example: Law of 21 December 2012 relative to Family Offices (Luxembourg). « … providing, on a professional level, patrimonial related advice or services to individuals, families or to patrimonial entities owned by these individuals or families or of which they are founders or beneficiaries … » • Example: http://en.wikipedia.org/wiki/Family_office • FO’s have been around since the late 19th century in the USA and, arguably, the 18th in Europe. They can be found in many countries, but primarily in New York, London, Geneva, Zurich, Luxembourg and Monaco. • As Asian and African economies grow rapidly, new wealth is being created at an unprecedented pace and families now face complex wealth planning issues. • Since 2000 more family offices have been set up in London, Singapore, Dubai and Hong Kong to represent “emerging market” families. • A majority of FO’s have typically served no more than 3 generations*. * 67% for members of the FO Exchange 2012. 18 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  19. 19. WHERE DOES UHNW WEALTH COME FROM? Taking a factual view of the inheritance versus self-made debate. Percentage of Inherited Fortunes 450 No (Forbes List 1982-2007) % 400 Some Figures 40 35 • “the vast majority of today’s rich didn’t inherit their money, but made it themselves.” Robert Frank, Wall Street Journal, 10 January 2008. According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (Credit Suisse cites 21% in 2007) • According to a study by Prince & Associates, less than 10% of today’s multi-millionaires cited “inheritance” as their source of wealth. • 350 • A study by Spectrem Group found that among today’s millionaires, inherited wealth accounted for just 2% of their total sources of wealth. 30 300 25 250 20 200 15 150 10 100 50 5 0 0 Billionaires Inheritors % • Worldwide, less than a third of Forbes billionaires inherited some of their wealth. • On the 2012 USA Forbes list, 69% were self-made billionaires. • If we exclude China, Russia and other transition countries, the inheritors’ figure is still 38%. (Credit Suisse Wealth Report 2012) • Fewer than 3% of Forbes list billionaires in 2012 had inherited wealth for over 3 generations. Wealthy Families derive their wealth mostly from entrepreneurship and hard work … and keeping the wealth in the family past 3 generations is extremely hard work. 19 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  20. 20. PERCEPTIONS OF UHNWI There is much political posturing and flawed debates around Ultra-High Net Worth Individuals (Families) … unfortunately some of these arguments influence tax policies and add pressure onto the “offshore” debate. 65 55 49 50 42 40 38 33 30 20 10 0 Republicans Democrats 30 69 31 1 Self-made Over 3 Generations Inherited Wealth What the Top 1% taxes really represents (2007, USA) % saying, compared with the average person, rich people are more likely to be … How Fortunes are Made (Forbes USA billionaires 2012) PERCEPTION REALITY 60 % saying upper income people are paying … in taxes • 70 The public debate around wealth is generally unhealthy, based on sentiments and emotions rather than facts. • When ask to express what they perceive, most respondent show political orientation rather than rational analysis. • 90 80 70 60 50 40 30 20 10 0 Wealthy individuals / families are perceived to pay too little taxes when in fact (as an example) their share of the US income tax is 40 times their share of the population. • When Democrats are asked whether wealthy people are likely to be hard working, only a small minority says yes. Yet 69% of Forbes USA billionaires are selfmade men. 78 44 33 14 13 4 Republicans Democrats 100% 80% 60% 99 40% 20% 81 23 0% Top 1% 20 Setting up a Single Family Office Sharing a few lessons and experiences 60 40 Rest 99% Sources: Pew Research Center 2012, Forbes, US-IRS © Geoffroy Dedieu 2013
  21. 21. WHAT THE FAMILY OFFICE DOES FOR THE FAMILY WILL DEPEND ON WHERE THE UHNW FAMILY IS IN THE FAMILY-WEALTH CYCLE? 1G 3G Acquisition Wealth Builders • • • • • • 2G Retention & Growth Disposition & Succession Status Quo Decay • • • Professional Effective Decision Making • Cognizant of Legacy or Family History Systematic, Business and Venture - style approaches • Want to build on parents’ legacy of charity but only after wealth is secured Self-Taught Entrepreneurial Frugal Lifestyle Generous and Charitable Well Educated Well Educated • • Understand 1G’s effort and sacrifice • Less Appreciation of 1G’s effort & sacrifice • • Searching for a Purpose Asian and African Families • • Mostly 1G Some 2G Sometimes have lower work ethics Inwardly Focused Build a Value Succession Plan • • • Define Objectives for Succession Plan Define Principles to live together & communicate well Define Precise Steps & Milestones 21 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  22. 22. WHAT ALL UHNW FAMILIES ARE UP AGAINST: ENTROPY To maintain wealth and perpetuate the family business, Families need new energy to revitalise dynamics between members and new members must bring new / renewed strengths. The Second Law of Thermodynamics • There is a universal tendency in nature to the dissipation of energy. • In thermodynamic terminology, families may be described as systems, which can only last and flourish by receiving and consuming new energy in transformations . • The second law of thermodynamics states that the entropy of an isolated system never decreases. • Consequence of the second law: Perpetual motion machines are impossible. Key Success Factor: New Energy • Unless new energy is regularly brought into the family dynamics, family wealth and family businesses, they will come to a standstill and disappear. • “Shirt-sleeve to shirt-sleeve in 3 generations”. Lord Kelvin originated the idea of universal heat death in 1852 • Thankfully, families are not isolated systems, new members join existing members and create new generations. • Families are dissipative systems, similar to thermodynamically open systems. They operate far from thermodynamic equilibrium in environments with which they exchange energy. 22 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  23. 23. FROM MONO-NUCLEIC TO POLY-NUCLEIC … THE EFFECT OF GENERATIONS As families evolve, even the simplest family structure becomes highly complicated in two generations. Managing successions and transitions is an ineluctable necessity. Snapshot of Family Structure Grand-Father (M) 01/01/1940 P: HK, Tax: UK Ms. A (F) 14/11/1969 P: UK, Tax: UK Principal (M) 01/01/1960 P: HK, Tax: UK Daughter (F) 31/07/2010 P: UK, Tax: UK (F) (M) MN P Tax Marriage: 01/01/1980 Divorce: 31/12/2000 Female Male Maiden name Passport Tax residence Evolving Family Structure Grand-Mother (F) 01/01/1940 P: HK, Tax: UK Brother (M) 01/01/1950 P: UK, Tax: USA 1G Sister (F) 01/01/1960 P: UK, Tax: HK 2G 2G 2G 2G 2G Ex-wife (F) 01/01/1960 P: UK, Tax: FR Daughter (F) 01/01/1990 P: UK, Tax: FR Son (M) 01/01/2000 P: FR, Tax: FR 1G 2G Founder, 1st Generation Male Outside of family 3G Female 23 Setting up a Single Family Office Sharing a few lessons and experiences 3G 3G 3G 3G © Geoffroy Dedieu 2013
  24. 24. FROM MONO-NUCLEIC TO POLY-NUCLEIC … IMPACT ON FAMILY BUSINESS AND WEALTH As family businesses become multi-generational, issues related to ownership, control and management / employment need to be addressed. To the founder / 1G, these issues may seem abstract or irrelevant, but the family needs guidelines and processes to handle them without conflicts. Snapshot of Family Structure Family Sphere • As time passes, UHNW families separate ownership from management/control. Business Sphere e 1G • Not al family members will be owners. • Some families chose to allow family members to become employees, others not (see later slides). 2G 2G 2G le ale • There is a certain level of impatience in many UHNW families as to the timing of wealth transfers and distribution of wealth and shares to the NextGen: 72% of family members 30-39 years old are little or not at all comfortable with timing decisions, vs. 84% very or completely comfortable amongst of 40-49 years old. (Morgan Stanley PWM / Campden Research Next-Gen Study 2012) Business Owner Employee / Manager Non-owner Board Member 24 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  25. 25. FROM MONO-NUCLEIC TO POLY-NUCLEIC … IMPACT ON FAMILY DYNAMICS Family dynamics refer to a system of behaviors and psychological processes occurring within a family. Patriarch Rules Family Trouble Improving Dynamics • The Patriarch directs; • Family is in conflict; • Patriarch participates; • Structures and Processes are unclear; • Discussions or disagreements about structures and process; • Processes are put in place; • Influence of external advisors tends to be greater; • Some family members may be disenfranchised. • Attempt to involve all family members; • This is a stage where advisors can act as bottlenecks or barriers. • Family members learn to function as a team; • A few family members are building up skills. Increasing Skills • Patriarch is able to step back; • Strong but flexible structures and processes are in place; • Family members are committed; • Several members are developing skills; • NextGen starts to join. 25 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  26. 26. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 4 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  27. 27. HOW DO UHNW FAMILIES TAKE THE DECISION TO BUILD A SINGLE-FAMILY OFFICE? Have a Business Plan • Background: the Family and its principles/beliefs • Corporate Structure • Description of Business and Activities • Financial Investment / Portfolios • Private Equity / Art • Properties Business • Revenues / Sources of Cash and Costs • Corporate Governance & Compliance • Initial Governance & Compliance Architecture • On-going monitoring & external support arrangements • Apportionment & Oversight of duties and responsibilities • Staffing • • • • • Chief Executive Officer / Chief Investment Officer Chief Operating Officer Portfolio Managers Compliance & Governance Chief Financial Officer • Risk Management & Capital Requirement • Company’s management organisation • Strategic and Financial risks • Business Continuity Risks Key Questions* • Why do we want to work together as a family to manage our wealth? • How will we make decisions together as a family? • What are our key guiding principals? • What are our goals (and mission) for the family office? • How will the family office be owned and structured? • How will the office be organized and managed? • What roles and responsibilities belong to the owners vs. the office executives? • What services will be provided? • What technology do we need? • How will we pay for the family office services? • How will we measure the success of the office? • Financial Plan • • • • Forecast P&L Cashflow Assets under Management & Assets under Supervision Scenario Planning (scope of services and changes in cost assumptions) 27 Setting up a Single Family Office Sharing a few lessons and experiences *Source: Family Office Exchange © Geoffroy Dedieu 2013
  28. 28. WHERE ARE FAMILY OFFICES LOCATED ? Single FO Single FO Concentration by Area (100% for each region) SFO Approximate total numbers • USA 500+ • LatAm 30 • Europe 170 • MEA 20 • APAC 100 *Source: Barclays Strategic Consulting, Campden Research 28 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  29. 29. WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (1) Roles of the Family Office Key Roles & Principles • Portfolio A single-family office is a structure that works exclusively for one family, all team members are employees, they do not own shares or interests in the FO. • The FO's core role is to manage risks. Family Portfolio Management Business Units Corporate Finance Support • • • • Financial risks; Insurance coverage; Physical security of people and assets; Reputational and image risks. Measure the FO's performance in terms of the family’s wealth preservation objectives. • Consolidate portfolios managed by separate institutions and provide analysis and advisory support. • Family Office It should manage relationships with banks and key advisors. • Family Values & Dynamics • Help the family with its “dynamics” issues, its family charts and ground values through: • new business coaching, • next-generation training, and • mediation. Trust Deed • Support the Family Business with corporate finance deals and strategic agenda management. • Tax, Accounting & Estate Planning Foster, coordinate efforts to build a family legacy and develop a philanthropy infrastructure. 29 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  30. 30. WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (2) Roles of the Family Office % 120 Comments In-sourced vs. Outsourced • There are all sorts of Family Offices in the World; some do it all, some do not even handle investments and wealth planning. 100 • Most FO’s handle wealth-planning and Investment Management tasks internally, but the use of advisors in both areas is predominant (FO’s get help). 80 60 • Understanding the costs of in-sourcing vs. outsourcing, inclusive of risks is essential in this debate on in- or outsourcing. 40 • In the long run, emerging Governance principles would indicate that Trust activities will increasingly be separate from Family Office tasks in order to ensure proper separation of management and ownership. 20 0 • Emerging-markets FO’s are likely to be more involved with the Family Business and Special Projects. In-sourced (incl. with advisors) Outsourced 30 Setting up a Single Family Office Sharing a few lessons and experiences * Source FOX 2012 Survey © Geoffroy Dedieu 2013
  31. 31. YOU CAN LEVERAGE YOUR FO RESOURCES AS … an internal Corporate Finance Team (1) The FO can support the family business with key corporate finance decisions and processes …. liquidity events, M&A, IPO … free of charge and without conflicts. Example: Reverse Take-over operation Family Investors Shares Business Unit 1 Family Investors Assets of Target Co. Family Investors 1. Family sales / brings shares in BU1 to Target Co. Shares BU International Old BU1 Key Support from the SFO 3. Family controls 85% of Target Co and decides to rename it BU1 as International. 2. Target Co pays Family not with cash but with new shares in Target Co. 4. Family has the OPTION to sell a 15% stake in BU International to a potential institutional investor. Shares Target Co. Family Investors Potential Institutional Investor Shares • A family with an existing business will need corporate finance advice, which the SFO can provide without conflict of interest. • The Single-FO can work alongside outside advisors (and supervise their costs and service levels…) • A Single Family Office acting as advisor in corporate finance transactions does not incur additional charges and prevents conflicts of interests (see discussions on Fixed Costs and Gorvernance). New Assets 31 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  32. 32. LEVERAGE YOUR FO RESOURCES AS … an internal Corporate Finance Team (2) The FO can support the family as active investors in the family business to drive an agendamanagement process. Keep it integrated and continuous as a means for ensuring superior decisions and actions in the family business group. An Integrated Management Process for the Group Initial Strategic Position Assessment • At any point in time, each Family Business Unit and the Family Group should have Management Agenda for Change Continuous Evaluation of Strategic Position • An agreed strategy that is being implemented; Generation of Alternatives Dialogue between Business Lines & Group Performance Management A Continuous Process • An agreed management agenda of the highest priority strategic and organizational issues and opportunities; • Initiatives in place to address the management agenda; and Evaluation of Alternatives • An on-going dialogue with the Group about the Business Line’s management agenda. Approval of Strategic Plan & Resource Allocation * Source: Marakon Associates 32 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  33. 33. YOU CAN LEVERAGE YOUR FO RESOURCES TO … build a family legacy. The FO can support the family as it develops and consolidates it philanthropic objectives and processes. Boosting and Structuring Family Philanthropy Governance • Vision and Mission • Board & Volunteer Structure • Public Accountability & Transparency • Board policies including conflicts of interest, gift acceptance, investment & spending • Human & Financial Resources • Fundraising Strategies and Programs Strategic Planning Implementation • Enunciation of values and mission • Community capacity building • Priority setting • Strategic resource planning • Resource & environment assessment • Private planning sessions for Families • Organisational Infrastructure • Drafting policies and procedures • Financial resource utilisation • Design implementation plans • Fundraising – annual gift, major gift, planned gift • Investment and spending policies • Trust structuring Linking Legacy & Philanthropy Succession planning Value Succession Philanthropy • Define a clear Philanthropic Focus. • Ensure involvement of family members in the charitable giving process. • Develop clear guidelines for funding. • Create sustainability for the families’ charitable giving and strong legacy for years to come. • Identify other granters who have similar interest. • Recruit professionals who understand the charitable sector (in-sourced model). • Database management systems 33 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  34. 