A complete guide to setting up a family office

“Family Management Internal Reference” hopes to become an industry evangelist and promote the development of the industry.

Editor’s note: This article is from the micro-channel public number “home run internal reference” (ID: foinsight), Author: home to do an internal control.

Currently, the size of China’s ultra-high net worth population is rapidly expanding. As the highest form of wealth management, family offices are being favored by more and more Chinese ultra-high-net-worth individuals. As an exotic product, family offices have not developed for a long time in China, and they are currently in a state of barbaric growth.

What exactly is a family office? How to set up a family office? And what risks will be involved after the establishment of a family office… “Family Management Internal Reference” has specially set up a “Family Management Academy” column. We hope to become industry evangelists and promote the development of the industry.

What is a family office?

When you know that the family office originated in the sixth century, you may be surprised. In fact, at that time, the king’s butler already had the responsibility of managing the royal family’s property, and the concept of family office was developed from this. In 1882, the Rockefellers established the first family office in the modern sense.

Family offices are mostly private companies. They are set up to help manage the financial funds of super-rich people or families. Therefore, a family office is a private wealth management consulting company dealing with ultra-high net worth individuals and families. It is currently one of the fastest growing companies in the world.

In terms of services provided to ultra-high net worth individuals and families, family offices are completely different from traditional wealth management companies. Traditional wealth management companies provide asset management or investment advice to their clients, but at the same time, they also promote other services that are not necessarily related to family financial management.

Divided by the number of customers served, there are two main types of family offices: single-family office (Note: the English abbreviation for the Family Office Internal Reference: SFO) and the United Family Office (Note: the English abbreviation for the Family Management Internal Reference: MFO).

Among them, the business goal of a single-family office is mainly to cater to the needs of a single family. Therefore, this type of family office usually handles other non-financial issues in addition to wealth management, such as providing private schools and daily preparations. Aspects of work.

The United Family Office (MFO) is mainly operated as a wealth management company on a commercial basis. While providing services to their customers, the United Family Office will also provide such services to customers who are interested in other types of business of their company. Under certain circumstances, the joint family office will provide services exclusively for certain families and is unwilling to accept other clients.

Usually, the first type of family office is a single-family office, but once they are successful in this field, the mostIt will eventually transform into a joint family office, because there may be industry imitators.

According to the different services provided by the family office, they will be divided into different categories. Generally speaking, family offices are divided into the following three categories:

Class A Family Office: Provide comprehensive financial and non-financial services for wealthy families, and provide industry management while managing the family’s financial situation. Such companies are supervised by family trustees or managers and operate as third-party companies.

The family office will supervise all liquid and illiquid assets in the family, and provide advice to the family without conflict of interest. The fee settlement structure is usually a monthly or annual fixed fee, which is the most common type of family office.
Type B family office: This type of family office usually only provides financial services. These include many other types of financial management companies, such as law firms, private banks, and accounting firms. It should be noted that there may be conflicts of interest in some of the consulting information provided by category B family offices.
Type C family office: This type of family office provides basic industry management services. This type of family office is usually directly operated and managed by a private company under the name of a wealthy family, and companies ranging from personal assistants to family trustees can include any internal employees.

This article will mainly focus on Type A family offices, but it is also helpful to understand the classification and functions of other types of family offices.

What are the core businesses of the family office?

Family wealth management is the core of family office services, but family offices can also provide other services. The following is the core business that the family office provides to customers:

First, financial management

Handling the financial issues of wealthy families is the main function of the family office. The following are several aspects of the financial planning of the family office:

1. Investment management services-usually the core of family office work, whose purpose is to preserve and increase the value of family wealth. It includes different aspects of investment, from determining investment goals and allocating assets to actual execution and goal tracking.

2. Reports and records-the family office will report andIntegrate all the assets and performance of the family, and also conduct tax planning and declaration.

3. Manage wealth transfer-Family offices can carry on wealth inheritance within the family, such as from parents to children.

4. Life management and budgeting-the family office can also deal with issues such as membership payments, budget services and budget goals.

Two, strategic planning

In addition to financial management, family offices usually provide strategic services, including the following aspects:

1. Commercial and financial advice-to provide assistance in financial strategic planning, such as debt management and structured financing. In addition, the family office also provides guidance on business management, such as mergers and acquisitions or business development issues.

2. Strategic real estate planning-if a wealthy family or individual owns multiple properties, the family office can help in the efficient use of real estate. For example, when to sell or how to strategically plan for taxation.

3. Succession planning-the family office can provide advice on succession arrangements and help the administrative department to ensure a smooth transition during the succession period.

4. Educational planning-the family office can also assist in educating the next generation for wealth management.

Three, administrative services

Family offices also tend to provide a series of administrative support for wealthy families and individuals. Administrative planning services include the following aspects:

1. Charity management-charity management services involve guiding family donations and managing charity work.

2. Other administrative work-The family office can assist wealthy families with public relations companies, banks, lawyers, and other administrative tasks.

Four, consultant role

Finally, the family office has a consulting role. The purpose is to provide wealthy families and individuals with fair and just advice in financial management and other important areas. The role of consultants usually involves the following aspects:

1. Taxation and legal advice-the family office can help draft tax plans and ensure that the family business meets tax regulations.

2. Compliance and regulatory recommendations-In some cases, families need further compliance and regulatory recommendations. For example, in terms of corporate governance, employee management, and the role of the board of directors.

3. Risk management-because investment is always accompanied by risk, the family office will provide customers with risk assessments under risk management and continue to monitor risks. In addition, risk managementAssistance also includes insurance advice services.

The above is a comprehensive list of the core services provided by the family office. However, the services provided may vary from company to company. Because even though the family office will provide multiple services, some families may only be interested in a particular service.

