October 2006

Insights for
Preferred Clients
                                  It all begins innocently enough, typical...
October 2006

into an operation requiring full-time           Marshall and Raattama. While that might       knows the f...
October 2006

In that case, it may be wise to hire a          Raattama and Marshall note. “You’ve    “People simply rea...
October 2006

    “Registering With the SEC—It May Not Be Neccessary for the Family Office After All,” Kimberly Clous...
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Managing Your Wealth With a Family Office


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It all begins innocently enough, typically as the result of a lifetime of personal achievement. An individual builds substantial wealth by running his or her own business, or through a series of smart investment decisions. Life is good and there are plenty of financial rewards to show for it.

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Managing Your Wealth With a Family Office

  1. 1. October 2006 Insights for Preferred Clients It all begins innocently enough, typically In another scenario, the family patriarch Managing Your as the result of a lifetime of personal or matriarch started a business years ago Wealth With a achievement. An individual builds sub- stantial wealth by running his or her own and sells it. A child or grandchild through various transfers acquired stock in a com- Family Office business, or through a series of smart pany for which she or he received a large investment decisions. Life is good and amount of cash. The child or grandchild there are plenty of financial rewards to might not have much knowledge about An effective office structure show for it. managing family wealth, even if he or and team can help families she had experience running the family navigate financial and business But below the surface, trouble can brew. business. They are two different and dis- complexities. Your family’s wealth may eventually tinct disciplines. spread out over a multitude of asset classes, legal and accounting complexities Centralized Decision-Making proliferate, and financial results falter. In some cases, proceeds from the sale of What began as a small and efficiently run a family business can become spread out household operation can eventually among several outside money managers, devolve into something that causes the each of whom has little or no knowledge family to feel overwhelmed. of what the other is doing. As a result, asset allocation ratios are derived in a “That’s when a family office can help,” haphazard manner, leading to sub-par say Stewart Marshall and Hank Raattama, performance. By establishing a family estate planning and tax attorneys with office, the owner can centralize the Akerman Senterfitt in Orlando and investment decision-making process and Miami, respectively, and members of the achieve accountability for results. UBS Attorney Network.* “You could have a family office that consists of one or But an in-house advisor would not neces- more professionals, such as a business sarily have to make all of the investment manager, accountant, secretary or invest- decisions. The family office investment ment advisor, depending on the level of professional could carefully screen outside sophistication required.” Estimates vary talent and ensure that the portfolio’s widely but it is thought some 3,000 full asset allocation is consistent with the service family offices exist today.1 family’s overall financial goals and risk tol- erance. The investment manager would There is no single definition of a family also be responsible for evaluating results office, explain Marshall and Raattama, and pruning managers whose perform- and it is something that can develop into ance fails to measure up. a group of people handling the family business affairs. After selling a family Similarly, a family office can help manage business, for example, the former owner a portfolio of real estate holdings whose may feel inundated by the responsibility success may have taken it beyond the abc of managing millions of dollars in assets. This is a good time to consider some expertise of its creator. For example, what began as a relatively straightforward pur- degree of a family office. chase of a duplex apartment or a small residential development eventually grows
  2. 2. October 2006 into an operation requiring full-time Marshall and Raattama. While that might knows the family. He or she can select management. Rather than disposing of sound like a lot of money, it is important from a narrow spectrum of necessary highly profitable properties and leaving to keep in mind the objective of a family services. The family pays only for services money on the table, the owner could office is to hire top talent—and top actually needed and gets top talent to hire a qualified expert to manage and talent does not come cheaply. “If your complete the job more efficiently. operate the real estate holdings while affairs are complicated enough to require working in close consultation with other a family office, you are going to want Thus the potential benefits of a family family office employees, such as an attor- to hire and retain good people,” say office are considerable. If done properly, ney and accountant. Many family offices Marshall and Raattama. “In the legal cat- families get immediate and ongoing have a business manager to help with egory, for instance, you are not going to access to qualified specialists within each mundane yet time-consuming matters, hire someone right out of law school.” field. These individuals, in turn, work such as paying bills and handling admin- together to provide a synergistic solution istrative details. The general rule of thumb is that house- to complicated financial matters. holds should aim to keep operational Hiring the Right People expenses below 1.5 percent of total Facilitating Succession Planning According to Raattama and Marshall, assets each year, so fixed costs of $1.5 A family office can also be a cost-effec- most families realize only gradually their million would require a net worth of at tive way to bring younger family mem- financial affairs may have grown beyond least $100 million to make a family office bers into a business. “To a great extent, their ability to handle them. “Usually, cost-effective. Raattama and Marshall the value of a family office lies in its there is no single event that triggers the emphasize that the $1.5 million figure intangibles—things like family succession need for a family office,” they say. Most only applies to family offices that use a and training younger family members of the time, it simply evolves through full range of professional services. how to run the family financial affairs,” awareness that a problem exists. say Raattama and Marshall. They note “Somebody might start with just an in- In reality, many families that could bene- less than half of all family businesses are house accountant and later add an indi- fit from a family office might have more passed on successfully to the second vidual to coordinate all the investment limited needs. They may need only an generation and less than a quarter ever aspects of the activity,” they continue. “It accountant or attorney to help them