34. YOU CAN LEVERAGE YOUR FO RESOURCES TO … monitor and manage the family’s risks. The FO can map key risks for the family and handle risk-mitigation task … this is not just about filing papers and sorting insurance policies. Understanding Risks Key Considerations • Insurance protection for properties and vehicles. • Adequate contracts and background checks on employees (house, drivers etc.) 2G 2G 2G Manage relationships with key brokers. Ensure adequate insurance coverage for all properties. Review property values to match coverage. Ensure compliance with local employment laws. • Insurance protection for family members • Medical insurance • Directors & Officers (D&O) • Kidnapping risks 1G • • • • • Centralise international medical protection policies and monitor coverage and costs. Ensure all board memberships have relevant D&O protection. Liaise with risk specialists. • • • Physical protection • Wills, trusts, estate plans, advisor agreements, deeds, contracts, tax returns, passports, birth certificates, marriage certificates, prenuptial and postnuptial agreements, and other paperwork. • • • • The FO can ensure safe document management and retention: Use appropriate safes and armored cabinets (fire and theft): define your required safety levels and buy adequate equipment. For example a 2mx1m armored cabinet costs around USD 2,000 so the cost is not an issue. IT systems need to have adequate backup and firewalls: use independent penetration tests. Define your Business-Continuity requirements: how fast would you like to be up and running after a fire? 1 day or 1 week?. 34 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  35. 35. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 5 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  36. 36. WHO DOES WHAT ON … THE FINANCIAL PLATFORM? Family Family Office Private Investment Company Custody & Banking Platform With or without a grouped (fund) portfolio Fund Manager Private Fund Family Member Portfolio Management Platform (if not the FO) Bank A Brokers Family Office Bank B Investment Fund Central Custodian Custodian 1 Insurance Portfolio Custodian 2 Trust 36 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  37. 37. WHO DOES WHAT … WHEN USING A FAMILY FUND Most UHNW families have the required scale to set up their own fund(s) to group and manage their financial and non-financial assets. The pooled structure will generate substantial economies/savings on various fee levels. The investors/family will also benefit from better governance (independently audited NAV and accounts) and greatly improved visibility on risks. Family Office Fund Manager OR (if not the FO) Trustee Bank A (if unit-trust fund) Fund Administrator Auditors Brokers Bank B Central Custodian Investment Fund Custodian 1 Portfolio Sollicitors 37 Setting up a Single Family Office Sharing a few lessons and experiences Custodian 2 © Geoffroy Dedieu 2013
  38. 38. WHO DOES WHAT IN … REAL ESTATE, ART AND PRIVATE EQUITY / NEW PROJECTS? Corporate Structure NextGen Trust2 NextGen Trust1 Family Members Comments • Family wealth planning and management should include a broad array of asset classes for which the family needs support from its FO. Family Foundation Consolidation • Art collections; Family Office Private Equity Ltd (new projects) Properties Ltd (property vehicle) USA Asia • Properties (personal use and investment); • Private equity investments and projects. Art Ltd (buying & trading) Investment Fund (managed by FO) UK Portfolio NextGen project 1 NextGen project 2 Business Projects 38 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  39. 39. POSSIBLE ORGANISATIONAL STRUCTURE OF A SFO (in-sourced model) Possible Structure Governance Principles Board of Directors Chief Executive Officer CEO Chief Operating Officer COO Assistant Family Officer Compliance & Governance Officer Compliance support: Specialised firm Chief Finance Officer CFO Chief Investment Officer or Portfolio Manager Assistant Accountant Accounting, VAT & Payroll support • Depending on the roles undertaken by the SFO, the resources allocated to Investment Management, Financial Reporting / Accounting, Tax / Legal and Operations (including sometimes Concierge) will vary. Composition of the Board of Directors. • Non-Executive Directors • Principal (Chairman of the Board); • Senior Family Members; • Senior Independent Director (Chair of Audit Committee). • An independent director should be free of links to management, controllers (family), and others that could influence his/her judgment*. • Executive Directors • CEO, COO, CIO. • Supported by: External Auditors, Audit Committee, Company Secretary. * IFC Family Business Governance Handbook 39 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  40. 40. WHAT KIND OF PEOPLE DOES A SFO NEED? Roles Chief Executive Officer / Chief Investment Officer • Emerging Markets families are likely to want a SFO that actually is able to buy/sell securities and manage portfolios … vs. the Old World model of “manager selection” i.e. a FO that only selects funds to invest with. • Therefore the CEO / CIO needs to have asset management skills and a good understanding of underlying risks and costs (including execution risks and costs). Chief Investment Officer / Portfolio Manager • In a larger team, there should be 2 Portfolio Managers (a CEO/CIO + junior PM). • The PM should experience of a fund’s middle-office (hedge fund or classic fund). Chief Financial Officer / Accounting Manager Comments A new FO created for an Emerging Market family should look for people interested in new challenges (not a comfy private banking job). Since the beginning of the Financial Crisis, more talent has been available on the market … but top people are still hard to get. • Hiring experienced Family Office managers helps speed integration; • Knowledge of fund middle-office and fund administration is a plus for accounting, reporting and control functions => understand your costs and risks! Compensation benchmark* • CEO for London SFO: GBP 150K to 390K + bonus • CFO for London SFO: GBP 70K to 230K + bonus • CIO for London SFO: GBP 100K to 250K + bonus • Preferably from another FO or a fund house. Required knowledge of fund reporting. • Preferably with a good understanding of international trusts and private investment vehicles. * Source: Sulger Buel UK Survey 2012 40 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  41. 41. WHAT DO FO EMPLOYEES SPEND TIME ON? Time is money: although most Single-FO costs are “fixed”, it is important to understand to which tasks / roles / projects these costs are allocated. Example Employee Time Allocation* General FO Administration 9% Philianthropy 5% Accounting, Reporting & Compliance 27% • Wealth Planning • Financial Planning • Tax Planning • Estate Planning Special Projects 3% • Portfolio Management Wealth Planning 15% What do you spend time on? Trusts 6% Task Description* Family Continuity 4% Portfolio Management 18% Business Management Lifestyle 5% Management 8% • Investment Policy & Strategy • Asset Allocation & Rebalancing • Manager Selection & Monitoring • In-House Portfolio Management • Custody Settlement • Lifestyle Management • Bill Paying • Cash flow Management / Budgets • Loans & Leverage • Payroll for Personal Staff • Insurance Oversight • Family Continuity • Client Communications • Family / Board Meetings • Owner Education Programs • Family Risk Assessment • Family Strategic Planning • Business Management • Airplane/Yacht Management • Aircraft Leasing Company • Personal Property Management • Operating Business Management • Private Trust Company • Trusts • Serving as Trustee • Trust Administration • Executorship • Philanthropy • Foundation Administration / Compliance • Strategy / Grant-Making • Investment Diversification • Board Development / Governance • General FO Admin. • Family Office Strategy • General Office Management • Technology • Payroll/HR Administration • Special Projects • • • • • • Philanthropic Ventures Political or Social Events Executorships Legal Disputes Property Construction Other Special Projects • Accounts, Reports & Compliance • • • • • Tax Compliance Regulatory Compliance Accounting / Reporting Partnership Accounting Investment Performance Reports * Source: 2008 Family Office Exchange 41 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  42. 42. WHO IS TYPICALLY AROUND THE TABLE? (out-sourced model) Investment Managers 11 FOX 2008 Survey (sample of 21 families) • USD600+ Million of family assets • 2nd to 4th Generation 22 Adult Households 46 Family Members • 12 Family Office Staff • 1 Corporate Trustee Custodians 2 Investment Consultants 1 Corporate Trustees 1 Accountants 2 Attorneys 4 • 14 Family Trustees • 27 External Advisors Insurance Advisors 3 External Board Members 1 Other Consultants 2 Family Office CEO * Source FOX 2008 Survey 42 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  43. 43. WHO IS TYPICALLY AROUND THE TABLE? A FEW WORDS OF CAUTION ABOUT ADVISORS… UHNW family disenfranchising is often the result of a massively under-studied phenomenon: Stakeholders’ conflict of interests and the impact on family dynamics. The scenario is now familiar and is described below. • Most 1G / Patriarchs built their wealth with the help of smaller firms of lawyers, financial advisors and other service providers; • For these advisors, the 1G and his businesses often represent a large share of their own revenues. 