131126 setting up a sfo

SETTING UP A

SINGLE FAMILY OFFICE

Sharing a few lessons and experiences

2011-2013 © Geoffroy Dedieu

© Geoffroy Dedieu 2013 2 Setting up a Single Family Office Sharing a few lessons and experiences

Legal disclaimer

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1. Key Messages

2. Key Challenges

3. Defining the Family

4. What do Family Offices do?

5. Organisation and Tasks

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

Chapters

1


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.


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


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.

1. Key Messages

2. Key Challenges










Chapters

2


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.


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



“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.






“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.


THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE …

OFFSHORE STRUCTURES (1)

• 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.

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.




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” ??? What does a trust really look like?

Most often the term “offshore” is used

erroneously or without proper definition.

• 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.

Independent Tax & Legal Advisor

ABC

Trust

Pote

ntia

l Cash D

istrib

utio

ns

(regula

r or fro

m tim

e to

time)

Other Properties

(Real Estate)

Trust Deed

and Letter of

Wishes

include

specific

conditions for

distributions

Sub-

Trust

Purpose Trust or Charity

OR

(more often)

Mr & Mrs Wise

Settlors

Mr True

(as trustee)

ABC Trustee

Company

Bank A

Beneficiaries

as Named

from time to

time

Mr & Mrs Wise

Beneficiaries

Children

Others

123 Company

Ltd

Portfolio Business Holding

Company

ABC Trustee

Company

Deed s

igned b

y settlo

r(s)

& tru

ste

e(s

)

Tra

nsfe

r of A

ssets

& P

ropert

ies




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.

• 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 Money-

Laundering.

• 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.

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.

* Source: OCRA 2012, www.ocra.com


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. * Source: PwC Jan 2007

** From Strategy for the Wealthy Family by Mark H. Daniell

*** 2002 JP Morgan Survey

1. Key Messages

2. Key Challenges










Chapters

3


SOME DEFINITIONS …WHAT IS A FAMILY NOWADAYS?

• 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

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.


SOME DEFINITIONS …WHAT ARE FAMILY OFFICES?

• 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.

Family offices are dedicated structures set up by ultra high net worth (UHNW) families to

manage their assets.

http://en.wikipedia.org/wiki/Family_office

http://en.wikipedia.org/wiki/Family_office


WHERE DOES UHNW WEALTH COME FROM?

Taking a factual view of the inheritance versus self-made debate.

Some Figures

• “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.

• A study by Spectrem Group found that among today’s millionaires, inherited

wealth accounted for just 2% of their total sources of wealth.

• 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.

Percentage of Inherited Fortunes

(Forbes List 1982-2007)

0

5

10

15

20

25

30

35

40

0

50

100

150

200

250

300

350

400

450

Billionaires Inheritors %

% No


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.

• 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.

• 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 self-

made men.

55

42 49

33

65

38

0

10

20

30

40

50

60

70

Republicans Democrats

% s

ayi

ng,

com

pare

d w

ith t

he

avera

ge p

ers

on, rich p

eople

are

more

lik

ely

to b

e …

Sources: Pew Research Center 2012,

Forbes, US-IRS

How

Fo

rtu

nes a

re M

ade

(Forb

es U

SA

bill

ionaires 2

012)

% s

ayi

ng u

pper

incom

e p

eople

are

payin

g …

in taxes

What th

e T

op 1

% taxes r

eally

repre

sents

(2007, U

SA

)

69

1

30

31

Self-made

Over 3 Generations

14

44

33

4 13

78

0

10

20

30

40

50

60

70

80

90

Republicans Democrats

PE

RC

EP

TIO

N

RE

AL

ITY

23 40

99 81

60

0%

20%

40%

60%

80%

100%

Top 1% Rest 99%

Inherited Wealth


WHAT THE FAMILY OFFICE DOES FOR THE FAMILY WILL DEPEND ON

WHERE THE UHNW FAMILY IS IN THE FAMILY-WEALTH CYCLE?

1G

Acquisition

Wealth Builders

• Self-Taught

• Entrepreneurial

• Frugal Lifestyle

• Generous and Charitable

• Effective Decision Making

• Cognizant of Legacy or Family

History

2G

Retention & Growth

Status Quo

• Professional

• Well Educated

• Understand 1G’s effort and

sacrifice

• Systematic, Business and

Venture - style approaches

• Want to build on parents’ legacy

of charity but only after wealth

is secured

3G

Disposition & Succession

Decay

• Well Educated

• Sometimes have lower work

ethics

• Less Appreciation of 1G’s effort

& sacrifice

• Searching for a Purpose

• Inwardly Focused

Asian and African Families

• Mostly 1G

• Some 2G

Build a Value Succession Plan

• Define Objectives for Succession Plan

• Define Principles to live together & communicate well

• Define Precise Steps & Milestones


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.

• There is a universal tendency in

nature to the dissipation of energy.

• 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.

The Second Law of Thermodynamics Key Success Factor: New Energy

• In thermodynamic terminology, families may be

described as systems, which can only last and flourish

by receiving and consuming new energy in

transformations .

• 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”.

• 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.

Lord Kelvin originated the idea

of universal heat death in 1852

http://en.wikipedia.org/wiki/File:Lord_Kelvin_photograph.jpg


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

(F) Female

(M) Male

MN Maiden name

P Passport

Tax Tax residence

Principal (M)

01/01/1960

P: HK, Tax: UK

Daughter (F)

01/01/1990

P: UK, Tax: FR

Ex-wife (F)

01/01/1960

P: UK, Tax: FR

Marriage:

01/01/1980

Divorce:

31/12/2000

Son (M)

01/01/2000

P: FR, Tax: FR

Ms. A (F)

14/11/1969

P: UK, Tax: UK

Daughter

(F) 31/07/2010

P: UK, Tax: UK

Grand-Father (M)

01/01/1940

P: HK, Tax: UK

Brother (M)

01/01/1950

P: UK, Tax: USA

Grand-Mother (F)

01/01/1940

P: HK, Tax: UK

Sister (F)

01/01/1960

P: UK, Tax: HK

Evolving Family Structure

1G

2G 2G 2G

3G 3G 3G 3G 3G

1G

2G 2G 2G

Founder, 1st Generation

Outside of family

Male

Female



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

e

ale le

• As time passes, UHNW families separate ownership from

management/control.

• Not al family members will be owners.

• Some families chose to allow family members to become

employees, others not (see later slides).

• 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 Sphere

Business Owner

Non-owner

Employee / Manager

Board Member

1G

2G 2G 2G



IMPACT ON FAMILY DYNAMICS

Family dynamics refer to a system of behaviors and psychological processes occurring within a

family.

• The Patriarch directs;

• Structures and

Processes are unclear;

• Influence of external

advisors tends to be

greater;

• Some family members

may be disenfranchised.

Improving Dynamics Increasing Skills Patriarch Rules Family Trouble

• Family is in conflict;

• Discussions or disagreements about structures and process;

• Attempt to involve all family members;

• This is a stage where advisors can act as bottlenecks or barriers.

• Patriarch participates;

• Processes are put in

place;

• Family members learn to

function as a team;

• A few family members

are building up 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.

1. Key Messages

2. Key Challenges










Chapters

4


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

• Financial Plan • Forecast P&L

• Cashflow

• Assets under Management & Assets under Supervision

• Scenario Planning (scope of services and changes in

cost assumptions)

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?

*Source: Family Office Exchange


WHERE ARE FAMILY OFFICES LOCATED ?

Single FO

Single FO Concentration by Area (100% for each region)

*Source: Barclays Strategic Consulting, Campden Research

SFO Approximate total numbers

• USA 500+

• LatAm 30

• Europe 170

• MEA 20

• APAC 100


WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (1)

Roles of the Family Office Key Roles & Principles

• 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. • Financial risks;

• Insurance coverage;

• Physical security of people and assets;

• Reputational and image risks.

• It should manage relationships with banks and key advisors.

• 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.

• Help the family with its “dynamics” issues, its family charts

and ground values through: • new business coaching,

• next-generation training, and

• mediation.

• Support the Family Business with corporate finance deals and

strategic agenda management.

• Foster, coordinate efforts to build a family legacy and develop

a philanthropy infrastructure.

Family Portfolio Management

Family Values & Dynamics

Tax, Accounting & Estate Planning

Trust

Deed

Portfolio

Business

Units

Corporate Finance Support

Fam

ily

Off

ice


WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (2)

Roles of the Family Office

In-sourced vs. Outsourced

Comments

• There are all sorts of Family Offices in

the World; some do it all, some do not

even handle investments and wealth

planning.

• 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).

• Understanding the costs of in-sourcing

vs. outsourcing, inclusive of risks is

essential in this debate on in- or out-

sourcing.

• 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.

• Emerging-markets FO’s are likely to

be more involved with the Family

Business and Special Projects.

0

20

40

60

80

100

120

In-sourced (incl. with advisors) Outsourced

%

* Source FOX 2012 Survey


YOU CAN LEVERAGE YOUR FO RESOURCES AS …

an internal Corporate Finance Team (1)

• 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).

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 Key Support from the SFO

Potential

Institutional

Investor

Target Co.

4. Family has the

OPTION to sell a

15% stake in BU

International to a

potential

institutional

investor.

3. Family controls

85% of Target Co

and decides to

rename it BU1 as

International.

Family

Investors

1. Family sales /

brings shares in BU1

to Target Co.

Family

Investors

Family

Investors

2. Target Co pays

Family not with cash

but with new shares

in Target Co.

Family

Investors

Business

Unit 1

BU

International

Assets of

Target Co. Old BU1 New Assets

Shares

Shares

Shares

Shares


LEVERAGE YOUR FO RESOURCES AS …

an internal Corporate Finance Team (2)

• At any point in time, each Family Business

Unit and the Family Group should have

• An agreed strategy that is being

implemented;

• An agreed management agenda of the

highest priority strategic and

organizational issues and opportunities;

• Initiatives in place to address the

management agenda; and

• An on-going dialogue with the Group

about the Business Line’s management

agenda.

The FO can support the family as active investors in the family business to drive an agenda-

management process. Keep it integrated and continuous as a means for ensuring superior

decisions and actions in the family business group.

Initial Strategic Position

Assessment

Management Agenda for

Change

Continuous Evaluation of

Strategic Position

Performance Management

Approval of Strategic Plan & Resource

Allocation

Evaluation of Alternatives

Generation of Alternatives

Dialogue between

Business Lines & Group

An Integrated Management Process for the Group A Continuous Process

* Source: Marakon Associates


YOU CAN LEVERAGE YOUR FO RESOURCES TO …

build a family legacy.

• 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).

The FO can support the family as it develops and consolidates it philanthropic objectives and

processes.

Boosting and Structuring Family Philanthropy Linking Legacy & Philanthropy

• Community capacity building

• Strategic resource planning

• Private planning sessions for Families

• Drafting policies and procedures

• Design implementation plans

• Investment and spending policies

• Trust structuring

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

• Database management systems

Strategic Planning

• Enunciation of values and mission

• Priority setting

• Resource & environment assessment

• Organisational Infrastructure

• Financial resource utilisation

• Fundraising – annual gift, major gift, planned gift

Implementation Value

Succession Philanthropy

Succession

planning


YOU CAN LEVERAGE YOUR FO RESOURCES TO …

monitor and manage the family’s risks.

• Manage relationships with key brokers.

• Ensure adequate insurance coverage for all properties.

• Review property values to match coverage.

• Ensure compliance with local employment laws.

• Centralise international medical protection policies and monitor

coverage and costs.

• Ensure all board memberships have relevant D&O protection.

• Liaise with risk specialists.

• 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?.

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

1G

2G 2G 2G

• Insurance protection for

properties and vehicles.

• Adequate contracts and

background checks on

employees (house, drivers etc.)

• Wills, trusts, estate plans, advisor

agreements, deeds, contracts,

tax returns, passports, birth

certificates, marriage certificates,

prenuptial and postnuptial

agreements, and other

paperwork.

• Insurance protection for family

members

• Medical insurance

• Directors & Officers (D&O)

• Kidnapping risks

• Physical protection

1. Key Messages

2. Key Challenges










Chapters

5


WHO DOES WHAT ON …

THE FINANCIAL PLATFORM?

Family Family

Office

Private

Investment

Company

Private

Fund

Family

Member

Bank A

Family

Office

Insurance

Trust

Central

Custodian

Custody & Banking Platform

Brokers

Custodian 2

Bank B

Custodian 1

Investment

Fund

With or without a grouped (fund)

portfolio

Portfolio Management

Platform

Fund

Manager (if not the FO)

Portfolio


WHO DOES WHAT …

WHEN USING A FAMILY FUND

Bank A

Family

Office

Central

Custodian

Brokers

Custodian 2

Bank B

Custodian 1

Investment

Fund

OR Fund


Portfolio

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.

Trustee

(if unit-trust

fund)

Fund

Adminis-

trator

Auditors

Sollicitors


WHO DOES WHAT IN …

REAL ESTATE, ART AND PRIVATE EQUITY / NEW PROJECTS?

• Family wealth planning and

management should include a

broad array of asset classes for

which the family needs support

from its FO.

• Properties (personal use and

investment);

• Art collections;

• Private equity investments

and projects.

Corporate Structure

Consolidation

Comments

Properties Ltd

(property vehicle)

Family Office

USA

NextGen

project 1

Family Members NextGen

Trust1

Family

Foundation

Investment Fund

(managed by FO)

Portfolio

Private Equity Ltd

(new projects)

Art Ltd

(buying & trading)

Asia UK

NextGen

project 2

Business

Projects

NextGen

Trust2


POSSIBLE ORGANISATIONAL STRUCTURE OF A SFO

(in-sourced model)

Board of Directors

Chief Executive

Officer

CEO

Chief Operating

Officer

COO

Compliance &

Governance Officer

Chief Finance

Officer

CFO

Chief Investment

Officer or

Portfolio Manager

Assistant Family

Officer

Compliance support:

Specialised firm

Accounting, VAT &

Payroll support

Assistant

Accountant

Possible Structure Governance Principles

• 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


WHAT KIND OF PEOPLE DOES A SFO NEED?

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

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

• 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


WHAT DO FO EMPLOYEES SPEND TIME ON?

Example Employee Time

Allocation*

* Source: 2008 Family Office Exchange

Wealth Planning

15%

Portfolio Manage-

ment 18%

Business Manage-

ment 5% Lifestyle

Manage-ment 8%

Family Continu-

ity 4%

Trusts 6%

Accoun-ting,

Reporting &

Compli-ance 27%

Philianth-ropy 5%

General FO

Adminis-tration

9%

Special Projects

3%

What do you 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.

