Setting up a Family Office: A Special Report by Keith Drewery and Barbara R. Hauser

Dr Linda S Spedding reviews this book on the nature of family offices and the deep complexities of the same by Keith Drewery and Barbara R. Hauser

The special report “Setting up a Family Office” is a practical, timely and clear overview of key considerations in how to establish a family office - particularly a single-family office - wherever the family and the management of wealth may be required. This is an increasingly important vehicle that can support and serve the ongoing needs that have intergenerational relevance and can complement the professional services that have been traditionally more well known. It is important to be aware of the growing importance of the family office at a time when - especially since the recent COVID 19 Pandemic - many economic impacts are affecting wealth ownership and management. Indeed as the concept of the family office is evolving and growing in influence this report allows the reader to grasp the pros and cons in key decision making in a way that can be extremely helpful to both the family members and their advisers when considering the growing sector of very rich families.

This publication clears many of the ambiguities around the definitions that are paramount to understanding the components of this aspect of responsible wealth management in a practical style that can appeal to both adviser and client. The family office is often defined as a dedicated solution for the complex management of family wealth, usually for families with over $100 million to manage as is noted below. It may be defined as a vehicle that supports the family in the day-to-day administration and management of the family's affairs, as well as a long-term strategy. As can be seen from key examples of influential families worldwide, what is described as ‘Family Wealth’ is both a very specific and complex type of wealth in terms of management. Family Offices indeed reflect this variety and are often as flexible—as wide and varied in source, size, structure and strategy—as the individuals whose money is being managed. Therefore, as this report explains, defining a family office can be challenging. By way of example, Family Offices may be considered to be private wealth management advisory firms that serve ultra-high-net-worth investors. Yet the Family Office solutions are different from traditional wealth management in that they can offer or go beyond a total outsourced solution to managing the financial and investment side of an affluent individual or family. Family offices are generally described or understood as being varied in terms of their:

• Source or range: Family offices may be solely structured around one principal - single-family or SFO - or multiple - multi-family or MFO: this report focuses mainly upon the SFO.
• Size or magnitude: Ranging from one or a few hundred million dollars under management through to multiple billions.
• Structure or set up: From fully-fledged investment advisors similar to even the most institutional of firms to just one known individual advisor.
• Strategy or objectives: While wealth preservation is generally the main goal, capital appreciation or growth can be equally important depending on the nature of the principles.

As these offices increase in size and influence in an era of populism, Family Offices also have to deal with additional concerns relating to how concentrated power can create inequality, especially given their intergenerational importance. There is now a flourishing Family Office professional sector in many jurisdictions and this report includes in its introduction a useful key definition of a Family Office while explaining the background to its increase in popularity, as follows:

“Simply put, a family office consists of one or more staff members dedicated to the needs of a family. It is a family’s tactical response to the strategic decision to safeguard the financial rewards of their hard work for future generations or the community at large”.

The report’s practical emphasis enables some consideration of key questions that pertain to the risks and opportunities involved in setting up the vehicle of an SFO in particular.

This book helps the reader to understand the context in which the development of this solution has evolved. This special report, which is written by established experts, includes the important initial question as to whether a Single Family Office (SFO) will be appropriate in the circumstances, bearing in mind: goals and objectives; alternatives such as the multi-family office; and SFO benefits. The authors explain the structure, key questions and SFO alternatives very clearly, enabling the reader to grasp the concept and how to start the process of establishing an SFO even if this is an unfamiliar strategy. Important assessments may include tax, estate legacy and intergenerational issues that extend to budgets, responsible financial planning, location and services. Accordingly, the range of potential services and the need for exclusivity and confidentiality is made clear to the reader.

The scope of the assets relevant to this strategy is also considered, as well as the global impacts and significance. Largely unnoticed yet of increasing significance, it is noteworthy that family offices have become a force in investing, with up to $4 trillion of assets - more than hedge funds and equivalent to 6% of the value of the world’s stock markets. Hence noting the relevance of this discussion in these economic circumstances. In principle, most practitioners use the $100 million net worth threshold as the point in which someone could potentially consider setting up a family office. Indeed, the trend is that global finance is being transformed through the Family Office strategy as billionaires get richer and cut out the middlemen by creating their own “family offices”, often considered to be personal investment firms that roam global markets looking for opportunities.

The main value of this publication is the practical explanation of why and how an SFO could be a useful vehicle to manage wealth in a responsible manner. The Authors deal comprehensibly with a key list of relevant topics. Helpfully the report includes how an SFO would be structured and provides an extensive explanation of the services that can be offered to the families as a matter of choice and suitability, from bill-paying and staffing to philanthropy. There is a useful integration of the areas under consideration, as well as guidance on the philosophy behind the decision whether or not an SFO is fit for purpose:

“Understanding the extent to which a family member is willing to tie their destiny to the family is key to the design of the family office and the nature of what it does and how it thinks about the management of capital”.

The contents also usefully cover the activities of an SFO, many of which are of course finance-related and include vital risk management procedures and policies that relate to:

• Health and life insurance;
• Personal security, including kidnap and ransom coverage; and
• Reputational risk and social media policies.

All of the above are key issues that are of increasing importance to any adviser also. In addition, the Authors address estate planning, employment of staff, tax returns and projections, trust oversight and philanthropy. Family education, family meetings and lifestyle services are explained as being within the areas that the SFO may provide. Examples of the flexible range of needs and solutions are included. Additionally, risk management and governance are given separate helpful explanations in the report, and the three following principles that are vital in today’s circumstances are emphasised:

• Transparency;
• Accountability; and
• Participation.

As highlighted in the conclusion, the life cycle of the SFO and the alternatives are discussed ...“as to the potential lifespan of the family office. Do you intend it to serve only the current family members or to co to use for future generations?”

This report is extremely apt and valuable in raising key questions to assist those considering setting up an SFO in particular, as well as those advising families in this connection. Moreover, it includes various useful additional resources and links that are helpfully set out at the end. In view of the trend in favour of the use of a family office in today’s economic circumstances in many parts of the world, there is no doubt that the accessible style enables the reader to grasp not only the challenges but also key solutions that are available. This is the case depending upon the needs and objectives of the families who are seeking effective strategies pertaining to wealth management along with an understanding of the steps involved in the process of setting up a family office as part of the safeguarding and sustainable stewardship of family resources. This is so, bearing in mind the well-known concern that: “There is a maxim that wealth is lost in three generations. The antidote is often said to keep the family strong and together, generation, after generation”.

This special report provides a refreshingly clear explanation of what is involved in any family office discussion to allow more informed decisions and ‘responsible wealth’ steps to be taken accordingly. It can be a welcome addition to the library of the family and their professional advisers alike and serve as a checklist to follow to ensure an inclusive and comprehensive approach when setting up a Family Office wherever the family or advisers are based.