Why set up a family office?

For the ultra-rich people, the main reasons for choosing a family office are the appreciation and preservation of wealth, and the smooth management of the enterprises under their names. In fact, managing a huge asset is laborious and laborious. Therefore, choosing an external family office can simplify the supervision process.

In addition, family offices, like many asset management companies, provide their clients with experienced, compliant and responsible wealth management solutions, and maximize the use and protection of client assets.

Although the above problems can be solved by general asset management companies, the family office has incomparable advantages. The most important point is that the family office will establish a good interpersonal relationship with the client’s family and create a more intimate relationship. Working atmosphere. However, the turnover rate of financial consulting companies and banks is very high, and asset advisors may also change. This kind of situation does not happen frequently in family offices.

In addition, the conflict of interest between the family office and the client is relatively small, because they focus on the asset management of the client’s family and do not promote specific products or services to the client. But banks are different. They may sign transactions with customers that they don’t need. For family offices, they allow customers to choose from a variety of service products.

For families running large businesses, trust is particularly important. An independent consultant who works closely with the client’s family can derive trustworthy relationships and provide better assistance in terms of assets and strategies. And because consultants can have a thorough understanding of a family’s business and financial situation, it is very important for clients’ families and consultants to build trust.

Usually family offices have a stronger dependence on client families, especially single family offices. This means that the company cares about their reputation and will make every effort to maintain it. Therefore, the company will have a better service level. Even for joint family offices, their client base is limited to a few families, which means that client families can enjoy the more concentrated and personalized services provided by the family office.

As the family office serves fewer clients, the consultants also have more time to pay attention to the needs of different families. However, in a law firm or a bank, a consultant may have to deal with multiple clients, so under pressure, it is difficult to provide high-quality services.

Because the income of the family office comes from the ultra-rich people or the ultra-rich family, the family office has a stronger motivation to establish a good relationship with it. The establishment of this relationship will benefit both. On the other hand, many financial consulting companies provide fixed salary for consultants, which may mean that they do not pay attention to the construction of relationships with customers.

What are the risks of setting up a family office?

Although establishing a family office is a beneficial business venture, it is a big project. Because not all family offices will be successful, the various issues of building a family office need to be carefully considered:

One, high cost

Due to the nature of the family office and the regulatory and compliance reports, the cost of setting up a family office is high, and it is difficult to find a wealthy enough family to pay for these expenses.

It is also worth mentioning that the operating costs of family offices have been increasing in the past few years. Statistics show that due to family office reorganization and increased willingness to attract top talent, operating costs have increased by 0.07% year-on-year.

The location of the family office will also have an impact on the company’s costs. Different countries have different taxation mechanisms, which will increase or decrease the operating costs of the family office.

The biggest expense of a family office is staff costs. According to research conducted by the American Family Office Exchange, more than 60% of the cost of a family office is the payment of employee salaries and benefits. Especially when family offices want to attract the right people, they need to provide more attractive remuneration packages to recruit talents.

In addition to staff costs, operating costs are another major factor, including office rent, legal fees, travel expenses, etc. Finally, you also need to consider the following costs: planning fees, insurance fees, external investment fees, internal costs , Custodian fees and other external costs.

Family offices can also reduce costs in different ways. When the family office does not have the ability to complete certain services, it can outsource some services. For example, outsourcing education and training is a low-cost and high-yield option.

Second, complex legal and tax structure

In addition to the pure cost (above), there are other things to consider when setting up a family office. Because it needs to face a complex legal and tax structure environment, it is very difficult to find a suitable structure for the company.

Although the legal structure of a family office is relatively flexible, it must be well considered. Before setting up a family office, the main issues that should be considered include:

1. Choose the correct entity type-the legal entity of the family office can be a company, partnership or trust, or a combination of entity types.

2. Choose the right financing structure-family offices can finance themselves by changing the fee structure of individual members to collective members.

3. Consider employment arrangements-you must consider what type of employment contract you want to provide, and answer this question: What if an employee wants to change jobs?

4. Solve obvious tax issues-tax legislation varies from country to country. You need to understand basic tax issues in order to make the best decisions in terms of capital gains and reducing administrative work.

5. Further regulatory issues-Different countries have different legislative requirements for family offices, which will either directly affect the company structure or tax revenue. Depending on where the family office is established, these regulatory issues may have an impact on the legal and tax structure.

Three, fierce competition with other financial management companies

Finally, family offices must reach a certain level to survive, and competition among different companies is fierce. And because the development of the family office depends on its reputation in the industry, it is difficult for a start-up family office to attract customers. In addition, it must compete with consulting companies such as banks and insurance companies that have a lot of resources.

Can I be a family office?

If you are considering whether to establish a family office, the above content is expected to provide you with information about the structure and process of establishment. Basically, the following three points can determine whether you can successfully establish a family office:

1. Do I have enough professional knowledge to satisfy customers?

As this guide reveals, wealthy families are looking for a comprehensive manager and consultant. In order to attract the interest of these families, you need to highlight your expertise in some areas. In addition, in order to achieve cooperation with customers, it is necessary to provide services different from those of wealth management companies.

Second, do I have enough interpersonal relationships to support it?

As mentioned above, customer competition in this industry is fierce. Because your (job) is to make a wealthy family trust you and give their money to you to manage, then you need aA strong network of people who trust you and understand your abilities will support you in building a successful family office.

Three. Do I have enough funds?

Establishing a family office requires a large amount of start-up capital. In addition, in order to carry out the company’s business, it is necessary to comply with corresponding laws and regulations.

Based on your answers to the above questions, establishing a family office may be a viable business option. But if you feel that you do not meet the requirements, working in a consulting company first may be a way for you to gain experience and build a network of potential clients.

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