Task Description*

• Wealth Planning • Financial Planning

• Tax Planning

• Estate Planning

• Portfolio

Management • 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


WHO IS TYPICALLY AROUND THE TABLE?

(out-sourced model)

Corporate

Trustees

1

Insurance

Advisors

3

Custodians

2

Attorneys

4

Accountants

2

Investment

Consultants

1

Investment

Managers

11

External

Board Members

1

Other

Consultants

2

Family

Office

CEO

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

• 14 Family Trustees

• 27 External Advisors

* Source FOX 2008 Survey

https://www.familyoffice.com/


WHO IS TYPICALLY AROUND THE TABLE?

A FEW WORDS OF CAUTION ABOUT ADVISORS…

• 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.

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.

Deteriorating Dynamics 1G Becomes Wealthy,

with the help of

trusted advisors

2G or NextGen start

joining the business

Me

& m

y A

dvis

ors

ve

rsu

s T

hem

• 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!


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…

A FEW WORDS OF CAUTION ABOUT ADVISORS… (2)


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.



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.”


1. Key Messages

2. Key Challenges










Chapters

6


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


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).


VIEWING THE ASSET MANAGEMENT PROCESS

AS A VALUE-CHAIN?

• 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.

• 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.

• 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.

Top line: Private Bank, IAM or MFO

0.5% - 3%

Asset / Fund Manager Costs

1% - 3%

Below the line: Charged to NAV

0.4% - 0.8%

3% Haircut

on Structured

Notes

Advisory or

Mandate fees

0.8% to 1%

MFO fees

30-50bp

Cost of

PIC and

Trusts

0-30%

Performance

1%-3% Fund

Management

Fees

Brokerage

bonds 5-

10bp,

Equities 10-

30bp Administra-

tion

5-10bp

Custody

2-7bp

Audit Fees

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”.


FUND SELLING IS A “RIP 0FF”

Financial Times 2012


FUND CHARGES ARE A “RIP 0FF”

Financial Times October 2013


FIGURES CAN BACK OUR MESSAGES ON COSTS

(Example based on 10-12 people)

SFO Budget (GBP) Your People Salaries & Benefits 1,200,000 Entertainment, Travel & Subs. 95,000 Training (Industry & Professional) 35,000 Training IT 13,000 Your External Advisors Legal Fees 35,000 Professional Fees (non IT) 55,000 Audit Fees 25,000 IT Consulting 30,000 Your Operational Capabilities Software 25,000 License Fees 150,000 Telephone & Internet 5,000 Printing Postage Stationery 10,000 Your Office Rentals and Maintenance 100,000 Utilities 6,000 Charity 35,000 Total 1,819,000

Considerations

• There are 4 main cost buckets to think of: • Salaries;

• IT;

• Legal and consulting fees; and

• Rental.

• Use benchmarks for salaries • 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 ex-

ante.

X 10


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.

HOW DOES YOUR PORTFOLIO ASSET MANAGEMENT STYLE / STRATEGIC

ASSET ALLOCATION (SAA) INFLUENCE YOUR COSTS?

Managed Risk

Management Style

Asset Class

Geography

Risk Appetite

Asset A Asset B Asset C Asset D

Euro Bonds

Asia Equities

Macro Hedge Fund

Portfolio Construction Asset Selection

Risk/Return Profile

Strategic Allocation

Tactical Allocation Picking Stocks &

Products

Realised Risk &

Volatility

• 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..

• 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.


HOW DO WE COMPARE COSTS?

Use Scenarios – What if you had these portfolios?

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).

Cash 25%

Fixed Income 75% Cash 10%

Fixed Income 40%

Equities 30%

Commodities / ETF 5%

Alternatives / Hedge 10%

Cash 5%

Fixed Income 5%

Equities 50%

Commodities / ETF 20%

Alternatives / Hedge 20%

Conservative Balanced Aggressive


COMBINE IT ALL … ASSET MANAGEMENT STYLE / SAA + VALUE CHAIN

… TO ASSESS COSTS DOWN TO SECURITIES LINES.

Top line: Private Bank, IAM or MFO

0.5% - 3%

Asset / Fund Manager Costs

1% - 3%

Below the line: Charged to NAV

0.4% - 0.8%

3% Haircut

on Structured

Notes

Advisory or

Mandate fees

0.8% to 1%

MFO fees

30-50bp

Cost of

PIC and

Trusts

0-30%

Performance

1%-3% Fund

Management

Fees

Brokerage

bonds 5-

10bp,

Equities 10-

30bp Administra-

tion

5-10bp

Custody

2-7bp

Audit Fees VA

LU

E C

HA

IN

SA

A




WHAT WOULD THE FULL COSTS LOOK LIKE? (PRIVATE BANKING)

Using a Private Bank: Aggressive mandate

Undisclosed Haircut 120,000

Management Fees 1,500,000

Administration Fees 50,000

Brokerage 227,500

Custody 200,000

Other fees 10,000

Total USD 2,107,500 or 2.11% of assets

Private Banking (USD$ 100 mio portfolio)

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-to-

securities costs are rarely understood, calculated and/or disclosed to clients.



WHAT WOULD THE FULL COSTS LOOK LIKE?

(MULTI-FAMILY OFFICE)

Using a Multi-Family Office in a transparent jurisdiction

(i.e. NO back-door commissions)

Undisclosed Haircut 0

Management Fees 1,000,000


FO Costs 500,000

Brokerage 60,000

Custody 100,000

Other fees 10,000


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 (USD$ 100 mio portfolio)




(SINGLE FAMILY OFFICE)

Using a Single FO with CEO/CIO, CFO, 2 accountants: Balanced mandate but with the ability to enforce a buy-to-

hold strategy on fixed income (low rotation = low brokerage)

Undisclosed Haircut = 0 Management Fees = 0


FO Costs 900,000

Brokerage 34,000

Custody 100,000

Other fees 0


Single-Family Office (USD$ 100 mio portfolio)

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.



(SUMMARY)

Based on our example USD 100 mio portfolio

Annual costs USD %

Private Bank 2.1 mio 2.11%

(Aggressive mandate)

Advertised / listed fees usually communicated to clients 0.8 to 1%

Multi-family Office 1.8 mio 1.77%

(Balanced portfolio, transparent jurisdiction)

Advertised / listed fees usually communicated to clients 0.4 to 1%

Single-Family Office 1.3 mio 1.34%

(Balanced Portfolio, buy-to-hold bonds)

Costs anticipated by the family: as per the FO business plan!

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 Observations

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%.


• 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 !





1. Key Messages

2. Key Challenges










Chapters

7


WE LIVE IN A WORLD OF INCREASED RESPONSIBILITIES AND PRINCIPLES

• Labour issues

• Health and safety

• Workplace practices

• Human Rights

• Forced labour

• Child labor

• Freedom of speech

• Freedom of

association

• Some environmental

concerns to take into

account when investing.

• Pollution, waste,

natural resources

depletion, biodiversity.

• Climate Change

• Carbon emissions,

physical impact of

industrial activity.

• Business ethics

• Integrity, anti-bribery

and anti-corruption

• Fraud prevention

• Product responsibility

• Transparency

• IFRS, annual reports

• GIPS

Environment Social Governance

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

• 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.


FAMILY STRUCTURE & FAMILY GOVERNANCE

Corporate Structure

Family Office

Family

Members

NextGen

Trust1 Family

Foundation

NextGen

Trust2

Family Structure

(F) Female

(M) Male

MN Maiden name

P Passport

Tax Tax residence

Principal (M)

01/01/1960

P: HK, Tax: UK

Daughter (F)

01/01/1990

P: UK, Tax: FR

Ex-wife (F)

01/01/1960

P: UK, Tax: FR

Marriage:

01/01/1980

Divorce:

31/12/2000

Son (M)

01/01/2000

P: FR, Tax: FR

Ms. A (F)

14/11/1969

P: UK, Tax: UK

Daughter

(F) 31/07/2010

P: UK, Tax: UK

Grand-Father (M)

01/01/1940

P: HK, Tax: UK

Brother (M)

01/01/1950

P: UK, Tax: USA

Grand-Mother (F)

01/01/1940

P: HK, Tax: UK

Sister (F)

01/01/1960

P: UK, Tax: HK

Family

Businesses

Combining healthy family dynamics, sound family governance and best-practice corporate

governance is extremely arduous.

* 67% for members of the FO Exchange 2012.

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*.


FAMILY GOVERNANCE & FAMILY BUSINESS 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.

Source: IFC /World Bank, Wikipedia

A well-governed FO requires a well-designed Family Governance.

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.

• 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).


FAMILY GOVERNANCE STRUCTURES : THE FAMILY COUNCIL

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.

Source: IFC /World Bank, Wikipedia

To ensure sound family governance, a Family Council acts as the Family’s top cooordination

and decision-making institution.

Family

Charter

Shareholders

Agreement

Family Office

Family Council

Governance Structure


FAMILY MEETINGS : ENSURE A FAIR PROCESS

*Source: Randel Carlock , INSEAD

Fair process during meetings is critical to sound family dynamics. It must be actively and

openly managed to avoid conflicts.

Communication 101 Key Steps of a Fair Process*

• Listen.

• Let all members speak.

• Do not judge or finger-

point.

• 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).

• Identify who will

organise the

meeting

• Collect input from

family members.

• Agenda items.

• Place, time.

• Send meeting

material to all

participants.

• 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.

• Chair.

• Voting and

discussion

process.

• Minutes to be

taken, circulated

and approved by

circulation or at

the next meeting.

Meeting

Preparation Meeting

What is the

Need

Meeting

Procedure Next Steps

• 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?


Family Office

EXAMPLE OF KEY SINGLE-FO GOVERNANCE PRINCIPLES

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.

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.

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 decision-

making.“

* IFC Family Business Governance Handbook

Family Owner

Family

Employee

Family

Director

Family

Member Family

Charter

Shareholders

Agreement


CORPORATE (FO) BOARD RESPONSIBILITIES

• 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

• 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.

• 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

Senior Management

Arrangements

Systems and Controls

Board Performance

Evaluation

Compliance

Responsibilities of

the Board

Matters Reserved

for Board Decision

Board Review of

arrangements

The Family Office’s Board of Directors has a significant amount of responsibilities towards

establishing and maintaining adequate Corporate Governance and Compliance.

• 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)


CORPORATE (FO) BOARD CAPABILITIES & TRAINING

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.”

Ensuring adequate level of skills and continuing training of board members is key to

maintaining efficient governance.


Financial Times, 6 June 2013


KEY CONCEPTS OF ANTI-MONEY LAUNDERING

• 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.

History of the KYC

H M L

H

M

L

Geographical Risk

Pro

du

ct

Ris

k

Composite Risk Model

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

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.


A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE

CLASSIFIED AS PEP: IS THIS AN INSULT? (1)

“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.

Who are PEP’s ?

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.


A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE

CLASSIFIED AS PEP: IS THIS AN INSULT? (2)

• “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.

What is the targeted risk?

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 it means for the FO

• 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.

http://transparency.org/




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.


A TYPICAL COMPLIANCE / CONTROL WORKFLOW (cont’d)

Automated email to

approver

Document not

approved

Automated email

sent to Compliance

with details

Document

changed, new-

version number

Previous document

archived in library

Compliance

initiates a change

in a control form

Signature on-

screen

Workflow Development Workflow Implementation


Chief

Executive

Officer or COO

Chief

Operating

Officer

DEALING WITH BRIBERY, CORRUPTION & WHISTLEBLOWING

Fighting Bribery & Corruption

• 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.

Example Statement of Anti-Bribery

Policy: “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!

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.

Internal Reporting

Procedures

Security

Incidents

Security

Incidents

Compliance

Incidents,

Suspicious

Activities

Compliance

Incidents,

Suspicious

Activities

Compliance &

Governance

Officer

Report

Whistle-

blowing

Whistle-

blowing

Report

Report

Any employee within the FO


CONFLICTS OF INTEREST

Defining & Identifying Conflicts within the

Family Office

• 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.

• Two or more parties have misaligned interests.

• Conflicts of Interest is anything that might impact on

your ability to make an independent judgement.

• 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 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).

Preventing & Managing Conflicts of Interest

• Relationships with family (customers) and all service

providers / suppliers must be open and fair;

• The Family Office should have proper controls for

identifying and managing conflicts of interest;

• Employees and Directors disclose personal business

interests when such could be in conflict with the

performance of their duties;

• 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

Special Case: Gifts & Entertainment (Hospitality)


Business Owner

Non-owner

CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (1)

The Issue

• 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.

The Options

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.

Employee / Manager

Board Member


CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (2)

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.

Different Families make different choices when it comes to allowing employment in the Family

Office or Family Business.

1. Key Messages

2. Key Challenges










Chapters

8


WHAT IS WRONG WITH THIS PICTURE?


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.


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.


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


EXAMPLE FAMILY OFFICE TECHNOLOGY MODEL

The cost of this model is approximately 10% of the office budget.

Portfolio / Assets Report

• Consolidated view of wealth and assets

• Consolidated view of income and

succession planning

Family Owner

Family

Employee

Family

Director

Family

Member

Report Distribution

• To external end users.

Family

Foundation Trust

External Trade

Data

Trade Allocation,

Broker/Custody

Notification

Shares

Prime

Broker Custodians Family Office Database

Market Price Updates

Online verification

& correction at

Family Office

Consolidation & Reporting

Final Rendering

PDF, XL,

SharePoint

Final Rendering

PDF, XL,

SharePoint

Report Definition

Intermediate

Formatting

Layout Layout

Incorporate / Interface

Accounting & Planning

Data

• IFRS compliance

• Audited Annual Reports

• Tax / Planning / Trust allocation

• Insurance / Endowment allocation

SAA

Input from Internal Risk

Models

Trading

Order Management

Liquidity

Portfolio

Construction

Asset Allocation

Portfolio Modelling

Trade data is reported to

Custodians

• Confirmation, Settlement

• Delivery vs. Payment (DVP)

Family

Office

Virtual

server

host

Firewall

Firewall

Remote

Access

Server

Family Office

Family Office


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.

Backup / Business Continuity Environment

• Remote location.

• Weekly replication of the full functional system and data.

Production Environment

• Over 8 Terabytes (TB) of data storage.

• 3 SQL databases: Accounting, Portfolio Management, Document Management.

• Virtualised servers.

• Data backed up to tape and separately backed up to disk.