2G or NextGen start joining the business Deteriorating Dynamics Me & my Advisors versus Them 1G Becomes Wealthy, with the help of trusted advisors • When 2G / NextGen becomes old enough to play a role in the family business or family governance, they may threaten the advisors position; • The arrival of 2G could be a time when governance and control gaps are identified; • Opinions on strategy and the future of the business may diverge. • In several reported cases, the presence of legacy, smaller advisors with a disproportionate personal risk / stake, has coincided with deteriorating family dynamics or even generational conflicts. • UHNW families should set up as early as possible guidelines on the maximum revenues they should represent for advisors: max 20%-30% of their turnover. • Families should use a mix of small and large firms. The larger firms will have their own internal conflict and compliance rules to prevent their employees from acting unfairly. • In case of tensions, use a new advisor as mediator! 43 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  44. 44. A FEW WORDS OF CAUTION ABOUT ADVISORS… (2) Forbes March 2013 – Liliane Bettencourt & family At age 90, Liliane Bettencourt is the world's richest woman, and returns to the top ten wealthiest for the first time since 1999. She and her family own more than 30% of L'Oreal, which her father founded. They've gotten far richer this year, thanks to a boost in the French cosmetics powerhouse's stock. However she had her fortune placed under the guardianship of her daughter Francoise Bettencourt-Meyers in 2011 following a very public three-year legal battle. The elderly widow, who suffers from dementia, was replaced on the company's board by her 25-year-old grandson Jean-Victor Meyers in February 2012. The family has waged numerous legal battles against one another. In 2008, Bettencourt-Meyers petitioned courts to investigate a reported $1 billion in cash and gifts her mother allegedly gave to a friend, Francois-Marie Banier, a well-known photographer, writer and painter. Francoise claimed, and Liliane hotly denied, that Banier had taken advantage of her mother. Reuters 23 March 2012 - L'Oreal heiress's ex-wealth manager held in custody … Patrice de Maistre, who had already been placed under investigation in December over allegations of fraud, conspiracy, money laundering and possession of stolen goods, was previously alleged to have made a 150,000 euro ($198,000) payment to former French budget minister Eric Woerth on Bettencourt's behalf… 44 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  45. 45. A FEW WORDS OF CAUTION ABOUT ADVISORS… (3) BBC 28 July 2013 – Daughters win maharaja's $4bn assets in court battle The daughters of a former Indian maharaja have won a 21-year court battle to inherit more than $4bn (£2.6bn) worth of assets. A court in the northern city of Chandigarh said the will of Harinder Singh Brar, Maharaja of Faridkot - who died in 1989 - had been forged. It had left his wealth in the care of a charitable trust set up by some of his servants and palace officials. The assets include a 350-year-old royal fort and a private aerodrome. But his daughter Amrit Kaur claimed the will had been written under duress, at a time when the maharaja was suffering from depression. The court ruled in her favour, declaring the document void. The will came to light following the death of Harinder Singh Brar. His two surviving daughters will now inherit all the assets, which also include a property on one of Delhi's most expensive streets as well as gold and vintage cars. Harinder Singh Brar was the titular ruler of the Faridkot area of Punjab before India became independent in 1947. 45 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  46. 46. A FEW WORDS OF CAUTION ABOUT ADVISORS… (4) The Telegraph 23 August 2013 – Sven-Goran Eriksson: I hate only one person on earth - the man who cost me £10 million Sven-Goran Eriksson, the former England manager, has spoken emotionally of his financial problems after allegedly losing £10 million through the actions of his former financial adviser, Samir Khan. He’s probably the only person on earth I hate,’’ said Eriksson. Now 65, Eriksson is currently coaching Guangzhou R&F, who face Marcello Lippi’s Guangzhou Evergrande in the Chinese Super League on Sunday. After training on Thursday, the Swede’s thoughts strayed to his financial concerns and his anger at Khan, who denied the claims but was taken to court by Eriksson to compensate him for his losses and who was last month declared bankrupt. “Yes, that’s right, £10 million,” confirmed Eriksson…”I feel let down, angry and disappointed because I trusted this man for many, many years. I gave him too much freedom. I gave him all the authorities he needed to take care of my economy.” Khan was introduced to Eriksson in 2004 and took control of his affairs in mid-2007. In 2009, Eriksson grew concerned and asked Deloitte to run checks on Khan, which led to Eriksson terminating his professional relationship with him a year later. In May 2010, Eriksson’s solicitors obtained a worldwide freezing order in the High Court against Khan and the Swede formally launched legal proceedings against him. Court documents claimed that Khan had access to confidential details “including mandates to bank accounts which gave him unlimited access to Mr Eriksson’s wealth”, adding that: “About finances, Mr Eriksson is not especially knowledgeable nor particularly interested, except to the extent that he wants to secure the financial future for his family and for himself, expecting his money to be invested soundly and rationally.” Eriksson claimed that his money was lost on a range of negligent investments including a residential and leisure development of 92 flats in Southsea, Hampshire, and a proposed development of two plots of land at the Royal Westmoreland Golf Club in Barbados. The money, according to the court papers, was used to fund a property for Khan and his family in Barbados, on building work on Khan’s own family home and “to earn secret profits that have been paid to himself’’. Khan also “bought expensive artworks and sculptures”, according to Eriksson’s lawyers. Court documents allege Khan “misappropriated money for a variety of improper purposes, including unsecured loans to other companies for secret profits” and “undertaking loss-making speculations on foreign currency markets”. As for what Khan has allegedly done with the money, Eriksson replied: “I think he has spent it.” 46 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  47. 47. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 6 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  48. 48. THE IN-SOURCING / OUTSOURCING DEBATE: MISLEADING COST ESTIMATES … What they tell you Most MFO’s and Banks (private banks) would claim that it is too expensive to run a Single FO - to better manage the multitude of risks associated to great wealth - if AUM / FUM < USD 50 mio. • MFO’s charge anything between 40bp and 1%. • Banks target 1%-1.5% net banking product (NBP) on Assets Under Management (AUM). Financial Times 2012 48 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  49. 49. THE IN-SOURCING / OUTSOURCING DEBATE: MISLEADING COST ESTIMATES… (con’t) What they do not tell you Brokerage, administration and custody costs within a fund are most often charged to the FUM/AUM, i.e. they are charged to your money. • Count an additional 20bp for conservative funds and 40bp for aggressive asset allocation (SAA). • The fund management industry is one of few in the World where managers are not incentivised to keep their own internal costs low. • The reason is that those costs are charged to clients’ money, directly before the calculation of the Net Asset Value (NAV) reported to clients. • It is OPM! Other People’s Money … those costs are usually not well disclosed to clients / investors. Did you know that structured products are sold with a haircut? • The dealing desk of banks can make 2% to 4% on a structured note and most often the client / investor is not informed. • Either your Front Office manager - your banker, your relationship manager - gets a share of the undisclosed haircut or he/she will make an extra margin for his/her own - internal - P&L and bonus. • See later slide about “ What Drives Financial Complexity?” The most risky products for the clients are often the most juicy for fund managers and banks (cf. Lehman mini-notes sold in retail bank branches in Singapore). 49 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  50. 50. VIEWING THE ASSET MANAGEMENT PROCESS AS A VALUE-CHAIN? Top line: Private Bank, IAM or MFO Asset / Fund Manager Costs Below the line: Charged to NAV 0.5% - 3% 1% - 3% 0.4% - 0.8% 3% Haircut on Structured Notes Cost of PIC and Trusts Brokerage bonds 510bp, Equities 1030bp 0-30% Performance Advisory or Mandate fees 0.8% to 1% MFO fees 30-50bp • In many countries, MFO’s and External Asset Managers or IAM can still negotiate with banks an undisclosed retrocession of up to 40% of the Net Banking Product (NBP). • The client in these situations tend to end up with aggressive portfolios that generate more fees for all parties involved. 