Meeting the needs of high net-worth individuals

Diversified assets in various countries, different tax regimes and legal systems – only the right infrastructure and constellation of highly skilled specialists can satisfy the needs of wealthy families and high net-worth individuals.

Wealthy families and high net-worth individuals (HNWIs) represent a special client segment that faces new and particularly difficult challenges in the current environment. On the one hand, they have relationships and investments in different countries that expose them to different tax regimes and legal systems at various levels. On the other hand, HNWIs have very diversified assets encompassing not only traditional bankable assets but also – and more importantly – real estate holdings, family businesses, etc. Consequently, they face a multitude of risks ranging from investment losses and liability, tax and reputational risks to the erosion of wealth as a result of the division of assets upon succession. Wealthy families and HNWIs seeking long-term growth and success, therefore, require coordinated asset management, legal advisory and other services – often involving highly-skilled specialists. This is in particular true in the Middle East, as wealthy families and HNWIs are facing similar challenges as the ones in other parts of the world despite the cultural differences. In the Middle East, typical large and complex family relationships, family businesses, and cultural requirements even intensify these needs. Infrastructural solutions such as family offices can fulfill these needs provided they are properly structured and involve the right people.

Tailored architecture

Family offices are growing increasingly popular in view of their ability to provide highly flexible, state-of-the-art infrastructural solutions to support wealth management and preserve the lifestyles of wealthy families and HNWIs. They usually take the form of special entities that focus exclusively on the areas of wealth management, family management and/or business management. Depending on the client's individual circumstances, the family office may provide the necessary services internally or supervise the delegation of these services to external specialists such as banks and law firms.

Like the architecture of the family office itself, the profile and roles of the family officers and family office employees are tailored to the requirements of the client and vary, depending on the type of services needed. For example, a family office that provides asset management services will need a chief investment officer, assisted by the right number of analysts and traders. Equally, a family office that outsources the management of the client's assets to third party specialists and focuses on tax and legal planning will require a team of tax and legal specialists. Furthermore, the roles and responsibilities of family office employees vary, depending on whether they are dedicated staff or external consultants (for example, if the family office establishes an investment committee).

The Middle East families and HNWIs who have already acknowledged these needs and, consequently implemented family offices to support them were confronted with a dilemma in connection with the quality of the specialists to be selected: should they create a family office locally with specialists familiar and close to their environment or should they look abroad to find talents, which are often based in the leading financial centres like New York, London, or Zurich, and set up a family office in one of these jurisdictions.

How to define the right family office

The considerable flexibility that exists when defining family office architecture, the location and the profiles of its employees also constitutes a weakness, since no standard rules apply to ensure that the right solution is implemented. It is, therefore, important to adopt a structured process that addresses and coordinates all the key aspects of a family office – from its legal structure to the job profile of its employees and operational support. This process should be based on a defined code of conduct, which should first determine the framework of the family office, i.e., the existing family governance, as well as its organisation and legal structure, vision and values.

The second part of the code of conduct should focus on the services provided. This is vital to assess the benefits created by the family office, to define the costs incurred and the resources required, and – last but not the least – to manage the expectations of the family members. The third part of the code of conduct should describe the governance structure of the family office itself, i.e., define its scope and establish a framework of roles and responsibilities, as well as key performance indicators to evaluate the family office's effectiveness in managing the family assets and in performing its other functions.

The governance structure should include the mission statement, objectives, strategy and roles and responsibilities of the family officers and family office employees, as well as detailing the involvement of family members and third party specialists. It should also address key aspects such as the establishment of formal committees and board structures, communication processes, compliance systems, decision making processes, management controls, risk management, reporting lines and deputising arrangements, contingency plans and confidentiality processes.

Accounting and reporting systems are crucial

Furthermore, the code of conduct should define the functional infrastructure of the family office, as this forms the basis for its day-to-day management and operation. The critical elements of the functional infrastructure are the accounting and reporting systems on the one hand and the IT systems on the other. The accounting and reporting systems must provide up-to-date information to help identify critical issues and facilitate decision-making processes. For the purposes of consolidated reporting, family offices can either have internal accounting and reporting systems or can appoint a global custodian. Meanwhile, its IT systems must allow online transactions to be carried out in a secure environment, ensuring fast processing and reporting without compromising on security. Finally, the code of conduct should set out the requirements and conditions regarding the use of external providers (financial institutions, lawyers, auditors, etc.) and ensure that the family office can co-operate with these third parties in an optimal manner.

Finding the right family office architecture

In view of the numerous and complex challenges that exist, it is essential to have the right dedicated family office structure, which will play a central role in co-ordinating the management of – and monitoring – family wealth. This structure should not only be robust and flexible from an operational perspective but should also guarantee that sound governance systems, effective monitoring tools and the right dedicated specialists are in place.

This is especially critical for long-term growth and success. A further challenge when creating a specially-tailored family office is the fact that many advisors are now highly specialised – with a narrow field of expertise – and often lack experience in other areas that are necessary to develop the right solution. Consequently, the establishment of an efficient process, the benchmarking of the family office against existing codes of conduct, and the involvement of advisors who can expertly address a diverse range of issues (tax, legal, governance, operations, etc.) are absolute prerequisites.

- The author is Executive Director, Wealth and Tax Planning at Bank Julius Baer, Zurich

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