EXAMPLE FAMILY OFFICE IT SYSTEMS & BUDGET

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 35,000

Software Maintenance and Licensing 150,000

Software Purchase 15,000

IT Consulting Fees 55,000

IT Training 10,000

Telecoms 5,000

Total 270,000

Inte

rfa

ce

1. Key Messages

2. Key Challenges










Chapters

9


UNDERSTANDING THE RISK VS. RETURN TRADE-OFF

Looking at long term return trends vs. our own expectations

Historical Performance (assumptions)

• As an example, we have mapped Strategic Asset Allocation pies that would match expected return levels:

1. Preservation, or up to 5% Returns;

2. 5% Returns (5-10%);

3. 10% Returns (10-15%); and

4. Above 15% Returns.

Based on these return rates

Cash 3.0% Equities 8.0%

Bonds - AAA 4.5% Real Estate 11.0%

Bonds - AA-A-BBB 6.5% Commodities 7.0%

Bonds - HYB 12.0% Alternative 5.0%

Leverage -4.0% (interest)

• To achieve 15%, a portfolio would have to include a massive amount of debt/leverage or beat the long term rates of return

in one or several asset classes.

• Over 10 or 20 years hardly anybody has ever managed to beat the market.

Understand that there is no such thing as higher expected returns without higher risks.


Up to 5% 5% Target 10% Target Above 15% Target

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%


Mapping the Portfolio against expected / desired returns

Mapping the Portfolio (Asset Allocation) vs. the Desired / Target Return

The more returns you “want”, the more risks you will be taking.

30%

3%

15% 15%

16%

6%

5%

10%

65%

20%

10%

2%

1%

3%

80%

12%

12%

7%

15%

? No Identified

portfolio

Cash

AAA

AA-A-BBB

HYB

Equities

Real Estate

Commodities

Alternative Leverage / Debt in the Portfolio

Target / Expected Return

Expected /

Desired Return



Calculating additional risks for each additional percent of desired return

Key Take-Aways

• An investor cannot expect to make a

higher return without taking

additional risks.

• Calculate your risk metrics: Value-at-

Risk, Max-drawdown, etc.

• Although 84% of family offices cite

“Capital Preservation” as a very

important driver of investment decisions

and 76% cite “Investment Risk” as a

major concern, their investment target

over the medium term do not match

those concerns: 63% target returns

above 5%, including 20% targeting

more than 10%.*

• UHNW families and their FO’s need

to re-define rational target returns

and acceptable risks levels.

Mapping the Risk-Return Trade-off of Single-Family Offices

And … remember that there is no such thing as higher expected returns without higher risks.

*FT Family Office Survey September 2013 -70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Up to 5% 5% Target 10% Target Above 15% Target

% of SFO''s targetting this Level Leverage / Borrowing

VaR (weekly at 97% confidence) Lehman Default 2008

Target / Expected Return

% of SFO’s which

target this return

level*

Chapters

1. Key Messages

2. Key Challenges







9. Investment Management & Reporting a) Defining your Beliefs & Principles

b) Portfolio Theory

c) Focus on Bonds / Fixed Income

d) Focus on Alternatives: Hedge Funds and Options

e) Basics of Trading

f) Reporting



9a


KEY STEPS TO DEFINE YOUR INVESTMENT GUIDELINES

Why have Investment Guidelines?

• To provide a framework for the management of the assets of the FO;

• To assist the Board of the Company in effectively supervising and monitoring the investments.

Why have Investment Beliefs?

• Investment beliefs are a clear view on how the SFO and the Family perceive the way the Economy and capital

markets work; and

• How the Family Office can add value to portfolios and strive for excellence in fund/asset management.

• The FO’s global view should be defined by aggregate sector & country based on research findings.

Why define principle-based investment guidelines?

• Principles reflect the family’s preferences beyond economic and financial aspects, including social responsibility and

environmental concerns.

Roles & Responsibilities?

• Role and responsibility of the Board • Define and agree Investment Beliefs of the family and FO.

• Define and agree Investment Targets.

• Role and responsibility of the Investment Management Committee (IMC) • Define and approve Investment Strategy

• Propose necessary updates to the Company Investment Management Process & Guidelines, subject to Board approval.

• Discuss any breach of the Investment Policy or Stop-Losses. Overrides shall be reported and discussed at the IMC, subject to board

approval on a bi-yearly basis.

• Define Strategic Asset Allocation


WHAT IS YOUR WORLD OUTLOOK?

Do you see the World like this? … … or still like that?


WHAT IS YOUR WORLD OUTLOOK?

Changing balance of power

Share of World GDP

Source: IMF 2011,

Google

http://www.google.com/publicdata/explore?ds=k3s92bru78li6_&ctype=l&strail=false&bcs=d&nselm=h&met_y=pppsh&scale_y=lin&ind_y=false&rdim=world&idim=country:CN:NG:SG:US:GB&ifdim=world&tstart=342835200000&tend=1510444800000&ind=false


EXAMPLE: THE PENSION BOMB (1)

Fund Country Assets

Japan Government Pension Japan 290,991

Singapore GIC (CPF) Singapore 248,000

Temasek Holdings Singapore 158,000

ABP Netherlands 142,084

California Public Employees USA 128,678

Local Government Officials Japan 101,020

Federal Retirement Thrift USA 96,020

New York State Common USA 95,951

Postal Savings Fund Taiwan 95,818

California State Teachers USA 88,125

Florida State Board USA 78,718

National Pension Corporation Korea 77,300

General Motors USA 73,600

Texas Teachers USA 67,095

New York State Teachers USA 66,360

New York City Retirement USA 65,928

National Public Service Japan 65,230

New Jersey USA 57,506

Public Schools Employees Japan 54,768

General Electric USA 54,002

Employees Provident Fund Malaysia 51,726

A Challenging World Outlook Pension Funds (2010, USD million)

Pauperisation in Europe will come from a

combination of 6 factors:

• High public debts (state and regional);

• Continuing public deficit to finance welfare systems;

• Pappy-boom (impact on pensions and health

systems);

• Persistently low economic growth rates;

• Unfunded pension plans (insufficient capitalisation);

• Defined benefit pension systems.

• Three of these factors are related to pensions: pappy-

boom, unfunded pension schemes, defined-benefit

(instead of defined contribution as in the case of the

CPF in Singapore).

• In the long run, the pauperisation created by pension

issues will impact property values in all sectors.


BBC 13 July 2011 – UK Public sector pension liabilities top £1 trillion

The report is designed to give a more accurate picture of the liabilities facing future generations. The UK's total liability for

funding public sector pensions has reached £1.13 trillion, according to official data. The figure, for the end of March 2010, is

£332bn higher than the previous year, although £260bn of the rise is due to a fall in bond yields. Ministers are expected to

use the data to reinforce their argument that pensions must be reformed.

The data was published by the Office for Budget Responsibility. The OBR report also disclosed that the total liabilities for

Private Finance Initiative contracts were about £40bn, or 2.9% of GDP, as of March 2010. Only £5.1bn of these were on the

public sector balance sheet in the National Accounts. Publication of the first OBR Fiscal Sustainability Report is designed to

give a more accurate picture of UK liabilities that that have been built up for future generations.

Future payments

Most public servants, with the exception of local government staff and university lecturers, are members of unfunded pension

schemes in which the pensions are paid for out of general taxation. The OBR's figure for pension liabilities, at £1.13 trillion, is

an estimate of the stock of assets the government would need now, if an investment fund had to be established to generate

the cash to make all the future public sector pension payments. The OBR makes that point that its calculation of the

taxpayers total liability to pay public sector pensions "had nothing to do with changes in the size of prospective pension

payments". Instead, its calculation is heavily influenced by a recent government decision to assume that, in theory, it would

need more assets than before to fund the pensions. The OBR points out that if future pension payments are compared to the

size of the UK's total economic output (gross domestic product) the cash value of public sector pensions will probably fall

from 2% of GDP in 2015-16 to 1.4% in 2060-61.

"These costs fall as a result of the decision to up-rate pensions in payment by CPI rather than RPI, the current pay freeze

and planned workforce reductions," the OBR said.



Telegraph 08 Sep 2009 - Pension liabilities break through £1 trillion mark Liabilities in defined benefit workplace pensions in the UK have broken through the £1 trillion mark.

The Pension Protection Fund (PPF), which oversees the assets of nearly 7,400 defined-benefit occupational schemes and

administers payments to members of schemes where employers have gone bust, said ballooning liabilities were driving up

deficits despite the recent stock market rally which has improved asset values.

Deficits – liabilities minus assets – worsened during August by £16bn to £195bn, while the value of the FTSE All-Share Index

rose by 7.1pc. This time last year, deficits stood at just £93bn. The PPF said 6,304 schemes are now in deficit – representing

85pc of the total.

Surpluses in those schemes which still have them have also plummeted, from £53bn this time last year to £21.4bn now.

Although rising share prices caused the value of assets in pension funds to increase by 3.3pc, lower gilt yields forced pension

scheme liabilities to rise by 5.2pc.

A spokesman for the PPF said: “Over the past year, falling equity markets and bond yields have led to an overall worsening of

the funding position. Lower bond yields resulted in a 9.6pc increase in aggregate liabilities, while weaker equity prices reduced

assets by 3.1pc over the year.”

Pensions consultant John Ralfe warned that pension liabilities will continue to grow, in spite of recovery in the stock market.

The Government’s appetite for quantitative easing is one factor causing them to expand.

Mr Ralfe said: “It is easy to focus on asset growth, but we need to look at what has happened to pension liabilities. Higher UK

share prices have been largely driven by falls in bond yields, which have also increased pension liabilities. UK pension plans

have been running to stand still. UK plc continues to run a huge asset and liability mismatch through holding equities to meet

bond-like pensions.”

Growing pension liabilities have already caused nine out of 10 final-salary schemes to close the doors to new employee

members. Many employers are now closing schemes to existing members as well.

Steve Webb, Liberal Democrat work and pensions spokesman , said the plight of workplace pensions will put intolerable

pressure on the state in future to support people who had expected to rely on them in old age. “With public sector pensions

likely to be reined back along with their private sector counterparts, more and more workers will find themselves facing means-

testing in old age,” he said. “If the Government really wants to give people dignity and security in old age, it should guarantee

a more generous basic state pension.”




The Pension “black-hole” will impact all sectors in the UK

Financial Times, 26 November 2012


A SOFTER VIEW: ECONOMIC COMPLEXITY EVOLUTION (1964-2008)

• One way of describing the economic world is to say

that things are made with machines, raw materials

and labour.

• Another way is to emphasize that products are

made with knowledge.

• Markets and organizations allow the knowledge that

is held by few to reach many. In other words, they

make us collectively wiser.

• Countries whose economic complexity is greater

than what we would expect, given their level of

income, tend to grow faster than those that are “too

rich” for their current level of economic complexity.

In this sense, economic complexity is not just a

symptom or an expression of prosperity: it is a

driver.

Quotes Change in Economic Complexity

-

0.50

1.00

1.50

2.00

2.50

1964 1968 1978 1988 1998 2008

Singapore USA UK China

Source: The Atlas of Economic Complexity, 2011, MIT / Harvard.

http://atlas.media.mit.edu

http://atlas.media.mit.edu/


A SOFTER VIEW: ECONOMIC COMPLEXITY AND GDP PER CAPITA

Expected Growth in GDP per Capita based on Economic Complexity

Singapore No 7 (1,639)

UK No 9 (1,558)

USA No 13 (1,447)

China No 29 ( 894)

Economic Complexity

SGP

GBR

USA

Source: The Atlas of Economic Complexity, 2011, MIT / Harvard.

http://atlas.media.mit.edu

http://atlas.media.mit.edu/


Negative Selection Positive Selection

WHY SHOULD THE FO DEFINE PRINCIPLE-BASED

INVESTMENT GUIDELINES

• Companies which bring sustainability into the heart of their

business strategy, outperform their counterparts over the

long-term, both in terms of stock market and accounting

performance (Robert G. Eccles, Ioannis Ioannou, and

George Serafeim, Harvard Business School: The Impact of

a Corporate Culture of Sustainability on Corporate Behavior

and Performance, Working paper, 4 November, 2011).

Positive Screening Methods:

• Positive screening involves preferentially investing in

companies or sectors on the basis of criteria relating to their

products, activities, policies or performance.

• Best-in-class involves preferentially investing in companies

with better governance and management processes and

ESG performance.

• Thematic investment involves selecting assets on the basis

of investment themes such as climate change or

demographic change.

• Investment guidelines can incorporate a clear set of

exclusion criteria for businesses (equities and fixed

income) and countries (fixed income and commodities).

• The Family Office may not have the internal resources to

monitor compliance with these rules but it can use its

information systems (Bloomberg ESG data) and

specialised consultants (Oekom Research).

Examples:

• Child labor: Ban any manufacturer in breach of the

International Labor Organisation rules.

• Alcohol. • Avoid producers and retailers

• Ban depending on sales thresholds (>10% or > 20%)

• Arms. • Avoid manufacturing and sales of weapons systems >10%

• Totally ban any company involved in manufacture or sale of

outlawed weapons as per the Rome Statute of the International

Criminal Court.

Principle-based investment recognises that the generation of long-term sustainable returns is

dependent on stable, well-functioning and well governed social, environmental and economic

systems.

Source: UN Principles for Responsible Investment, Oekom Research AG

Chapters

1. Key Messages

2. Key Challenges








b) Portfolio Theory




f) Reporting



9b


• Securities

selection /

picking

• Trading and confirmations

Construction &

Execution

INVESTMENT MANAGEMENT PROCESS

Have clear investment beliefs and processes

Beyond your own beliefs, there are now key industry

standards: • ESG - Environmental, social and corporate governance.

• PRI – Principles for Responsible Investment.

• United Nations Global Compact.

Some examples: • “… In the long run, asset mix (the Strategic Asset Allocation –

SAA) is the main determinant of portfolio return and risk…”;

• “… We believe the use of derivatives, hedging and shorts

would reduce understanding of our risks. Therefore currency

hedging will not be used…”;

• “… We believe the pauperisation trend in Europe will be

accentuated by demographic issues (Baby-boom to Pappy-

boom)…”;

• “… We do not believe funds-of-funds or bank mandates add

value. Performance of such solutions, net of fees, is inferior to

direct management…”

Investment Management Process

A family office should develop a rigorous Investment Management process. Its independence from

fund managers’ “benchmarking” mentality allows the SFO to define distinct Product Biases.

• Performance

• Limits

• Asset classes & securities picking

• Risk metrics

• Macro research/strategy

• Discussed with external managers

• Macro research/strategy

• Discussed with external managers

Annual

Strategic Asset

Allocation

Quarterly Asset

Allocation &

Monthly Review

Monthly

Performance &

Risk Review


A sound portfolio construction process is based on a Top-Down approach and strong focus on

Strategic Asset Allocation (SAA).