1%-3% Fund Management Fees • US-type FO’s tend to act as Asset Allocators: their role is to select fund management houses and funds. • Hence the pervasive terminology: “manager selection” • Most emerging market investors / families view this part of the value chain as redundant and costly. Administration 5-10bp Audit Fees Custody 2-7bp • Investors / Families who do not operate their own FO (SFO) would most often not realise the full extent of the cost of managing their financial assets “down to the securities lines”. • These costs are rarely reported by funds. • These costs are charged to your money, the NAV. Costs charged to the NAV “inside” funds are typically not transparent to the investor / family In some countries, undisclosed kick-backs from fund managers are still legal and even “Compliant”. 50 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  51. 51. FUND SELLING IS A “RIP 0FF” Financial Times 2012 51 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  52. 52. FUND CHARGES ARE A “RIP 0FF” Financial Times October 2013 52 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  53. 53. FIGURES CAN BACK OUR MESSAGES ON COSTS (Example based on 10-12 people) SFO Budget (GBP) X 10 Your People Salaries & Benefits Entertainment, Travel & Subs. Training (Industry & Professional) Training IT Your External Advisors Legal Fees Professional Fees (non IT) Audit Fees IT Consulting Your Operational Capabilities Software License Fees Telephone & Internet Printing Postage Stationery Your Office Rentals and Maintenance Utilities Charity Total Considerations • There are 4 main cost buckets to think of: 1,200,000 95,000 35,000 13,000 • • • • Salaries; IT; Legal and consulting fees; and Rental. • Use benchmarks for salaries 35,000 55,000 25,000 30,000 25,000 150,000 5,000 10,000 100,000 6,000 • i.e. 2012 Sulger Buel & Co compensation survey. • Define quantitative bonus plans • Use different formulas for portfolio managers and private equity. • Categorically ban all conflicts of interests • No carry, no shares; • Use claw-backs and deferred bonuses. • Define and budget your IT platform exante. 35,000 1,819,000 53 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  54. 54. HOW DOES YOUR PORTFOLIO ASSET MANAGEMENT STYLE / STRATEGIC ASSET ALLOCATION (SAA) INFLUENCE YOUR COSTS? Understand how SAA is defined in order to understand why families end up with different allocations depending on whether they work with banks, Multi-FO or Single-FO. Asset Selection Portfolio Construction • Define your financial objectives and needs in the medium and long term. • Develop and maintain an economic and financial outlook tailored to your beliefs and positions • Formulate the investments split between asset classes: Strategic Asset Allocation (SAA) • bonds, shares, hedge, real estate, commodities.. Risk/Return Profile Tactical Allocation Managed Risk • Select securities you want to buy and monitor volumes on the markets. • Keep a separate watchlist for future picks. • Monitor risk levels in view of your objectives, time horizon and your outlook. Picking Stocks & Products Realised Risk & Volatility Risk Appetite Euro Bonds Management Style Strategic Allocation Asset Class Asia Equities Asset A Asset B Asset C Asset D Macro Hedge Fund Geography 54 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  55. 55. HOW DO WE COMPARE COSTS? Use Scenarios – What if you had these portfolios? Conservative Cash 25% Fixed Income 75% Balanced Cash 10% Fixed Income 40% Equities 30% Commodities / ETF 5% Alternatives / Hedge 10% Aggressive Cash 5% Fixed Income 5% Equities 50% Commodities / ETF 20% Alternatives / Hedge 20% What sort of portfolios do we compare? a) Using a Private Bank: high costs assumptions, i.e. aggressive mandate given to the bank. b) Using a Multi-Family Office in a transparent jurisdiction (i.e. NO back-door commissions, so not in Switzerland, Bahamas, Liechtenstein, but rather in the UK, USA, Singapore). Balanced portfolio mandate. c) Using a single FO with CEO/CIO, CFO, 2 accountants. Balanced mandate, with buy-to-hold strategy for bonds (less turnover, so lower brokerage costs). 55 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  56. 56. SAA COMBINE IT ALL … ASSET MANAGEMENT STYLE / SAA + VALUE CHAIN … TO ASSESS COSTS DOWN TO SECURITIES LINES. Conservative Balanced Aggressive VALUE CHAIN Top line: Private Bank, IAM or MFO Asset / Fund Manager Costs Below the line: Charged to NAV 0.5% - 3% 1% - 3% 0.4% - 0.8% 3% Haircut on Structured Notes Cost of PIC and Trusts 0-30% Performance Advisory or Mandate fees 0.8% to 1% MFO fees 30-50bp Brokerage bonds 510bp, Equities 1030bp 1%-3% Fund Management Fees 56 Setting up a Single Family Office Sharing a few lessons and experiences Administration 5-10bp Audit Fees Custody 2-7bp © Geoffroy Dedieu 2013
  57. 57. WHAT WOULD THE FULL COSTS LOOK LIKE? (PRIVATE BANKING) Due to pressure on the revenue target of bankers, it is likely that “client” families will end up with a more aggressive portfolio, which generates higher fees for the bank. Total down-tosecurities costs are rarely understood, calculated and/or disclosed to clients. Private Banking Conservative (USD$ 100 mio portfolio) Balanced Using a Private Bank: Aggressive mandate Undisclosed Haircut Management Fees Administration Fees Brokerage Custody Other fees Total USD Aggressive 120,000 1,500,000 50,000 227,500 200,000 10,000 2,107,500 or 2.11% of assets 57 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  58. 58. WHAT WOULD THE FULL COSTS LOOK LIKE? (MULTI-FAMILY OFFICE) MFO’s are on average less “sales” oriented and likely to take into account the risks appetite and long term risk management interests of the family, resulting in generally more balanced portfolios. Multi-Family Office Conservative (USD$ 100 mio portfolio) Balanced Using a Multi-Family Office in a transparent jurisdiction (i.e. NO back-door commissions) Undisclosed Haircut Management Fees Administration Fees FO Costs Brokerage Custody Other fees Total USD 0 1,000,000 100,000 500,000 60,000 100,000 10,000 1,770,000 58 Setting up a Single Family Office Sharing a few lessons and experiences Aggressive or 1.77% of assets © Geoffroy Dedieu 2013
  59. 59. WHAT WOULD THE FULL COSTS LOOK LIKE? (SINGLE FAMILY OFFICE) Single-FO’s are free to integrate all aspects the of risk-return trade-off when defining the adequate Strategic Asset Allocation of the family portfolios, resulting in generally more conservative portfolios and lower down-to-securities costs. Single-Family Office (USD$ 100 mio portfolio) Conservative Balanced Aggressive Using a Single FO with CEO/CIO, CFO, 2 accountants: Balanced mandate but with the ability to enforce a buy-tohold strategy on fixed income (low rotation = low brokerage) Undisclosed Haircut = 0 Management Fees = 0 Administration Fees 100,000 FO Costs 900,000 Brokerage 34,000 Custody 100,000 Other fees 0 Total USD 1,134,000 or 1.13% of assets 59 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  60. 60. WHAT WOULD THE FULL COSTS LOOK LIKE? (SUMMARY) Industry data indicates Single-FO costs are in the range of 0.70% (top level) to 1.20% (down to securities lines). SFO costs are largely “fixed”, which means that the office can generate economies of scale and scope. Summary on Cost Comparison Based on our example USD 100 mio portfolio Annual costs USD Private Bank (Aggressive mandate) 2.1 mio Observations % 2.11% Advertised / listed fees usually communicated to clients 0.8 to 1% Multi-family Office 1.8 mio (Balanced portfolio, transparent jurisdiction) 1.77% Advertised / listed fees usually communicated to clients 0.4 to 1% Single-Family Office 1.3 mio (Balanced Portfolio, buy-to-hold bonds) Costs anticipated by the family: as per the FO business plan! 1.34% Note that the lager portion of the SFO costs are mainly FIXED • Using the same data as previous slide, for a USD 200mio portfolio, the Single-FO’s costs would be USD 1,368,000 or 0.68% of assets. • Family Office Exchange (FOX) 2012 Survey: Single-FO average size USD461 mio, costs 0.64%. https://www.familyoffice.com/ • The team in place can be leveraged for: • Private equity deals or new business projects, • Family-business corporate transactions, • Assistance to family foundation or family philanthropic projects, • Coaching and supporting NextGen. … free of charge and without conflicts of interests ! 60 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  61. 61. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 7 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  62. 62. WE LIVE IN A WORLD OF INCREASED RESPONSIBILITIES AND PRINCIPLES If you have been reading the newspapers lately you probably have heard of Corporate Social Responsibility and Environmental, Social and Governance principles: CSR and ESG need to be embedded into the Family Office principles and governance processes. Impact on FO Governance Principles Environment • Some environmental concerns to take into account when investing. • Pollution, waste, natural resources depletion, biodiversity. • Climate Change • Carbon emissions, physical impact of industrial activity. Social • Labour issues • Health and safety • Workplace practices • Human Rights • Forced labour • Child labor • Freedom of speech • Freedom of association Governance • Business ethics • Integrity, anti-bribery and anti-corruption • Fraud prevention • Product responsibility • Transparency • IFRS, annual reports • GIPS 62 Setting up a Single Family Office Sharing a few lessons and experiences • Family Offices need to embrace universal principles and build robust governance and control processes around leading global trends. • Adopting responsible investment and governance principles makes your life easier: no need to reinvent the wheel, all these principles are supported by clear guidelines from the United Nations (UN-PRI), the International Finance Corp. (IFC, part of the World Bank), international accounting bodies (IFRS), international investment institutions (GIPS) and national regulators. © Geoffroy Dedieu 2013