get handed down successfully to really is an evolutionary process. In some make sense of complex financial man- successive generations. parts of the country, accounting and law agement and legal matters. Or, they firms offer family office services. And, might have a general family administra- Family offices can be used also in con- some family offices have certain aspects tor to help pay bills and handle impor- junction with family charitable founda- of their management that have become tant correspondence. In these scenarios, tions. “Philanthropy is a wonderful way so successful they are spun off into other other services such as investment advice to bring families together,” observe profitable investment businesses could be outsourced to qualified firms. Marshall and Raattama. “The charitable (e.g., hedge funds).” aspect can eventually become a signifi- Gatekeeper of the Business cant function of the family office.” How much money is required to make a Family office specialists can also function family office cost-effective? Once again, as gatekeepers to direct essential services According to Raattama and Marshall, there is no single template that can be to the most qualified outside experts many overstretched individuals realize applied to every situation. Running a full- within their discipline. “Think of it in only gradually a family office might blown family office may include special- terms of a large corporation that has a address their concerns. “Very few peo- ists such as an attorney, accountant, general counsel,” explain Raattama and ple just walk in and say they want to set business manager, investment advisor Marshall. “You might ask: What’s the up a family office,” they say. “In fact, and a general family administrator. In advantage of having an in-house general most people are not even familiar with addition to salaries, family offices typical- counsel staff? Why would a company the family office concept. What usually ly will incur expenses related to: renting pay an in-house general counsel especial- happens is they say, ‘Look, every year or owning office space; employee bene- ly since in-house general counsel does I’m hiring all of these accountants, fits (such as health insurance and retire- not perform all needed services?” It lawyers and financial advisors, and I’m ment plans); and information technology could simply hire the occasional legal not sure anymore I have my arms that most professionals require to do services needed. The advantage is the around this situation.’ ” their jobs. This could cost as much as family gets someone experienced in $1.5 million annually, according to selecting certain expertise and who 2
  3. 3. October 2006 In that case, it may be wise to hire a Raattama and Marshall note. “You’ve “People simply reach a point where the qualified in-house specialist to serve as picked the wrong person if they spend light goes on and they realize things may gatekeeper for all issues relating to the time—and your money—educating have gotten out of control—they do not family's business affairs. A few years themselves on some arcane matter.” fully know what is happening anymore later, that same individual might express with their business and financial affairs, similar concerns about legal matters, or The advantage of retaining qualified and the results are no longer good the performance of their investment in-house persons is they should know the enough,” Raattama and Marshall say. portfolio, say Marshall and Raattama. “It experts to retain and when such are That is when it might be time to sit really is an evolutionary process that typi-necessary. Even if experts charge higher down and consider whether a family hourly rates, they should get the job cally takes several years to play out fully.” office makes sense, they suggest. And in done in less time. That will save money in many cases, the answer is yes. Your UBS Managing Costs the long run. When a family office hires Financial Advisor can help you to decide Part of that evolutionary process requires people who are experts in their field, one if a family office structure is appropriate having a positive experience with the first should expect them to produce results for your individual situation and help you forays into a family-office structure. If that justify their cost, assert Marshall to craft a strategy for establishing one executed properly, there should be a sig- and Raattama. that helps to run your business and nificant return on whatever investment is financial matters more smoothly. made to establish a family office. Making Time for Leisure In many cases, candidates for a family Naturally, there are costs involved in office have reached a stage in their lives managing family affairs, whether in the where they want to slow down and context of a family office or through the enjoy the fruits of their labors. They may usual network of outside assistance. want to interact with fewer outside “Always hiring an outside generalist to people, not more. And they often want solve investment, legal or accounting to start the process of succession by problems could end up costing extra bringing family members into a business money. They might have to spend too where they can be trained by in-house much time bringing themselves up to professionals with a deep understanding speed—both on the family situation and of the family’s finances and guiding on the specific issues involved,” principles. 3
  4. 4. October 2006 1 “Registering With the SEC—It May Not Be Neccessary for the Family Office After All,” Kimberly Clouse, Trusts and Estates, August 2006. * The Attorney Network is a nationwide network of independent trust and estate attorneys that can help to meet your comprehensive estate planning needs. Attorneys that are part of the Attorney Network are independent of, and unaffiliated with, UBS Financial Services Inc. These attorneys may refer clients to UBS Financial Services Inc. but receive no compensation from us for these referrals. Neither UBS Financial Services Inc. nor its employees provide tax or legal advice. You must consult with your legal and/or tax advisors regarding your personal circumstances. As a firm providing wealth management services to clients in the U.S., we offer both investment advisory programs and brokerage accounts. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information, please visit our website at www.ubs.com/workingwithus. UBS Financial Services Inc. does not provide tax or legal advice. The information stated in this white paper is not meant to be all-inclusive and is not intended to provide specific advice or recommendations. We strongly encourage you to retain an attorney and/or an accountant to help determine the appropriateness of a particular strategy. ©2006 UBS Financial Services Inc. All Rights Reserved. Member SIPC. Brand names, product names, trademarks and service marks mentioned in this publication are the property of their respective owners. Wealth management services in the United States are provided by UBS Financial Services Inc., a registered broker/dealer offering securities, trading, brokerage and related products and services. UBS Financial Services Inc. www.ubs.com/financialservicesinc 061002-2045 V137 UBS Financial Services Inc. is a subsidiary of UBS AG.