TOP-DOWN PORTFOLIO MANAGEMENT PROCESS

Asian Investors’

Focus

Management Style

Asset Class

Geography

Risk Appetite

Asset A Asset B Asset C Asset D

Euro Bonds

Asia Equities

Macro Hedge Fund

Risk/Return Profile

Strategic Allocation

Tactical

Allocation

Picking Stocks &

Products

Realised Risk &

Volatility

European

Investors’ Focus


WHAT IS ALL THIS TALK OF SAA ABOUT?

Asset allocation between bonds,

equities, alternative and cash helps

manage portfolio volatility and

losses.

• The Asset Allocation is the percentage

of total assets invested in different asset

classes.

• Do not invest all assets into one type of

asset class. Spread or diversify risk by

investing in different types of

investments.

• When one asset class is performing

poorly, another may be doing well and

compensating for the poor performance

in the other.

• Each broad asset class

has various subclasses

with different risk and

return profiles.

• The more return an asset

class has historically

delivered, the more risk

that its value could fall as

well as rise because of

greater price volatility.

• To earn higher potential

returns means to take

higher risk.

High-level asset allocation matters more to investment success than the choice of investments

within the allocation (stock-picking).

Risk What is Asset Allocation?

Bonds & Cash

• See the bonds section regarding the construction of a

laddered bond portfolio.

• Manage the opportunity risk with a cushion of cash.

• Generate (small) short-term returns.

• Keep a mattress of liquidity for family needs.

Equities

• Equities perform during periods of growth and

moderate inflation.

• Different return/risk characteristics: price more volatile

and higher risky investment.

• Unlimited capital gains from equity price increases.

• No vulnerability to interest rate risk.

Alternatives

• Low correlation between bonds and hedge funds.

• Overall risk reduction.

• Stabilisation of returns.

Main Asset Classes


DEFINING RISK & RETURN TARGETS (NOT SIMPLY RETURNS)

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 sales pitch with

minimalised Risk explanation should be thrown out.

Adopt Product Biases

• No investment in Structured notes that incorporate any type of “worse case”

outcome (this excludes 99% of the notes in the market).

• No Dual-Currency-Deposit.

• No FX option.

• No rate swap, whether Fixed/Float or FX based.

• No coverage of securities denominated in currencies other than USD (no

coverage of FX exposure).

• No funds of funds: we invest in single-strategy funds managed by single

managers.

A family office should define its target return levels and associated acceptable risk. To avoid

greed and target slippage, define an Adequate Level after which you can take all money off the

table.

Always Measure Realised Risk & Volatility

Equities 26%

Fixed Income

43%

Cash 9%

Commodities 9%

Alternatives 13%

Balanced Portfolio


IN THE MEANTIME …

“BUY HIGH - SELL LOW” IS WHAT PEOPLE REALLY DO…

Sources: 2005 Fortune Magazine, Investment Company Institute

Over the past few cycles, individual investors have been investing mostly when the market is high

and selling when it is low.

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

0

200

400

600

800

1000

1200

1400

1600

Monthly Mutual Fund

Inflows in USD m (bars)

S&P 500

(line)


• Why Do We Sell Low and

Buy High?, Amir Avitzur,

2012.

• Funds of funds are hurting

but they are not dead.

• People who collect UHNW

assets and park them with

other fund managers are

thriving.

• Undisclosed fund

retrocessions are still

around.

• Product sellers punt their

ware on “expected” high

returns, with little or no

visibility on risks and true

costs.

WHAT HAVE WE LEARNED SINCE THE 2008 CRISIS?

What’s New?

Source: Thomson One

Quarterly S&P 500 Stock Repurchases vs Index

http://cdn.dealbreaker.com/uploads/2012/08/sandp-buybacks.png


Comments

Financial complexity is a result of banks pushing less transparent products to generate hidden

profits. It is not a sign of market sophistication or productive innovation.

Source: What Drives Financial Complexity?”, Claire Célerier & Boris Vallée, 2013

WHAT DRIVES FINANCIAL COMPLEXITY?

• The classification of clients’ level of sophistication is largely based on assumptions, translated into bank-defined test questions that often tend towards classifying the client as “sophisticated”.

• There is no real effort to accurately test the real level of sophistication of clients.

• When in doubt, UHNW investors (families) are deemed “sophisticated” or “accredited” or “exempt” in most jurisdictions and therefore do not benefit from even the poor protection offered to other clients.

• Even with ample resources in an FO, with Bloomberg stations, several portfolio managers and years of investment experience, we should still consider that our information is no match for the banks’ structuring desks.

Key Statistical Findings

The study covers the period of 2002-2010 – therefore includes the Financial Crisis – and 15 European countries.

• The more complex the structured product, the more profitable for the bank and the less performing it is for the investor.

• These products are juicy for banks mostly because of information asymmetries.

• Hidden mark-ups average 2.5% - in addition to entry fees and management fees – and they increase with product complexity / opacity. Some products have had mark-ups of 14%.

• Structured products are sold to investors, not bought by them – push, not pull.

• The less sophisticated the investor, the more banks sell complex structures.

• The greater the competition between banks, the more they attempt to increase information asymmetry and search costs (for clients).


For the overall portfolio, Strategic Asset Allocation dominates over Tactical Asset Allocation as a

driver of over/under performance

• 1996, 1997 and 1998 losses were due to an over

reliance on bonds and exposure to weak Asian

currencies.

• In 1998 and 1999 the Allocation was corrected to

increase the Equity ratio.

• 1999 gains were due to higher US equity exposure but

what about 2000, 2001 ? Remember the dotcom

bubble?

• Overall it can be seen that the fund manager has been

making “follower” decisions.

• Errors in SAA can rarely be compensated by good stock

picks

Insights on the SAA Process Example SAA/TAA Performance

Actual vs.

Assumed Return (%)

-30

-20

-10

0

10

1995 1996 1997 1998 1999

SAA

TAA

5

15

-5

-15

-25

THE IMPORTANCE OF STRATEGIC ASSET ALLOCATION (SAA)

Impact on Financial Performance

Sources: Marakon Associates Research


Implementing the Risk Profile

KNOW THIS GRAPH:

If a product provider promises higher returns at no additional risk … beware.

WHAT IS POSSIBLE / IMPOSSIBLE IN THE MARKET ?

• PM : Objective Market Portfolio without any lending or borrowing.

• PA - PB • Investor Portfolios taking into

account the risk/return preferences of investors A & B.

• PA & PB have to be along the Capital Market Line (CML).

• PA & PB are at the intersection of the CML and the investors investment indifference curves.

• PA & PB contain different levels of lending/borrowing.

• PA & PB then have to be translated into Strategic Asset classes, Tactical Asset categories and individual Stocks.

Defining the Optimal Portfolio

Investor A

Risk Averse

(lends)

Portfolio

Returns Investor B

Risk Seeking

(borrows)

Risk Level

Possible Equity Market

Investments

Capital Market

Line - CML

(blue/below)

Risk-Free

Rate

(Rf)

Efficient Set

(green/above)

0

PB

PA

PM


SAA EXAMPLE

Equities Neutral*

Regions North America, Emerging Markets Eurozone, Japan

Sectors Energy, Materials, Consumer

Staples, Health Care Consumer Discretionary, Financials

Styles Large cap growth Small cap value

Asset Class Rating Overweight Underweight

Cash Overweight

FX GBP, CHF USD, EUR

Convertible bonds; short-dated financial issues Long Corporates, high yield

Commodities Agriculture Industrial metals

Hedge Funds Global macro, fixed income, volatility arbitrage Equity hedge, credit long-short

Real Estate US real estate, Asian real estate Swiss real estate

FX CHF USD

* Neutral stance due to equity exposure through convertible bonds

Bonds Underweight

Overweight Alternatives

Duration & Segments


FOCUS ON SOME ASSET CLASSES

Summary of Main Asset Classes

Bonds & Cash

• See the bonds / fixed income section.

Equities

• No covered here, subject of numerous reviews and easily available online information.

Alternatives

• See Hedge Funds.

• See Options.

Chapters

1. Key Messages

2. Key Challenges








b) Portfolio Theory




f) Reporting



9c


WHAT ROLE CAN BONDS PLAY IN A PORTFOLIO ?

• Payment of specified interest rate during the life of the

bond and repayment of face value called “principal”

when it matures, or comes due.

• Although bond prices may fluctuate with the business

cycle, principle is usually returned upon maturity.

• Opportunity to generate a steady income stream that

preserves/ increases capital and provides stability to

the portfolio by diversifying across asset classes.

• Different risk exposures throughout countries,

currencies and sectors.

• Interest-rate risk controlled via active duration

management: a bond portfolio should be built with

staggered (laddered) maturities. Make sure you monitor

your Weighted-Average Duration and Maturity Ladder

(see example).

A bond is a debt security issued by a government, municipality, corporation, or other entity.

• Considered as a conservative investment for wealth

preservation.

• Not too much exposed to the equity markets’

fluctuations, although correlation increased sharply at

various points during the 2008-2009 crisis.

• In the context of a weaker and longer-stretched

economic recovery.

• Yields rising to an equilibrium level of around 2.5%

for the 10-year Treasury rate (?)

• Equities / shares expected to earn low total share

returns (TSR) over the next two decades.

• Look for a yield pickup by choosing best value

amongst issues: the official “rating” is not always the

best indicator of signature risk. Apply same “value”

principle to bond lines as you would to equity lines.

For example: check the debt/equity ration, cash

cover of coupons, major geographical drivers of

sales growth.

Portfolio Rationale Characteristics


TYPES OF BONDS

• « Munis », debt obligations issued by US states,

European regions/provinces/lander and other local

governmental entities.

• To finance capital investment and cash flow needs for

the public good.

• Exemption of interest income from federal and state

taxes.

• High degree of safety with regard to payments.

• Outstanding municipal debt of more than $2 trillion.

• Approximately 50,000 issuers.

• Minimum investment of $5,000

• Over-the-counter (OTC) market, negotiation of price

rather than use of an auction system.

• U.S. Treasury securities

• The largest and most liquid debt market, where

trading occurs 24 hours a day.

• Backed by “full faith and credit” and ability to raise

tax revenues and print currency.

• No “credit risk “ with very low interest rates.

• $4 trillion in outstanding marketable Treasury debt.

• Three types :

• bills with maturities of less than 1 year;

• notes with maturities from 1 to 10 years

• bonds with maturities of greater than 10 years.

• Others Government Bonds

• Sovereign issuers and country credit ratings.

• Worldwide diversity and exposure.

• The more volume outstanding, the more liquid the

market is likely to be.

Government Market Municipal Market


TYPES OF BONDS

• $5 trillion obligations in the OTC market.

• Issued by private and public companies in multiples of

$1,000 and/or $5,000.

• A wide range of structures, coupon rates, maturity

dates, credit quality and industry exposure.

• A stated rate of interest, usually semi-annually.

• Taxable interest payments.

• Capital and operating cash flow purposes.

• They do not give an ownership interest in the issuing

corporation (except convertible bonds).

• Benefits:

• Attractive yields

• Dependable income

• Diversity

• Marketability

• Purchase of an interest in pools of loans:

• Mortgage-Backed Securities (MBS)

• Created when loans are packaged, or “pooled”.

• Ownership interest in mortgage loans.

• Made by financial institutions as savings and loans,

commercial banks or mortgage companies.

• To finance residential properties.

• Asset-Backed Securities (ABS)

• Form of credit enhancement.

• Backed by financial assets: credit card receivables,

auto loans and leases or home equity loans.

• Sale to a special-purpose vehicle (SPV), usually a

corporation => sale to a trust => repackage of loans

as interest-bearing securities and issuing.

MBS/ABS Market Corporate Bond Market


KEY BOND INVESTMENT CONSIDERATIONS

• Interest rate can be fixed, floating or payable at

maturity.

• Maturity is the specific future date on which the

principal will be repaid.

• Short-term notes: maturities of up to five years;

• Intermediate notes/bonds: maturities of five to 12

years;

• Long-term bonds: maturities of 12 or more years.

• Yield: return earned on the price paid and the interest

payment received.

• Current yield, annual return on the amount paid for the

bond and is derived by dividing the bond’s interest

payment by its purchase price.

• Yield to maturity and yield to call, total return received

by holding the bond until it matures or is called.

• Yield curve, the link between maturity and yield

• A line between the yields available on securities of

different maturities, from shortest to longest.

• The longer the maturity is, the greater the risk will be.

• Credit quality, issuer’s ability and willingness to make

interest and principal payment when due.

• Credit Ratings depending on issuer’s financial condition

and management, economic and debt characteristics,

and specific revenue sources securing the bond.

• Rating agencies: Moody’s, Standard & Poor’s and Fitch.

• AAA => Highest quality bonds

• AA to BBB => Investment-grade

• BB to B => High-yield bonds

• B to D => “Junk” bonds

• Redemption Features

• Call Provisions: issuer repays the principal at a

specified date before maturity.

• Puts: option of requiring the issuer to repurchase the

bonds at specified times prior to maturity.

• Assessing risk of a bond based on its return, its price

and its rating.

Rating Rates & Yield


HOW TO INVEST ?

Individual Bonds

• New bonds on the over-the-counter (OTC) market in

$100,000 denominations.

• Trade of outstanding bonds (already issued) on the

secondary market in $100,000 increments.

• Bond price depends upon the size of transaction, the

type of bond, the amount of service the firm provides.

• Markup, the dealer’s costs and profit, is included in the

price as well.

Bond Funds

• To offer professional selection and management of a

portfolio of securities.

• Do not have a specified maturity date

• “Open-end” funds: buy or sell shares in the fund at

any time.

• “Closed-end” funds: specific number of shares that are

listed and traded on a stock exchange.

Money Market Funds

• To pool investments in short-term, highly liquid

securities with a maturity of three months or less.

• To offer convenient liquidity, since the money can be

withdrawn at any time.

• No assurance that the fund will be able to maintain

a stable net asset value of $1.00 per share.

• Minimum initial investment between $1,000 and

$10,000.

Bond Unit Investment Trusts

• A stable portfolio of investments across all bonds

subclasses, professionally selected.

• Not an actively managed pool of assets => no

management fee but charges to cover evaluation

expenses and trustee fees.

• Minimum initial investment between $1,000 and

$5,000.

• End of the trust upon maturity of the last

investment.


Beware: if you invest with “managers” (i.e. bond funds), it is likely that they will trade their positions

more than a family office investing directly with a buy-to-hold strategy. Brokerage costs will be

charged to YOUR money, these costs will hardly ever be disclosed to the FO and they will impact

performance.