  63. 63. FAMILY STRUCTURE & FAMILY GOVERNANCE Combining healthy family dynamics, sound family governance and best-practice corporate governance is extremely arduous. Family Structure Grand-Father (M) 01/01/1940 P: HK, Tax: UK Ms. A (F) 14/11/1969 P: UK, Tax: UK Daughter (F) 31/07/2010 P: UK, Tax: UK (F) (M) MN P Tax Female Male Maiden name Passport Tax residence Principal (M) 01/01/1960 P: HK, Tax: UK Marriage: 01/01/1980 Divorce: 31/12/2000 Grand-Mother (F) 01/01/1940 P: HK, Tax: UK Brother (M) 01/01/1950 P: UK, Tax: USA Sister (F) 01/01/1960 P: UK, Tax: HK Ex-wife (F) 01/01/1960 P: UK, Tax: FR Daughter (F) 01/01/1990 P: UK, Tax: FR Son (M) 01/01/2000 P: FR, Tax: FR Corporate Structure Family Members NextGen Trust1 Family Office NextGen Trust2 Family Foundation Family Businesses Despite the media perception that wealth is passed on from a privileged few to the privileged descendants, the reality is that 95% of family businesses do not survive the 3rd generation of family ownership and a majority of FO’s have typically served no more than 3 generations*. * 67% for members of the FO Exchange 2012. 63 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  64. 64. FAMILY GOVERNANCE & FAMILY BUSINESS GOVERNANCE A well-governed FO requires a well-designed Family Governance. Family Charter • Draft a statement of the principles that outline the family commitment to core values, vision, and mission of the family business (IFC / World Bank, Family Business Governance Handbook). • Family values, mission statement, and vision. • Family institutions, including the family assembly, the family council, the education committee, the family office, etc. • Board of directors (and board of advisors if one exists). • Senior management. • Authority, responsibility, and relationship among the family, the board, and the senior management. • Policies regarding important family issues such as family members’ employment, transfer of shares, CEO succession, etc. • There are strong cultural aspects to family charters, c.f. The Charter of the Rights of the Family of the Vatican (1983). Shareholders Agreement • Shareholders Agreements should be used at the Business level and at the Family Office level to frame important discussions, handle issues of exit and shares sell/buy and prevent disputes. • The family office is owned by “the family” meaning family members of various generations and family trusts, all these shareholders need to have a framework of ownership of the shares in the FO and other family entities. • Key features: • Regulate the ownership and voting rights of the shares in the company; • Control and management of the company, which may include power for certain shareholders to designate individual for election to the board of directors; • Making provision for the resolution of any future disputes between shareholders. Source: IFC /World Bank, Wikipedia 64 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  65. 65. FAMILY GOVERNANCE STRUCTURES : THE FAMILY COUNCIL To ensure sound family governance, a Family Council acts as the Family’s top cooordination and decision-making institution. What is a Family Council? • It is the top governing body of the family. • The council can take many shapes and forms, there are no prescribed formats. • The notion does exist in a prescriptive legal form in certain jurisdictions (France Code Civil Art 407 cc and Art. 477 cc). • The composition, structure and functioning of family councils differ from one family business to another. • The size / membership should allow fair representation and meaningful debates. • The council will be the forum for discussion and drafting of the Family Charter and other key documents such as Shareholder Agreements. Governance Structure Family Council Family Charter Shareholders Agreement Family Office Source: IFC /World Bank, Wikipedia 65 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  66. 66. FAMILY MEETINGS : ENSURE A FAIR PROCESS Fair process during meetings is critical to sound family dynamics. It must be actively and openly managed to avoid conflicts. Key Steps of a Fair Process* What is the Need • Why do we need to meet? • Anybody should be able to ask for an item to be discussed. • The family council or Board of Directors should decide on actual notice of meeting. • Family members should be motivated to attend and contribute. • Listen to everybody. Meeting Preparation Meeting Procedure • Identify who will organise the meeting • Collect input from family members. • Agenda items. • Place, time. • Send meeting material to all participants. • Chair. • Voting and discussion process. • Minutes to be taken, circulated and approved by circulation or at the next meeting. Communication 101 • Listen. Meeting Next Steps • Let all members speak. • Do not judge or fingerpoint. • Present agenda and rules. • Listen to all, within discussion guidelines. • Make clear decisions. • Agree Next Steps. • Next meeting dates and minutes review. • Who should do what? • Timeframe. • Reporting to whom? • The most senior members should be careful to not make comments that frustrate or mute younger members. • Encourage Participation. • Training and coaching are important for the family to understand what this is all for. • Chose location well. • No sleeping! • Deal with conflicts. • Try to identify potential areas of conflicts and faulty family dynamics in advance, with the help of a neutral party if necessary (useful). *Source: Randel Carlock , INSEAD 66 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  67. 67. EXAMPLE OF KEY SINGLE-FO GOVERNANCE PRINCIPLES The OECD defines Corporate Governance as … “Procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decisionmaking.“ Example FO Mandate • Our No1 priority is to identify and manage risks for the family. This goal is reflected in a conservative investment profile as well as in the FO’s corporate governance. Family Member Family Charter Family Director Family Office Family Owner Shareholders Agreement Family Employee FO Governance Principles • Transparency and Accountability. • Compliance and Regulatory Oversight. • Strong Internal Controls with Separation of Powers. • The effective segregation of duties is an important element in the internal controls of the family office. • Internal controls are at par with listed businesses to ensure the reliability of the FO's financial reporting. • In particular, it helps to ensure that no one individual is completely free to commit the family’s money or incur liabilities on its behalf. • Segregation also helps to ensure that the family receives objective and accurate information on financial performance, the risks faced by the family and the adequacy of the FO’s monitoring systems. • Separation of Family, Ownership, Board and Management roles*. • These roles entail different incentives and interests, which increases Governance challenges for the Single FO. * IFC Family Business Governance Handbook 67 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  68. 68. CORPORATE (FO) BOARD RESPONSIBILITIES The Family Office’s Board of Directors has a significant amount of responsibilities towards establishing and maintaining adequate Corporate Governance and Compliance. Compliance Responsibilities of the Board • The Board is deemed to be ultimately responsible & accountable for compliance and risk management. • The Board sets up control policies and creates the required environment to promote a strong compliance culture. • The Board should ensure that staff is aware of this duty and that a "compliance culture" exists within the Company, starting at the top. Senior Management Arrangements Systems and Controls • General Organizational Requirements • Employees, Agents & relevant Persons • Compliance, Internal Audit & Financial Crime • Risk Control • Outsourcing • Record Keeping • Conflict of Interest • Liquidity Risk Systems and Controls • Whistle-Blowing Matters Reserved for Board Decision • The Board may determine any matter it wishes in full session within its statutory powers • Regulation & Control • Appointments • Policy determination • Strategy and Business Plans and Budgets • Risk Management • Direct Operational Decisions • Financial and Performance Reporting Arrangements • Audit Arrangements 68 Setting up a Single Family Office Sharing a few lessons and experiences Board Performance Evaluation Board Review of arrangements • Follow international governance standards to ensure the performance of the Family Office board is assessed on a regular basis and with adequate accuracy / transparency. • The process should be led by the Chairman with support from the Company Secretary or Compliance. • In the UK the review should be annual and supplemented every three years with an external review (UK Corporate Governance Code, Financial Reporting Council, www.frc.org.uk) © Geoffroy Dedieu 2013