Strategies for bond investing range from a buy-and-hold approach to complex tactical trades.

FIXED INCOME STRATEGIES

• “Buy and hold” strategy

• invest in a bond and hold it to maturity means

• to earn interest: interest paid usually twice a year;

• to preserve principal: face value of the bond received at maturity; and

• consider yield-to-maturity or yield-to-call: higher yields can mean higher risks.

• Laddering

• Building a laddered portfolio involves buying bonds with maturities distributed over time.

• Low sensitivity to interest rate risk because of principal being returned at defined intervals.

• Opportunity to reinvest the proceeds from the bond maturity at the longer-term end of the ladder.

• If rates are rising, that maturing principal can be invested at higher rates.

• If they are falling, the portfolio is still earning higher interest on the longer-term holdings.


BOND CREDIT QUALITY RATINGS BY AGENCIES

Credit Risk Moody’s* Standard & Poor’s** Fitch Ratings**

Investment grade

Highest quality Aaa AAA AAA

High quality (very strong) Aa AA AA

Upper medium grade (strong) A A A

Medium grade Baa BBB BBB

Not investment grade

Lower medium grade (speculative) Ba BB BB

Low grade (speculative) B B B

Poor quality (may default) Caa CCC CCC

Most speculative Ca CC CC

No interest being paid C D C

In default C D D

* The ratings from Aa to Ca by Moody’s may be modified by the addition of a 1, 2 or 3 to show relative standing within the category.

** The ratings from AA to CC by Standard & Poor’s and Fitch Ratings may be modified by the addition of a plus or minus sign to show relative

standing within the category.

Chapters

1. Key Messages

2. Key Challenges








b) Portfolio Theory




f) Reporting



9d


Two very different reasons

• Diversification: you are trying to broaden your exposure,

chase some extra performance and lower the overall risk

of the portfolio. This applies to Commodities, Art, Real

Estate… or..

• Access to skills and techniques unavailable to the FO as

direct investor: you are trying to gain access to risk/return

trade-offs which the FO cannot reach on its own for lack

of resources. You want a wider range of investment and

trading activities than what you can do in-house. This

applies to what people call Hedge Funds.

The usual pitfall is that FO’s confuse these 2 reasons.

• Some Alternative assets can offer the same level of cost

and risk management: Commodities, Art, Real Estate.

These do not necessarily require the FO to delegate

management.

• Some require a delegation of asset management and

make it difficult for the FO to consolidate its cost analysis

and compile its risk metrics: Hedge Funds.

• What the FO will and will not do in this asset class needs

to be clearly defined in the Investment Beliefs and

Guidelines.

WHY DO WE NEED ALTERNATIVE ASSETS?

Five Main Hedge Fund Styles

• Directional portfolios tend to employ top-down

analysis of macroeconomic and financial conditions

to uncover pricing inefficiencies that often arise in

countries as a result of political or economic

changes at both a regional and national level.

• Long/short equities strategies trade long and

short without any particular restriction on the

degree of net long or short exposure.

• Event Driven take advantage of special corporate

situations like M&A or distress.

• Arbitrage strategies typically exploit pricing

anomalies between related securities within and

between markets.

• Managed futures invest on both the long and short

side of the market and usually apply technical

analysis, systematic investment processes.

Understanding Hedge Funds


ARBITRAGE

Convertible

arbitrage Event driven

Fixed income

arbitrage

EVENT DRIVEN

M&A Distress Strategic

Shift

DIRECTIONAL

Emerging

markets Global macro Opportunistic

HEDGE FUNDS STYLES

MANAGED

FUTURES

Discretionary Fast trading Trend following

LONG /

SHORT

Geographical

exposure Net bias Sector focus


WAS MADOFF AVOIDABLE?

• In 1998, the near collapse of Long Term Capital

Management spawned a global liquidity crisis and

called for regulatory scrutiny in the Hedge Fund

industry's largely unregulated domain.

• At one time, Long-Term Capital Management was

the largest hedge fund in history with more than

$100 billion in assets. Its partners included

legendary bond trader John Meriwether, and

Nobel Prize-winning economists Robert Merton

and Myron Scholes.

• There was a general lack of transparency of the

LTCM fund and there was an extremely high level

of leverage involved, magnifying the risk

exposures.

• LTCM was essentially a one-manager hedge fund

that was open to institutions only and focused

primarily on a single strategy : Arbitrage (see later

slide).

The LTCM Debacle

LTCM and Madoff had similar issues: poor legal structuring and lack of transparency.

Central

Custodian

Brokers

Investment

Fund

Fund

Manager

Portfolio

Trustee

(if unit-trust

fund)

Fund

Adminis-

trator

Auditors

1. The FM structure

was not properly

audited and had no

functioning board of

directors.

2. Brokers were “in-

house” or handled only

a portion of the deals.

3. Custodian and

Administrator were not

separate. Custodian did

not verify the existence

of underlying assets.

5. Auditors were not a

large firm with robust

Compliance. They also

failed to audit the

underlying assets and

confirm their existence.

4. The main “fund” had

no direct assets but

only sub-funds.

Nobody verified the

existence of the sub-

fund assets.

Madoff: How to Structure a Fraud


BASIC PRECAUTIONS AFTER MADOFF

• Do not use funds-of-funds.

• Prefer single-manager + single strategy funds.

• Demand GIPS compliance.

• Ensure administrators and custodians are separate.

• Do not invest in offshore funds with low

transparency and disclosure requirements.

• Beware of funds where insider trading is a risk.

• “In 2008, the hedge fund industry lost more money than all

the profits it had generated during the previous ten years”.

Simon Lack, The Hedge Fund Mirage .

• According to Alternative Investment Management

Association (AIMA 2010), managers capture 28% of profits

and investors only 72%.

• i.e. : They play with your money, they keep almost a third of

profits and 0% of losses.

Basic Principles for the FO

To Keep in Mind …

Source: The Economist 2011


FINALLY: UNDERSTAND THIS …

OTHERWISE DO NOT BUY ANY OPTION-BASED PRODUCT

Gain

Loss Premium

Share Price

Gain

Loss Premium

Share Price

Gain

Loss Premium

Share Price

Gain

Loss Premium

Sell a Put Sell a Call

Buy a Put Buy a Call

Premium

Price

Premium

Price

Premiu

m Price

Premiu

m Price

0

0

0

0

Share

Price

Strike

Strike

Strike

Strike

Chapters

1. Key Messages

2. Key Challenges








b) Portfolio Theory




f) Reporting



9e


TRADING PROCESS & PLATFORM

(with a portfolio grouped into 1 controlled fund)

Compliance

Pre-Trade

Post-Trade

Trading

Order Management

Liquidity

Connectivity

Portfolio

Construction

Asset Allocation

Portfolio Modelling

Drift Analysis

Post Trade

Allocation

Broker/Custodial

Notification

Ad

ve

nt

ove

rvie

w (

MO

XY

)

Order placed either electronically or via phone

Trade decided between FO

and Fund Manager

• Asset Allocation

• Geographic Sector

• Industry Sector

• Research

• Market available volumes &

order size

Broker receives order and

executes in market

• Execution style (VWAP, AT

MARKET)

• Market Impact

• Execution venue (Exchange,

Dark Pools)

• Cost

• Discretion

Executed trade is

reported to custodian

• Confirmation

• Settlement

• Delivery vs. Payment

(DVP)

• Consolidation

• Reporting to client

Regulatory Best-Execution rules apply

Bank A

Bank B

Custodian 1

Broker A

Indirect Order

Bank B trading platform

Broker B (Bank B broker)

Direct order

(DMA or EDA)

Portfolio Managers & Investment Management Committee

Family

Office

SAA

Fund

Manager (if not the FO) Investment

Fund

Shares



What you need to know about types of market orders.

Non-automated orders

• Market order: At the best price available at the time the order is

placed.

• Best effort order: Does not need to be executed immediately. • Rare in G7 countries.

• Market-on-open order: Order executed at the opening price. • Usually when there is a time-zone difference.

• Limit Order: Order executed when the market price reaches the limit. • Limits include Good for Day (GFD) and Good to Cancelled (GTC): if the limit is

not reached within the day or before cancellation, the order is no longer valid.

• In electronic markets, order priority rules encourage simple market

and limit orders.

Automated orders

• Most banks now offer algorithmic trading services. • These programmes allow investors to buy or sell according to pre-determined

strategy.

• The algorithms are usually liquidity-sensitive (tap volumes), price-sensitive

(benchmarked price, volatility measure), time-sensitive (pacing, weighted

average).

• Some programmes embed complex order tactics.

Family Offices need to understand (if not define) the type of orders they want and the way each

order needs to be “worked” in the market to get the best price.

* Source: Wikipedia, SEC, UK-FCA

Dark Pools What are the various types of market orders?

• Dark pools are liquidity pools that are not

available on public markets. • When investors place an order to buy or sell on an

exchange, the exchange typically makes that order

available for the public to view. With some dark

pools, however, investors are able to signal that

they have an interest in either buying or selling a

security. But that so-called indication of interest

(IOI) is communicated only to a subset of market

participants.

• Allows funds to buy/sell large volumes without

moving the market.

• Volumes traded are generally considered

Other-the-Counter (OTC).

• Controversy: when the same securities are

traded on a public exchange, does the public

get a fair deal? • In 2009 the Securities and Exchange Commission

(SEC) announced that it was proposing measures

to increase the transparency of dark pools.



What you need to know about order routing.

• The FO needs to understand leading standards (FIX) and regulatory

requirement (SEC in the USA, FCA in UK).

• FIX standards: The Financial Information eXchange (FIX) protocol is an

electronic communications protocol initiated in 1992 for international real-

time exchange of information related to the securities transactions and

markets. • FIX has become the standard electronic protocol for pre-trade communications and

trade execution.

• Direct market access (DMA) is an electronic trading facility that gives

investors wishing to trade in financial instruments a way to interact with the

order book of an exchange. • Normally, trading on the order book is restricted to broker-dealers and market making

firms that are members of the exchange.

• Using DMA, a family office (buy side) utilise the information technology infrastructure

of sell side firms such as investment banks and the market access that those firms

have, but control the way a trading transaction is managed themselves rather than

passing the order over to the broker's own in-house traders for execution.

• Best execution refers to the duty of an investment services firm (such as a

stock broker) executing orders on behalf of customers to ensure the best

execution possible for their customers' orders. • Some of the factors the broker must consider when seeking best execution of their

customers' orders include: the opportunity to get a better price than what Is currently

quoted, and the likelihood and speed of execution.

Family Offices need to monitor their trading risks. You can rely on Best-Execution rules … but

you need to understand how your orders are routed and which price you are getting.

* Source: Wikipedia, SEC, UK-FCA

How is your order executed in

the market?*

Trading

Order Management

Liquidity

Connectivity

Order placed either electronically or via phone

Broker A

Indirect Order

Bank B trading platform

Broker B (Bank B broker)

Direct order

(DMA or EDA)

How is your order executed in the market?*

A SFO needs to have a Bloomberg or Reuters

platform to monitor its own orders, prices and

volumes on the relevant exchanges.



Delivery Versus Payment

1. Trade order

by Client

3. Trade confirmation

Market

5. Cash

7. Securities DVP

4. DVP instruction

2. Dealing

Instruction

6. Purchase

Bank B

ABC Ltd

Client

Prime

Broker

Custodian 1

Bank A

OR

Broker B (Bank B’s

external broker)

Delivery Versus Payment is a common form of settlement for securities. The process involves the

simultaneous delivery of all electronic documents necessary to give effect to a transfer of

securities in exchange for the receipt of the stipulated payment amount (usually via SWIFT).

Source: Wikipedia

Start

End


Bank B

Back Office


Using a Private Bank

Market

Calls or

speaks to …

Most cumbersome and most expensive way to access the Market. Most Private Banks use internal

dealing rooms, which have no access to the market but only further access to external brokers.

Client

Start

End

Bank B

Relationship

Manager

ABC Ltd

Client

OR

Family

Fund (if not the FO)

Securities

Order

Bank B

Private Bank

Dealer

Bank B

Global Markets

Dealer

YES

NO FX, Options, SWAPs

Execution

Broker B (Bank B’s

external broker)

Confirmation

Bank B

Relationship

Manager RM sends

confirmation

to client

Client A SFO needs to understand the costs associated to a private bank’s intermediated / multi-layered trading

process: Internally the private banker (RM) will need to make a return on the transaction and the bank’s

“dealers” will have their own cut / margin added. Then the external broker will charge brokerage and other fees.

Chapters

1. Key Messages

2. Key Challenges








b) Portfolio Theory




f) Reporting



9f


PRIMER ON PORTFOLIO MANAGEMENT / REPORTING SYSTEMS

Swiss systems tend to

cater to EAM (External

Asset Managers) and

focus on calculation of

back-door commissions

for the “manager”.

• Beware of systems

catering to jurisdictions

where the main focus is on

calculating (undisclosed)

retrocessions, … rather

than providing quality

portfolio performance

reporting.

Buy a market-leading

software for family

offices.

• Focus on following

international reporting

standards and monitoring

risks (GIPS).


WHAT TELLS YOU THAT YOUR BANK PORTFOLIO STATEMENT IS

ACCURATE?

Reporting from your SFO

• If your SFO uses a regulated fund to manage your

assets, the fund can/should be independently

audited.

• The SFO, using industry-standard software, should

report performance on GIPS basis.

www.gipsstandards.org/

Reporting to Private Banking Clients

• The client’s bank is audited, but not the account

statements received by clients.

• Nobody independently verifies client portfolio

statements.

• Most private banks are still struggling with Global

Investment Performance Standards … and client

performance reports are often not compliant with GIPS.

Portfolio statements provided by banks to clients are un-audited and often not GIPS compliant

Global Investment Performance Standards

(GIPS)

• “By demanding GIPS compliance from the asset

managers they hire, asset owners promote good

practice based on the ethical principles of fair

representation and full disclosure.” CFA Institute -

Market Integrity Insight, 28 March 2013

http://www.gipsstandards.org/

http://www.gipsstandards.org/


EXAMPLE PORTFOLIO DASHBOARD


EXAMPLE WORKFLOW - FUND ADMINISTRATION AND ACCOUNTING

Shareholder

Services

Record

Keeping Trade

Processing

Financial Reporting

Tax & Compliance

Sec/Port

Valuation Recon

Income &

Exp.

Collateral

Mgmt

Reporting

& Corp.

Action

Pricing &

Risk

Mgmt

Cash &

Data

Mgmt

Trade

Capture

& Mgmt

Trade Date Reporting & Middle Office Solutions Fund Accounting Fund Administration Transfer Agency

Trade

Validation

&

Enrichment

Trade

Matching

&

Confirmation

Failed Trade

Mgmt

Reconcile

with 3rd

parties

Export and

Reconcile to

Prime Broker

Cash

Reporting &

Admin

Institutional

Portfolio

Record

Keeping

Asset

Reference

Data Mgmt

Claims

Mgmt

Asset

Pricing

Operational

Risk Mgmt

Mgmt

Reporting

Corporate

Action

Admin

Investor

Allocations

and fees

Eligibility

Analysis

Net

Exposure

Calculation

Dispute

Support

Processing

Falls Mgmt

General

Ledger

Mgmt

Budget Maintenance

Monthly

Close

Automated

fees &

Allocation

End-of-day

P&L

Recon

Trade Data

Daily Cash

Recon

Position

Recon

NAV

Calculation

Investment

Tracking

Pricing

Distribution

Integrated

Risk

Reporting

Price

Verification

Daily

Economic

Distribution

Mgmt

Perform

Fees

Tax

Services

Compliance

Annual

Reporting

Daily

Portfolio Performance

Semi-

Annual

Reporting

Track

Transaction

Cash

Processing

Record

Ownership

Changes

Maintain

Security

Holder

Records

Share-holder

Reporting

Dividend

Distribution

Anti-Money

Laundering

ERISA

Monitoring

Investor

Eligibility


REPORTING BEYOND FINANCIAL ASSETS.

A Single-FO needs to combine governance and reporting standards

Emerging Trends / Best Practices

• Family Offices are now producing

statements of the value-add they

contribute to the family.

• An increasing portion of SFO’s use

secured intranet platforms to share

information, examples: http://office.microsoft.com/en-au/sharepoint/

http://www.roambi.com/

• FO’s tend to increase the customisation of

reports to family members based on

profiles.

• Asset-class look-through reports using

data aggregators (larger FO’s). In

particular, the changes in SAA over time

provides key insight into performance.

• Environmental Social & Governance

reports.

What Should be in a Comprehensive

Wealth Report* ?

• Statement of Net Worth, by asset class;

• Performance report and analysis, with market/economic review;

• Relevant Balance Sheets (follow IFRS or other common accounting

standard, use external auditors for significant entities);

• Risk report • risk metrics: VaR, Sharpe Ratio • risk dimensions: volatility, geography, currency, duration, role (liquidity / income /

growth), liquidity level, directionality, passive / active.

• Income and Expenses of family member and Family Office (as % of

assets) with benchmarks compared to UHNWI.

• Cashflow summary: income, dividends, coupons, properties rentals;

• Tax review;

• Insurance dashboard (assets covered, risks covered, people covered);

• Goals and projection models;

• Estate plan progress.

The FO must be equipped to report holistically on wealth and measure assets, cashflows, risks

and returns for family members / structures. Performance should be measured against stated

goals and targets.

*Source: Family Office Exchange

http://office.microsoft.com/en-au/sharepoint/






1. Key Messages

2. Key Challenges










Chapters

10


UHNW FAMILIES, LIKE ALL FAMILIES, OWN DIVERSE ASSETS

UHNW Families own around 50% of their non-business assets in non-financial assets.

• The family office’s ability to manage those assets is as important as financial portfolios.

• Non-financial assets are typically not managed by private banks and multi-family offices as these businesses do

not have a clear revenue model to derive income from such assets.

• They would typically recommend fund investments, bringing non-financial assets classes back into investment

funds which generate fees.

What are you good at? What do you really know about professional real estate management or

art investing?

• Skills and information need to be developed / acquired by the Family Office.

• Hire the right people for the right asset class.

• Develop an adequate infrastructure for each asset class: IT systems (accounting, performance reporting). A good

example is the difference between Sage 200 (or 50) for general accounting purposes and Sage Construction

module (http://www.sage.co.uk/product-information/construction/index.html).

Real assets or non-financial assets need to be invested in with the same rigor and discipline.

• Define your investment targets;

• Measure performance of your investments;

• Buy and sell with discipline.

http://www.sage.co.uk/product-information/construction/index.html





LOOKING AT WEALTH BEYOND FINANCIAL MARKETS

Africa 1%

Asia 23%

China 9%

India 1%

Europe 31%

Latin America

4%

North America

31%

2012 Total Net Wealth (in USD value)

(25)

(15)

(5)

5

15

25

35

45

55

65

75

85

95

2012 Wealth per Adult (%)

Financial Other Debts

Source: 2012 Credit Suisse Global Wealth Report

%


WHICH ASSET CLASSES ARE WE TALKING ABOUT?

Real Estate.

• Buy or build / develop?

• Rent or resale?

• Residential, Commercial, Industrial.

Private Equity.

• Private Equity or Venture Capital?

• What type of deal?

• What stage?

• Family NextGen incubation?

• The primary incubator function has been described as increasing the

chances of an incubated firm surviving its formative years (Allen and

Rahman 1985).

Art.

• Collection or dealing?

• Own artists or others’ artists?

• What era / style?

Others.

• ???

Some Data on SFO Asset Allocation Some Assets UHNW Families can invest in …

-

5

10

15

20

25

30

352012 Asset Allocation of US Family Offices*

(%)

Source: 2013 Family Office Exchange, data is

median and does not add up to 100%.


Define target returns per asset class.

Obviously the higher the expected returns the higher the risk. Be aware of both side of the coin. There is no such world

where returns would increase and risks remain the same…

Examples:

• For a conservative investor:

If LIBOR + 200 bps makes sense for a conservative portfolio of financial assets.

Expect LIBOR + 400 bps for Residential Real Estate in a global portfolio across USA + Europe + Asia.

Expect LIBOR + 20% on early stage venture capital.

Define other benefits:

Examples:

• In the case of Private Equity: Are there synergies with existing family businesses?

• Art: can the FO leverage the family’s home connections?

• Real Estate: Can the FO start its portfolio by gathering some existing family properties and improving the management?

HOW DO WE MEASURE PERFORMANCE

ACROSS VARIOUS ASSET CLASSES?


ADVANTAGED DECISION MAKING

YOU NEED TOOLS TO GATHER AND ANALYSE DATA

“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


HOW DO WE MEASURE PERFORMANCE?

Some jargon (see Appendix for more)

• Performance Targeting

• Corporate Level

• Performance Measurement

• Corporate Level

• Performance Targeting

• Corporate Level

• BU Level Measurement

• Performance Measurement

• Corporate Level

• BU Level Measurement

• Signaling Tool - Value Creation in a single period

• Signaling Tool

• Decision Criteria - expressed as NPV of cash flow or

economic profits plus current capital employed

How We Use It

• Total Shareholder Returns -

Capital Appreciation plus

Dividends Yield over a defined

period of time

• Comprehensive single period

measure of profitability

(value creation)

• Warranted Equity Value (Intrinsic

Value)

Definition

TSRs

Economic Profit

WEV

Jargon


Chapters

10a 1. Key Messages

2. Key Challenges








10.Managing Non-Financial Assets a) Example: Properties

b) Example: Art

c) Example: Private Equity and NextGen Business Coaching



UHNW FAMILIES CAN INVEST IN GLOBAL REAL ESTATE MARKETS

Source: 2013 Jones Lang LaSalle

Highly transparent

Transparent

Semi-Transparent

Low Transparency

Opaque

As indicated by the Jones Lang LaSalle Global transparency Index (2013), UHNWI now have a

wide choice of international real estate markets to invest in.


ASIAN FAMILIES HAVE ENJOYED A FORMIDABLE RUN OF REAL ESTATE

PRICES SINCE THE 1990’s

Melbourne

Sydney

Mumbai

Bangalore

Delhi Hong Kong

Guangzhou

Shanghai

Seoul Beijing

Osaka

Tokyo

Singapore

Bangkok

Source: LaSalle Investment Management

Investible Real Estate Markets in Asia (2007)

• There is a strong correlation between real estate

wealth and overall wealth creation in Asia.

• Up to the mid-80’s wealth was created /

concentrated in a handfull of cities only (Mumbai,

Hong Kong, Singapore, Taipei, Bangkok)

• Now there are dozens of cities with several million

habitants, strong local economies and “investible”

real estate markets.

Wealth Creation is Spreading Geographically

The Range of Investable Markets has Expanded and Continues to Grow.


What do people use as metrics in the Real Estate world?

• Look at private portfolio companies, quasi-Private Equity (real estate restructuring) and mutual funds.

Three main metrics are used, for different purposes.

• Fair Market Value: this is a requirement under accounting and auditing guidelines (International Financial Reporting

Standards).

• FMV is compulsory “measure” as part of IFRS. It will be embedded into accounting figures.

• IRR and NPV: Internal Rate of Return and Net Present Value. This is used by all Real Estate players for decision-making

purposes. When you want to decide whether to BUY or SELL.

• The IRR is a way to include all investment elements into one ratio: rental yield, expenses, capital gains, taxes, currency.

• NPV allows us to re-base investment decisions on a comparable benchmark. It includes all relevant factors, not just Gross Yield: growth, costs,

interests, taxes, FX, capital appreciation.

• NPV is always comparable, whatever the Geography, rental yield, Currency and capital gains. NPV allows investors to put all go /no-go

decisions on a comparable footing (especially if we have capital allocation choices between different countries).

• Yield: this is an important metric for Cash Flow planning. It is used for loan repayment assessments. Not used to

compare properties or decide to BUY /SELL.

• The idea is: Do we generate enough Free Cash Flow to allow us to meet bank loan repayments (interests and principal) so as to be sure we do

not run a default risk.

• Gross Yields are not comparable from one market / jurisdiction to another.

HOW DO WE MEASURE PERFORMANCE?

Example : Real Estate


HOW DO WE TAKE DECISIONS?

Example : Real Estate – Scenario Planning (1 – Assumptions)

152

GDP Growth

2005 2006 2007 2008 2009 2010 2011 Average

USA 3.10% 2.70% 1.90% -0.30% -3.10% 2.40% 1.80% 1.21%

UK 2.80% 2.60% 3.60% -1.00% -4.00% 1.80% 0.80% 0.94%

Singapore 7.33% 8.83% 8.88% 1.83% -0.90% 14.85% 4.98% 6.54%

Inflation

2005 2006 2007 2008 2009 2010 2011 Average

USA 3.38% 3.23% 2.87% 3.85% -0.35% 1.63% 3.17% 2.54%

UK 2.04% 2.32% 2.34% 3.61% 2.18% 3.31% 4.48% 2.90%

Singapore 0.48% 0.97% 2.09% 6.61% 0.62% 2.83% 5.24% 2.69%

Growth Rates

USA UK Singapore

Rental Yield Growth 2.54% 2.90% 2.69%

Investment Gain 1.21% 0.94% 6.54%

Tax Rate 39% 28% 17%

FXC Gain/Loss (15 years) 0% -5% 30%

Ke (using mortgage rates)

USA 3.00%

UK 3.20%

Singapore 2.50%

Base Data

Assumptions



Example : Real Estate – Scenario Planning (2 – Playing with Scenarios)

Investment Gain 2% USA and UK, 3% Singapore

Rental Yield Growth 2% USA and UK, 2% Singapore

FXC Gain/Loss (15 years) 3% Singapore, GBP not depreciating

Ke, Discount Rate 3% UK, USA and 5% Singapore

Investment Gain 7 years based on GDP growth

Rental Yield Growth 7 years based on Inflation

FXC Gain/Loss (15 years) based on average of last 15 years

Ke, Discount Rate Based on local mortgage rates

Capital Charge (Book * Ke) Applied on NAV

Net Present Value NPV based on Economic Profit

Based on Macro Data (USD) Singapore Adjusted Downwards (USD)

-

10

20

30

40

50

60

70

USA UK Singapore

Millio

ns

Today

NPV

-

10

20

30

40

USA UK Singapore

Millio

ns

Today

NPV


USD -

USD 10

USD 20

USD 30

USD 40

USD 50

USD 60

USD 70

USA UK Singapore

USD Millions

Today NPV

• The question is : What do we need to believe to

make these figures acceptable to us and make a

decision?

• If you cannot believe it … change the assumptions and

see what happens!

• That is what scenario planning is about.

• NPV can be used even in case you need to make a

Capital Allocation decision outside of Properties (this

will happen…).

• You can play with key assumptions to model your

scenarios:

• Rental Yield Growth

• Investment Gain

• Tax rates

• FXC Gain/Loss (15 years)

• Ke : cost of equity

Using Scenarios and NPV to make Decisions


Example : Real Estate – Scenario Planning (3 – Output)

Using Scenarios and NPV to make Decisions


Chapters

10b 1. Key Messages

2. Key Challenges









b) Example: Art




THE ART MARKET IS NOW A GLOBAL MARKET (1)

China 41%

USA 27%

UK 18%

France 4%

Germany 2%

Switzer-land 1%

Others 7%

2012 Fine Art Auctions (in USD value)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,0002011/2012 New Auction Records

Contemporary Artists (USD)

New Record Previous Record

Source: 2013 ArtPrice


THE ART MARKET IS NOW A GLOBAL MARKET (2)

Asian Explosion

• ZHANG XIAOGANG

bloodline series, oil on canvas

signed in Chinese & Pinyin

• dated 2001, 200×300 cm

• RMB: 16,800,000 (2012)

Who buys What

Source: Poly Auction 2013, ArtPrice

Chinese Contemporary Artists have Global Reach

Who buys Asian Art?

• Most of the « stocks » of Asian art are still kept in the USA

and Europe …

• … but new pieces coming to the market are increasingly

grabbed by Asians.

• Hong Kong is the largest market place in Asia, although

Dubai plays a major role for Indian buyers.

China 12%

Hong Kong 32%

Taiwan 15%

Indonesia

8%

Asia Other

9%

Switzer-land 1%

Where are buyers coming from? (2007 HK auctions)

http://www.polypm.com.cn/english/0602bb.php


The Art Market is Now a Global Market (3)

The Chinese art market

• The Chinese art market has proven to be the most successful art market within any emerging economy and art

market and may, to a certain extent, act as a prototype for the characteristics and type of monetary success which

can be gained from prudent investment in other emerging markets.

• Unlike the traditional structure of the western art market, China’s initial growth occurred as a result of several auction

houses Sotheby’s and Christies included, along with local houses within China and Hong Kong, became the main

backers of the fledgling market.