  69. 69. CORPORATE (FO) BOARD CAPABILITIES & TRAINING Ensuring adequate level of skills and continuing training of board members is key to maintaining efficient governance. The UK Combined Code on Corporate Governance refers (in supporting principles) to the board’s role as: “to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed.” Walker Report (2009) “The FSA’s (now FCA) on-going supervisory process should give closer attention to the overall balance of the board in relation to the risk strategy of the business, taking into account the experience, behavioural and other qualities of individual directors and their access to fully adequate induction and development programmes. Such programmes should be designed to assure a sufficient continuing level of financial industry awareness so that Non-Executive Directors are equipped to engage proactively in banks and other financial institutions board deliberation, above all on risk strategy.” 69 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  70. 70. Financial Times, 6 June 2013 70 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  71. 71. KEY CONCEPTS OF ANTI-MONEY LAUNDERING Composite Risk Model History of the KYC • • • • • • The origins of Customer Due Diligence (CDD) rules are to be found in 1980’s prudential law and internal risk management within financial institutions. Practice have shown that understanding the client’s activities and conducting due diligence verifications is the most effective way for banks to minimise their exposure to risks. The Basel Statement of Principles (BSP, 2003) addressed the issue of 'know your customer' (“KYC”) as a base in merging the CDD with the Anti Money Laundering system. The international response to the underground economy was coordinated by the FATF whose original 40 principles form the basis of most international countermeasures to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organizations, were added on June 30, 2003, with another added 22 October 2004, to form what is now known as the "40 + 9" principles of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). Money Laundering is the filtering of proceeds from an illegal activity, through a series of transactions designed to disguise the funds as the proceeds from a legitimate activity. International initiatives to curb and deter terrorism have intensified since 2001 by targeting its funding and procurement structures. Banks must collect enough information from their client to understand the clients’ business activities in order to identify any unusual transactions or patterns of transactions. The client profile (KYC) must allow the bank to establish the source of wealth of the client and also to profile the future transactions against the original client profile to detect any unusual transaction or inconsistent activity as opposed to the client’s principal account activity. Based on the three risk factors; Client Risk, Country Risk and Product Risk; the bank will assess the composite risk of the client and classify it as a low, medium or high risk account Product Risk • H M L H M L Geographical Risk This approach is now used by law firms, audit firms, financial institutions … it will soon be used by real estate agents, car dealers, airlines, hotels. 71 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  72. 72. A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE CLASSIFIED AS PEP: IS THIS AN INSULT? (1) PEP is not a bad word, it is a risk classification. Being a PEP means you need to have the right people and procedures in your family office to handle the additional requests and queries of banks, other counter-parties and service providers. Who are PEP’s ? “Politically Exposed Persons” (PEPs) are defined as persons holding (or previously holding) prominent public positions, members of a government of any country or state or sub-section of such a government, senior politicians on the national level, senior government, judicial, military or party officials on the national level, or senior executives of state-owned enterprises of national importance individuals, companies and legal entities having close connections to such persons/entities, either through family ties, personal or business connections. 72 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  73. 73. A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE CLASSIFIED AS PEP: IS THIS AN INSULT? (2) Being a PEP means you will be monitored by all counter-parties as a “high-risk” client. Your FO needs to help your counter-parties understand and measure these risks accurately. What is the targeted risk? What it means for the FO • “Politically exposed persons” risk corresponds to the risk associated with providing financial and business services to public or government officials. • This risk is particularly important where PEPs are from countries with widely-known problems of bribery, corruption and financial irregularities. See Transparency International’s Corruption Perceptions Index (for details on the CPI, see http://transparency.org/). • For countries with high corruption levels, individuals in power have the ability to build large fortunes by looting their country’s funds, diverting international aid payments, disproportionately benefiting from the proceeds of privatizations, or taking bribes (described by a variety of terms such as commissions or consultancy fees) in return for arranging for favorable decisions, contracts or job appointments. • The Family Office will need to deal with counter-parties who apply “high-risk” monitoring to everything the FO does. • It is likely the FO will need to have its own Compliance team to respond to queries and requests for documentation. • The FO will monitor reputational risks: all new business partners need to be screened by the FO. New suppliers as well. • Conduct full and regular web searches and database searches on your own profile. Understand what the Compliance people within banks will think when they do a search. • All investment or banking instructions need to be accompanied with relevant documents, contracts, invoices and explanations … the FO needs to help the front office managers on the counter-party side with their own Compliance process. Make sure they have all the information they need before they ask for it. 73 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  74. 74. A TYPICAL COMPLIANCE / CONTROL WORKFLOW • To embed compliance processes into the Family Office, the FO’s IT team and Compliance & Governance can implement an intranet and a workflow platform to ensure that internal controls / compliance forms, declarations, tasks and reports are prepared, delivered and approved on time. • This example is based on the latest Microsoft SharePoint platform. 74 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  75. 75. A TYPICAL COMPLIANCE / CONTROL WORKFLOW (cont’d) Workflow Development Compliance initiates a change in a control form Automated email to approver Workflow Implementation Signature onscreen Document not approved Document changed, newversion number Previous document archived in library Automated email sent to Compliance with details 75 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  76. 76. DEALING WITH BRIBERY, CORRUPTION & WHISTLEBLOWING Internal Reporting Procedures Fighting Bribery & Corruption Any employee within the FO Compliance Incidents, Suspicious Activities Security Incidents Example Statement of Anti-Bribery Policy: Whistleblowing Report Report Report Chief Executive Officer or COO Compliance & Governance Officer Chief Operating Officer • In the UK, the Bribery Act 2010 not only makes bribery and corruption illegal, but also holds UK companies liable for failing to implement adequate procedures to prevent such acts by those working for the company or on its behalf, no matter where in the world the act takes place. “The Office has a zero tolerance of bribery and corruption, this policy extends to all business dealings and transactions in all countries in which it or its subsidiaries and associates operate. This policy will be given force in a detailed anti-bribery programme which is regularly revised to capture changes in law, reputation demands and changes in the business. All directors and employees are required to comply with this policy.” • Penalty for Bribery in the UK is up to 10 years of jail and unlimited fine! 76 Setting up a Single Family Office Sharing a few lessons and experiences Whistleblowing Policy What this policy does • Ensure that all members of staff can blow the whistle on (suspected) criminal or unethical conduct. How? • By encouraging staff to make disclosure of Criminal or Unethical conduct; • By ensuring that disclosures will be treated with discretion and utmost confidentiality; • By explicitly protecting the individual who makes a disclosure in good faith; • Complies and concurs with the provisions of the UK Public Interest Disclosure Act 1998 ("PIDA"); • Communicated to directors and employees appropriate internal procedures for handling their concerns as part of an effective risk management system; • The office should appoint a whistleblowing officer. © Geoffroy Dedieu 2013