• Throughout the past five years, Chinese contemporary art has featured extensively in Sotheby’s and Christies

Contemporary Evening auctions. With prominent galleries in Berlin, London, Milan, New York and Paris, this will only

serve as further exposure and increase interest in Chinese contemporary work.

• Mainland Chinese auction houses Guardian and Poly had seen their growth in their Chinese contemporary art

seasons rise from $ 397 million in 2009 to $2.2 billion in 2010. In terms of Chinese contemporary art, Christies Hong

Kong raised $24,140,220 in November 2010, which was at the top end of the pre-sale estimate of $16,773,250.

While Sotheby’s Hong Kong recorded $22,129,120 against a pre-sale estimate of $15,038,270.

• Beijing also has one of the most well known commercial centers of art in China which features the 798 Art District or

Dashanzi in East Beijing.


UNDERSTANDING THE ASSET CLASS

• Wassily Kandinsky (1866-1944)

• The Archer, Print-Multiple , Woodcut , 16.5x15.3 cm

• Auction starts on 05/23/2013, Starting bid: 2,500 $

• 2024 auction records. 7 Nov 2012 Wassily

KANDINSKY who set a new personal world record of

$20.5m with his Studie für Improvisation 8.

• Check Price levels and indices.

Key Considerations for Art Investors*

Source: *Collecting Contemporary Art, Alan Lyndemann 2006

** ArtPrice

Do your Homework**

How to buy?

• Just like for share and bonds, Art has a primary and a

secondary market.

• Buying from the primary market: buying from the artist or

his dealer / gallery. That is relevant to contemporary art.

• Buying from the secondary market: buying from a collector

or on resale from a dealer.

• Buying at auction.

• Buying at an art fair.


UNDERSTANDING THE INDUSTRY

• Qiu Jie: Solo Exhibition

31 September to 26 October 2013

• Art Plural Gallery, Singapore

www.artpluralgallery.com

Understand the industry and the processes*

Source: *Collecting Contemporary Art, Alan Lyndemann 2006

** Art Plural Gallery 2013

Do your footwork**

Who are the players

• Artists.

• Art critics.

• Art dealers / galleries.

• Consultants.

• Private collectors.

• Auction houses.

• Museums.

Aspects of art management

1. Cataloguing

2. Coordination of appraisals

3. Coordination with auction specialists

4. Photography

5. Shipping

6. Packaging

7. Storage

8. Insurance


ENHANCING VALUE OF YOUR ART

Buy-to-Hold

• Look to hold pieces for between 3-5 years minimum.

• Acquisitions will be selected after extensive research has been conducted on each artists back catalogue of past

show and works, supplemented with inside knowledge from gallerist and auction house experts.

• Large commissions are to be taken into account when assessing acquisitions.

• Negotiate more advantageous fees and conditions from galleries.

Manage the asset mix

• The collection needs to be actively managed in order to enhance the provenance and, thus the market value of the

art assets it holds.

Promote your artists

• Lending art assets to key museums and gallery exhibitions across the globe;

• Lobbying influential curators to include artists in key biennials and exhibitions;

• Generally promoting artists in the art market and lifestyle press, and through commissions of the artists’ work;

• Collaborating with influential galleries to promote certain artists’ reputations.


Chapters

10c 1. Key Messages

2. Key Challenges









b) Example: Art




• Fact-finding

• Financial data

• Strategic data:

analyse market

and competition

• Understand the

macro-

economic risk

in the country

(especially EM

countries)

• Understand the

Political risks

• Aggregate data

• Compare to industry benchmark

• In the case of a PE investment (into a 3rd party business), start commercial and legal due-diligence

Is the family launching a new project that requires review and validation or is the FO looking at

investing as a PE investor?

HOW DO WE TAKE INVESTMENT DECISIONS?

Example : New Business / Project

Gather

Information

Generate

Insights

Define the

Opportunity

Analyse

Information

Formulate

Business Plan

Implementation

& Review

Present

Business Plan

• Data

observations

• Understanding

of relationships

to generate

insights.

• In the case of a

PE investment:

build scenarios

to test

assumptions

and assess

expected

returns.

• Beyond the

normal

components of

a business plan,

a family office

should try to

integrate

creative

investment

solutions (debt

instruments).

During Analysis Planning & Design, analysis is the key link between market information and

insight generation for a new business idea / project. Do not shortcut the brainstorming step!

Formulate

Investment

Recommendation

OR

(more often)

Present

Recommendation

to Board

What are the key steps to preparing and reviewing a Business Pan?


• What is the scope of your private equity or venture capital

investment?

• Specific sectors, Investment stage, Geography, Ticket

size, Duration

• What are your target return levels for each type of

investment?

• Examples: LIBOR + 25% for venture capital, LIBOR +

20% for PE?

• Example outline of PE Guidelines Mission Statement

Investment Scope

Supporting Family Businesses (greenhouse)

Specific sector, ticket size and geography

Specific exclusions

Roles and Responsibilities

Role and responsibility of the Board

Investment decision making process for new investment

opportunities

Due Diligence Process

Due Diligence documentation and checklist

Requirements of Investment

Post Investment

Valuation and monitoring of investment

The Family and the FO need to have a PE strategy and develop guidelines to match. What is the

scope of possible new investments? What are expected minimum returns?

What are the exit strategies?


Example : Private Equity (1)

Key Steps of the Due-Diligence Key Considerations for PE

1. Fit / Compatibility with your scope and strategy.

2. Financial audit, including profitability and cashflows risks.

3. Macro and market environment analysis (use Porter

model).

4. Legal audit.

5. Production audit.

6. People & Management review.

7. Information systems audit.


In any PE / Venture Capital decision, the due diligence should clearly determine the optimal capital

structure and take into account the risks associated to each type. The higher the risk, the higher

your discount rate (kE) or Expected Return. The investment or project must pay for its own risk.


Example : Private Equity (2)

Equity

Unsecured

Loan Preference

Shares

Mezzanine

Cash

Senior

Debt

Second

Lien

Source: 2011 BVCA, British Venture Capital Association

High

High Low

Expected Return

Risk


SPECIAL NOTE : NEXTGEN BUSINESS INCUBATION

How Can a Family office help the NextGen build its own wealth? (1)

1. Have a passion:

• Have you got a passion? An idea? A hobby that you can

turn into a business? Is there a gap in the market that you

can fill? Do you want to be your own boss? If the answer

is yes, then you could have what it takes to start your

own business. The first step is to get in touch with us by

filling out a quick application form online giving us some

basic contact information.

2. Make a plan

• Once you have applied, we will identify the most

appropriate Delivery Partner who can work with you to

turn your idea into a plan. From workshops to advisors,

our Delivery Partners will help you build the right plan that

makes sense to you and your business.

3. Present your plan

• With the idea mapped out, your business plan will be

considered for funding. We want your business to have

every chance of success so the main things they will be

looking for is confidence that your business plan makes

sense and that your numbers stack up –Obviously with

the help of the Delivery Partner, you should be in a strong

position for funding.

4. Get going

• When your plan gets the green light, you're on your way

to building your business. With the money in your own

account, it's time to put your plan into action and make

things happen. In addition, you’ll then be able to access

exclusive offers from our Global Partners including

virtual office service, free accounting software and

reduced fees with eBay and PayPal!

5. Meet your mentor

• Every business that gets funded by Start-Up Loans gets

assigned to a mentor who is on hand to help you

succeed. You will have a lot of questions to answer and

decisions to make – our mentors will be able to give you

advice and guidance on what's best for you and your

business.

What do other incubators do ? The general public view: http://www.startuploans.co.uk/ (2013)

http://www.startuploans.co.uk/




1. Have a passion:

• This is an essential concern in the family wealth cycle,

ensure the next generation is motivated.

2. Make a plan

• The FO can help NextGen build a robust business plan.

• The FO can have a series of strategic dialogues with the

NextGen to insure the plan is matured at the right pace.

1G

Acquisition

Wealth Builders

• Self-Taught

• Entrepreneurial

• Frugal Lifestyle

• Generous and

Charitable

• Effective Decision

Making

• Cognizant of

Legacy or Family

History

2G

Retention & Growth

Status Quo

• Professional

• Well Educated

• Understand 1G’s

effort and sacrifice

• Systematic,

Business & Venture

- style approaches

• Want to build on

parents’ legacy

3G

Disposition & Decay

• Well Educated

• Sometimes have

lower work ethics

• Less Appreciation of

1G’s effort & sacrifice

• Searching for a

Purpose

• Inwardly Focused

Asian and African Families

• Mostly 1G

• Some 2G

Value Succession Plan

• Define Objectives for Succession Plan

• Define Principles to live together &

communicate well

• Define Precise Steps & Milestones

SPECIAL NOTE : NEXTGEN BUSINESS INCUBATION

How Can a Family office help the NextGen build its own wealth? (2)

3. Present your plan

• The plan can be presented to the FO investment

committee, the Board or the family business.

• The FO can maintain a strategic dialogue with the

NextGen. The dialogue will serve as quality checks

on the NextGen ideas and progress status-checks.

4. Get going

• The FO and / or family can decide to (/not) invest in

the NextGen venture. Or the FO can support the

NextGen with funding rounds.

• The FO can provide a range of support services at no

additional cost and without conflict of interest.

• Physical office support.

• Accounting and Finance training and logistics.

5. Mentoring

• FO managers or external advisors can serve as

mentors.

• The strategic dialogue should be maintained to

embed training and coaching for the NextGen.

1. Key Messages

2. Key Challenges










Chapters

11


MINIMUM LEGAL CULTURE REQUIRED TO MANAGE RISKS

FOR A UHNW FAMILY

• Conflict of laws & jurisdictions

• Conflict of laws (or private international law) is a set of procedural rules that determines which legal system and which

jurisdiction apply to a given legal situation.

• Comparative Law

• It is the study of the different legal systems in existence in the world, including common law and civil law systems.

• UHNW families need to understand the legal culture of the countries they are present in.

• The family also needs to understand the culture of its various law firms: is it right to apply a Common Law concept to a

contractual issue in … Vietnam?

• International Taxation

• International taxation is the study or determination of tax on a person or business subject to the tax laws of different

countries or the international aspects of an individual country's tax laws.

• Most studies of international taxation are the later (international aspects of 1 country’s tax laws) whereas what UHNW

families need is a good understanding of the former (understanding the tax laws of different countries).

• International Structuring

• Merchants have used international legal structures since the XVIth Century.

• Trading companies, trusts, investment companies ???

International families require international structures to manage their wealth and plan for

successions. Structuring for family offices requires good understanding of legal systems

(Comparative Law) and international private law (Conflict of Laws & Jurisdictions).


WHY DO UHNW FAMILIES NEED COMPLEX, INTERNATIONAL LEGAL

STRUCTURES?

Managing successions and transitions is an ineluctable necessity. It requires good family

dynamics, strong governance, clear communication and robust legal structuring.

Snapshot of Family Structure

(F) Female

(M) Male

MN Maiden name

P Passport

Tax Tax residence

Principal (M)

01/01/1960

P: HK, Tax: UK

Daughter (F)

01/01/1990

P: UK, Tax: FR

Ex-wife (F)

01/01/1960

P: UK, Tax: FR

Marriage:

01/01/1980

Divorce:

31/12/2000

Son (M)

01/01/2000

P: FR, Tax: FR

Ms. A (F)

14/11/1969

P: UK, Tax: UK

Daughter

(F) 31/07/2010

P: UK, Tax: UK

Grand-Father (M)

01/01/1940

P: HK, Tax: UK

Brother (M)

01/01/1950

P: UK, Tax: USA

Grand-Mother (F)

01/01/1940

P: HK, Tax: UK

Sister (F)

01/01/1960

P: UK, Tax: HK

Evolving Family Structure

1G

2G 2G 2G

3G 3G 3G 3G 3G

1G

2G 2G 2G


BASIC ISSUES OF INTERNATIONAL STRUCTURING

Company

Child 1

Child 2

Wife 1

Wife 2

Mr. Wise Mr. Wise is a billionaire who was married and divorced in Australia, re- married in France and lives in the UK. Wife 1 in Australia Wife 2 in UK Child 1 in UK (1st wife) Child 2 in France (2nd wife) Bahamas Trust setup for the kids and Wife 2 when they all were residents of Hong Kong BVI company now owned by the trust has a bank account in Singapore, which holds cash, deposits and US. Europe and Asia securities. Mr. Wise owns a French SCI (transparent real-estate company)

What happens if ... Wife 1 sues Mr. Wise when she learns about the trust?

• Trust says Bahamas Law applies, meaning an

Australian judge applies Bahamas Law ?

• Can Wife 1 execute a judgment against the Child 2 in

France.

• Can Child 2 plead with a French judge that the

Bahamas Trust is valid ?

Wife 2 files for divorce in France?

• French Law applies to the wedding since they lived in

France after getting married at the Paris City Hall.

• Therefore all assets acquired after the marriage are to

be shared 50/50.

Mr. Wise dies in France?

• He is not a resident of France, just vacationing in his

Riviera property (owned through the SCI).

• There will be a UK probate but London magistrate /

judge has to apply French marital rule (community) to

the couple’s assets.

• UK judge may not recognise the SCI as a company...

Sub-

Trust

Bank A


BASIC FINANCIAL PLATFORM:

WHAT STRUCTURES DOES THE FAMILY NEED?

Family Family

Office

Private

Investment

Company

Private

Fund

Family

Member

Bank A

Family

Office

Insurance

Trust

Central

Custodian

Custody & Banking Platform

Brokers

Custodian 2

Bank B

Custodian 1

Investment

Fund

With or without a grouped (fund)

portfolio

Portfolio Management

Platform

Fund


Portfolio

Private

Foundation

Chapters

1. Key Messages

2. Key Challenges









11.Structuring International Wealth for Future Generations a) Conflict of laws & jurisdictions

b) Comparative Law

c) International Taxation

d) International Structuring

11a


Connection Points & Characterisation What Creates Conflicts of Laws &

Jurisdiction?

SOME NOTIONS OF PRIVATE INTERNATIONAL LAW

UHNW families are often international by nature, with family members, assets and business

interests in various countries. Potential disputes will regularly involve several countries. Private

International Law is the area of the Law used to determine which country’s laws apply and which

court have jurisdiction.

• Two questions apply to all international disputes or

situations: • Conflict of Laws: Which courts have jurisdiction in case of

dispute?

• Conflict of Jurisdictions: Which country’s laws apply?

• Conflicts can be related to various areas of the Law. • Law of individual persons (residence, capacity, filiation);

• Property law;

• Contract law;

• Matrimonial law (marriage and divorce);

• Successions, wills, donations.

• Connection points or connecting factor (point de

rattachement): they are elements of the situation which can be

used to connect it to a jurisdiction and a country’s laws.