  77. 77. CONFLICTS OF INTEREST Defining & Identifying Conflicts within the Family Office Preventing & Managing Conflicts of Interest • A conflict of interest occurs when the private interests of an employee or Director (board member) interfere, or appear to interfere, with the performance of his or her duties. • Relationships with family (customers) and all service providers / suppliers must be open and fair; • Two or more parties have misaligned interests. • Employees and Directors disclose personal business interests when such could be in conflict with the performance of their duties; • Conflicts of Interest is anything that might impact on your ability to make an independent judgement. Special Case: Gifts & Entertainment (Hospitality) • This policy should establish a common understanding of appropriate conduct expected of all Board members and staff in relation to gifts, benefits and hospitality. • The Family Office should have proper controls for identifying and managing conflicts of interest; • When a conflict arises with different relationships the Family Office should reallocate responsibilities and/or where a relationship is inappropriate it should be terminated. • Identified conflicts should be documented (!) and should clearly evidence how the conflict was managed • The objective is to ensure that no material conflict arises with any duty that a firm owes to its customers. • Entertainment, hospitability or other benefits given and received by any director or employee are to be reported to the Family Office and a log should be maintained. (there should be a threshold i.e. USD100). 77 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  78. 78. CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (1) When to have (or not) family members as employee of the business or the family office is a thorny issue for all families: there is an embedded conflict of interest and it needs to be addressed. The Issue The Options • Appointing family members to the business or FO may seem to other members to represent an unfair advantage for the person hired/employed: Extra income is generated and extra power is granted. • The appointment process may not seem fair process to the rest of the family. How was this family member selected for that job? • Whatever the position of the family charter / constitution on the issue, it needs to promote wealth preservation and successful succession. Business Owner Non-owner 78 Setting up a Single Family Office Sharing a few lessons and experiences Employee / Manager Board Member © Geoffroy Dedieu 2013
  79. 79. CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (2) Different Families make different choices when it comes to allowing employment in the Family Office or Family Business. Option A • Allow family members to be employed • This is the more frequent choice in emerging-market families with 1 or 2 generations. • The family and the FO needs to be aware of the trend to move to Option B as time and generations pass. • In the long run, Option A is viable only if the family sets clear guidelines regarding required qualifications (MBA from certain schools) and experience (outside jobs with A-list banks, consulting firms or successful entrepreneurial project). • Fair process needs to be maintained: special hiring committee. Option B • Do not allow family members to be employed. • Certain families make 1 exception for an exceptionally talented family member to represent the family, as CEO or Chairman. • The family has a Governance and directorship role. • The issue of director fees will pose the same issues as in Option A. If family members receive fees as directors, this needs to be tabled, discussed and agreed. The access to directorships should be based on merits and competence, not birth rights. 79 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  80. 80. Chapters 1. Key Messages 2. Key Challenges 3. Defining the Family 4. What do Family Offices do? 5. Organisation and Tasks 8 6. The In-sourcing vs. Outsourcing debate 7. Governance & Policies 8. Information Technology 9. Investment Management & Reporting 10. Managing Non-Financial Assets 11. Structuring International Wealth for Future Generations
  81. 81. WHAT IS WRONG WITH THIS PICTURE? 81 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  82. 82. THIS IS WHAT MOST BANKS’ IT BACKBONE LOOKS LIKE! THIS IS THE CORE TOOL USED TO DELIVER SERVICES TO CLIENTS The code in most banks’ IT, especially Private Banks, dates back to the 1980’s. Black screen, no GUI, no mouse. 82 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  83. 83. BANKS & FINANCIAL INSTITUTIONS’ IT SYSTEMS ARE FALLING APART! RBS • Lost at least GBP 125 mio in June 2012 due to retail software failure • Botched an overnight upgrade installation NASDAQ • Unspecified losses incurred by brokers during Facebook IPO on 18 May 2012 • Apparently due to capacity constraints and failsafe failures Knight Capital • Lost USD 440 mio in 45 minutes on 1st August 2012 • Botched an upgrade installation • Thousand of erroneous orders sent Banks’ legacy systems are hugely complex and piled up over 30 years (where complexity theory needs to be applied…). Strong internal resistance to change. Entrenched vested interests. Lack of top-management IT skills. Short term focus. Lack of political will to fix the situation. 83 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  84. 84. ADVANTAGED DECISION MAKING “The most meaningful way to differentiate your company from your competition, the best way to put distance between you and the crowd, is to do an outstanding job with information. How you gather, manage and use information will determine whether you win or lose.” Bill Gates, March 1999 Source: FT IT, October 18, 2000 84 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  85. 85. EXAMPLE FAMILY OFFICE TECHNOLOGY MODEL The cost of this model is approximately 10% of the office budget. Incorporate / Interface Accounting & Planning Data • • • • IFRS compliance Audited Annual Reports Tax / Planning / Trust allocation Insurance / Endowment allocation Trading Portfolio Construction SAA Order Management Liquidity Asset Allocation Portfolio Modelling Prime Broker Family Office Database External Trade Data Firewall Custodians Market Price Updates Input from Internal Risk Models Trade data is reported to Custodians • Confirmation, Settlement • Delivery vs. Payment (DVP) Shares Family Office Trade Allocation, Broker/Custody Notification Virtual server host Family Office Report Definition Layout Online verification & correction at Family Office Consolidation & Reporting Firewall Final Rendering PDF, XL, SharePoint Remote Access Server Intermediate Formatting Portfolio / Assets Report • Consolidated view of wealth and assets • Consolidated view of income and succession planning Family Member Family Director Family Owner Family Employee Family Foundation Trust Report Distribution Family Office 85 Setting up a Single Family Office Sharing a few lessons and experiences • To external end users. © Geoffroy Dedieu 2013
  86. 86. EXAMPLE SINGLE-FO IT ARCHITECTURE NETWORK DIAGRAM Communications / Internet • Secure access to Internet. • Data replication route for Backup / Business Continuity with additional firewall. • 3 Internet data lines. 1 dedicated to backup. Production Environment Backup / Business Continuity Environment • Over 8 Terabytes (TB) of data storage. • Remote location. • 3 SQL databases: Accounting, Portfolio Management, Document Management. • Weekly replication of the full functional system and data. • Virtualised servers. • Data backed up to tape and separately backed up to disk. 86 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013
  87. 87. EXAMPLE FAMILY OFFICE IT SYSTEMS & BUDGET Interface Example IT budget for 3 main IT packages relevant to FO functions • Advent/Bloomberg: Portfolio Management, GIPS compliant; • Sage 200: accounting package, IFRS compliant; • SharePoint: Internal Workflows for compliance and controls, internal communication, and file management. IT Budget (GBP) first year Hardware Purchase Software Maintenance and Licensing 35,000 150,000 Software Purchase 15,000 IT Consulting Fees 55,000 IT Training 10,000 Telecoms 5,000 Total 270,000 87 Setting up a Single Family Office Sharing a few lessons and experiences © Geoffroy Dedieu 2013

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