• Examples include: • Nationality;

• Residence;

• Location of property.

• Characterisation (USA) or Classification (UK) or

Qualification (France): the judge needs to assign each

connection point to the most appropriate legal concept or

category.

• Most jurisdiction classify issues according to their own rules:

Macmillan Inc. v Bishopsgate Investment Trust plc [1996] 1

ALL E R 585, Auld LJ., ". . .the proper approach is to look

beyond the formulation of the claim and to identify according to

the lex fori the true issue or issues thrown up by the claim and

the defence".

• Examples include: • Wills: can it be written in simple handwriting, without a notary public?

• If this is classified as a matter of capacity => apply law of the nationality.

• If this is classified as a matter of documentary form => apply law of the

place of writing.


EFFECTS OF PRIVATE INTERNATIONAL LAW

Beyond general rules related to applicable laws and competent jurisdictions, specific rules have

been developed by countries as well as through international convention to apply to people,

assets and contractual relationships.

Assets People (Family Members)

• The law applicable to citizenship

is usually based on the national

law (refer to passport).

• The law applicable to capacity (or

incapacitation) and family

(protection of minors, marriage) is

usually the law of the residence

or domicile. • Note the distinction between Common

Law and Civil Law countries when it

comes to define “domicile” as opposed

to “residence”.

• Note that there vis a significant body of

E.U. directives and regulation applying

to personal status, minors, marriages.

• Lex Rei Site.

• Most countries apply to assets the law

of their location.

• Boats and aircrafts are deemed to be

located in their country of registration.

• Copyrights are protected in each

country where protection is sought.

• Patents are protected separately in

each country under the World

Intellectual Property Organization

(WIPO).

Relationships (Contract and Tort)

• Contracts.

• Most systems allow the parties to a

contract to chose the law applicable to

the agreement.

• If parties have not made a choice, the

most common principle is to apply the

law of the country of residence of the

debtor of the main contractual obligation.

• Damages or Tort.

• Most countries apply the law of the

event that cause a damage and leave

the possibility to apply the law of the

country of residence of the victim(s).

• There are specific international

conventions applying to traffic

accidents, product liability, food

products.

Chapters

1. Key Messages

2. Key Challenges










b) Comparative Law



11b


Common Law Civil Law

SOME NOTIONS OF COMPARATIVE LAW

• Based on enacted Codes, first code was Napoleon’s Code

Civil, France 1804. Followed by others in Europe (German

BGB, 1896).

• Art. 5 Code Civil : “It is forbidden for judges to pronounce

general rules …” Judges follow the written Law and, when

necessary, can interpret it.

• Qualifications are often made following a hierarchy of

alternative criteria (tax residence).

• Differences in philosophy : • Contracts are based on the true intentions of the parties.

• Matrimonial regime is a community by principle.

• Forced heirship rules apply

• No trust but notion of split property : usus, fructus, abusus

(Art 544 cc). Therefore usufruct can be separated from legal

ownership.

• Countries : • France, Germany, Holland (except Curacao);

• French & Portuguese-speaking Africa;

• Latin America (except some Caribbean islands);

• Thailand, Indonesia, Vietnam, Taiwan, China, Japan,

Philippines.

• Originated in England : case law and Equity (rules

defined by the Chancellor’s Chancery Courts) were

merged by the Judicature act in 1873 (USA : 1848)

• Judge-made-Law : court decisions are binding on courts

of lower levels (and same court)

• Qualifications are made taking into account all relevant

factual elements.

• Differences in philosophy : • Contracts are interpreted literally.

• Matrimonial regime is separate by principle.

• Forced heirship is rare

• Fiduciary concept : a person or institution in a position of

a trustee is bound to act in good faith for another’s

benefit.

• Countries : • UK, USA

• English-speaking Africa;

• India, Australia, Singapore, Hong Kong

Note that there are 2 main legal systems in the contemporary legal world (the whole World does

not follow the same legal philosophy …). With variances in each country.


Observations Private International Law … compared

COMPARING PRIVATE INTERNATIONAL LAWS ?

• Solutions adopted in different countries regarding conflicts

of laws or jurisdiction will differ.

• There is not a single Private International Law, there are

many. Almost one different PIL per country.

• Hence the need to compare Private International Law rules.

• For example : The doctrine of “renvoi” considers the issue

in internal PIL and gives it a … local solution. • In certain cases, a court referring to a foreign law may find that this

law handles the connecting factor / connection point differently to that

of the judge’s own forum.

• The difference in treatment in the same international issues

can lead to two (non-exclusive) outcomes: • Inconsistent decisions in two or several countries; or

• Forum shopping: the parties compare potential solutions before they

chose which country’s courts they will apply to. In that case parties do

compare various national treatments of the conflict. That is a

comparative approach to Private International Law(s).

The way different countries treat the same international situation will differ, resulting in different

solutions. Judges and countries have tried to reduce these difference.

• The definition of the same connecting factor (for laws or

jurisdictions) can be different from one country to another.

• Example: “residence”.

• This can cause different countries to adopt different

solutions despite having the same conflict of law rules. It

can also cause a “renvoi”.

• Note that some countries even have internal conflict

systems (federal states).

• The Hague Conference on Private International Law and

the International Institute for the Unification of Private Law

(UNIDROIT, French: Institut international pour l'unification

du droit privé) both oversee the drafting and adoption of

international conventions designed to develop a uniform

system of Private International Law.

• Short list of Hague & Unidroit conventions: • Family: Marriage, divorce, minors, child abduction.

• Contracts & assets: international sale of goods, contracts,

testaments, matrimonial property, product liability, recognition of

trusts, stolen cultural objects, aircraft.

• Legal procedures: enforcement of foreign judgments, evidence,

access to justice.


COMPARING TAX LAWS ?

• Each country has its own Tax laws and regulation.

• There are international tax agreements between countries … but they tend to be bilateral: between 2 counties only. • Although model (template) OECD tax conventions have allow for a certain harmonisation in Double-tax Agreements (DTA’s)

• “Internal Tax” studies and literature usually describes 1 countries approach to extraneous elements affecting that 1

countries tax revenues.

• So the description and study of “Internal Tax” in Germany is different from the same “Internal Tax” review in Singapore.

• It is a question of vantage point.

• Therefore Comparative Law has a role to play for international UHNW families and their family offices.

The way different countries treat the same international situation will result in different tax

treatments, which in turn will create opportunities and risks for international tax structuring.

Chapters

1. Key Messages

2. Key Challenges










b) Comparative Law



11c


THE EVASION VS. AVOIDANCE DEBATE

• We all have a right to arrange our affairs so as to pay what we owe to the taxman, but not more.

Evasion vs. Optimisation / Avoidance (UK: see 1860 Turner LJ, Fisher v Brierly)

1. Tax Evasion

• The illegal act of not paying due taxes.

• It is usually a crime but the little cat-and-mouse game some jurisdiction are playing around the definition of the crime makes

the international debate more complicated. Family offices should beware of jurisdictions that do not recognise tax evasion in

other countries as a crime.

2. Tax Optimisation and correspondingly Tax Avoidance

• Tax avoidance is legal but generally frowned upon by tax services and subjected to specific anti-avoidance regulation.

• Mostly, my optimisation is your avoidance: Optimisation is viewed from the taxpayer’s perspective, while avoidance is

viewing the same system from the vantage point of the taxman.

• What allows tax authorities to characterise any scheme as “avoidance” rather than acceptable optimisation is the intention

to use loopholes against the intention of the law: intention to play with words in an artificial, non-substantiated manner is the

limit that FO’s need to be aware of.

“Taxes are the price of civilisation”.

Oliver Wendell Homes, Jr.


WHAT ARE THE REASONS AND WAYS THAT UHNW FAMILIES OPTIMISE

THEIR TAXES?

There are 2 main factors allowing international tax optimisation

1. Differential in tax rates

• G7 countries tend to have high government and social expenditures and therefore higher tax collection needs, resulting in

generally higher tax rates.

• A UHNW family can decide to locate part of its assets, businesses, family members or any part of the FO structure

(administration, fund management, trust company, fund custody etc..) in lower-tax jurisdictions. In certain G7 countries the

media positioning of such “relocation” can be tricky.

2. Different tax treatment and classification: Tax mismatches

• All tax systems, as legal systems, resort to necessary classification of situations, instruments and entities. • Different jurisdictions will follow different legal systems and therefore classification methods and outcomes will vary.

• In most jurisdictions tax classifications substantial, appropriate but flexible.

• A classification must apply equally to all members of the same class.

• See discussion on tax mismatches based on classification issues.

• Use of mismatches for the purpose of avoidance / optimisation is what generally triggers Anti-avoidance rules.

• Therefore, as a rule of thumb, families and FO’s should not use mismatches in the absence of strong material

justifications (USA: Gregory v. Helvering: business purpose and economic substance)

UHNW Families and their Family Offices most often try to optimise their international tax

exposure. That is a right … but it should be done within reasonable limits, within the bounds of

the Law and taking into consideration potential reputational consequences.


Effects of Mismatches Main Types of Mismatch

INCREASED INTERNATIONAL AWARENESS OF AGGRESSIVE STRUCTURING

Tax Mismatches (1)

• Using entities specific to a legal system • Some entities do not exist as such or are not recognised in the

same way in different legal systems;

• Some entities have legal personality in a jurisdictions but are not

recognised as legal persons for tax purposes in other

jurisdictions.

• Example: playing on the legal nature of trusts.

• Playing on the definition of residence • Entities that are resident in 2 different jurisdictions;

• Entities that play on the definition of “local” income.

• Using instruments that are characterised

differently in different countries • Example: debt in a country but equity in another.

• Using agreements or vehicles that leverage a

variation in the nature of ownership ( • Beneficial ownership vs. legal title;

• Usus, fructus & abusus;

• Example: playing on the definition of an asset vs. a collateralised

loan.

1. Deduction of expenses and non-inclusion of income.

2. Double deduction of same economic value in two jurisdictions.

3. Generation of extra foreign-tax credit (where in fact little or no

foreign tax was paid).

Responses

• International response to mismatches have consisted mostly of

national responses but OECD jurisdiction are increasingly

sharing intelligence on hybrid arrangements.

• Anti-avoidance rules: in most OECD jurisdictions, the common

test is that of “substance”.

• UHNW families and their FO’s should use the same test as a

sanity check on any structuring they devise with advisors. Is

there a real need for family assets, businesses, employees or

family members to be located in that other country?.

• Use of comparative taxation: in some countries tests were

established to check the corresponding treatment of a situation

in the other relevant jurisdictions.

International tax planning often takes advantage of the difference of national tax treatment of

instruments, entities or transfers, this practice creates no real economic value and generally

induces negative image / reputational consequences.

Source: OECD, Hybrid Mismatch Arrangements, March 2012


INCREASED INTERNATIONAL AWARENESS OF AGGRESSIVE STRUCTURING

Tax Mismatches (2)

Example: The Repo Mismatch, a hybrid transfer of a security instrument.

Source: OECD, Hybrid Mismatch Arrangements, March 2012

SPV

6. BU2 collects foreign tax

credit in Country 2 for

taxes paid by SPV in

Country 1.

5. SPV pays $7 dividend to

BU2.

1. BU1 obtains $100

financing from BU2 at 4%

interest.

2. BU1 creates SPV with

$100 preferred equity (at

7% dividend). BU1 enters

into repo of SPV shares

with BU2.

Business

Unit 1

SPV

Shares

SPV

Shares

7. In Country 1 the

arrangement is seen as a

loan from BU2 to BU1. BU1

is exempt from taxes for

dividend paid by SPV. BU1

can also deduct interests

charged by BU2.

Business

Unit 2

$100 Principal

3. BU1 enters into repo of

SPV shares with BU2.

4. SPV earns income and

pays corporate tax to

Country 1.

Sourc

e: F

inancia

l Tim

es, N

ovem

ber 2

013


THE ERA OF GLOBAL TAX COMPLIANCE HAS ARRIVED … (1)

Time to wake up.

• Why do people still use

these jurisdictions for

international structuring? • These structures are flexible

and easy to set up and

administer (efficiency).

• Progressive Trust & Company

legislation.

• Optimised tax exposure;

• Privacy / Confidentiality;

• Succession, statutory regime &

protection of the weak. No

forced heirship rules;

• Protection against unfair

claims;

• Charity purposes;

• Protection of all children in

case of divorces & secondary

families.

• What clients want to see in

an international jurisdiction: • Good professional and legal

infrastructure;

• Independent judiciary;

• Sound, progressive regulation;

• Competitive services and value

proposition.

International tax evasion will be rooted out but offshore centers will still have a role to play.


THE ERA OF GLOBAL TAX COMPLIANCE HAS ARRIVED … (2)

TAX COMPLIANCE DECLARATION

To: ABC Trust Ltd, street, ZIP, country

From: Name of UBO: Mr Wise Name of Trust: ABC Settlement

I, Mr Wise of street, town, country CONFIRM AND DECLARE as follows:

• I am aware of Country A’s commitment to safeguarding its financial system from being used to harbour

or launder tax evasion monies or proceeds from serious tax offences. Serious tax crimes include

omissions, falsifications or fraudulent conduct perpetrated with wilful intent to evade tax or to assist

others in evading tax;

• I have sought appropriate legal and tax advice and/or am aware of and have fully considered my tax and

other regulatory reporting obligations in all applicable countries with regards to the Trust and its

underlying entities and I undertake to comply with these obligations;

• All assets which I have settled and/or will be settling into the Trust and its underlying entities (whether

directly or indirectly) are sourced from legitimate sources on which all applicable taxes have been paid

and / or declarations made to the relevant tax authorities;

• Upon your request, I will promptly provide any information relating to my tax affairs as may be

reasonably required for the purpose of verifying the tax status of the assets settled into the Trust and its

underlying entities;

• Upon your request, I will promptly provide, as far as I am able to, any information relating to the Trust

(including any trust relevant party of the Trust) as may be reasonably required for the purpose of

verifying that the Trust and its underlying entities are not used in connection with any serious tax

offence;

• To the best of my knowledge, the Trust and its underlying entities are not used in connection with any

serious tax offence, my tax affairs are fully compliant with all applicable laws, and I have not been

convicted of any serious tax offence in any country; and

I will notify you immediately if there is any change to the circumstances declared above.

DECLARED by Mr Wise at (place) __________________________ on (date)_________

Signed ____________________

TAX COMPLIANCE DECLARATION

To: ABC Trust Ltd, street, ZIP, country

From: Name of UBO: Mr Wise Name of Trust: ABC Settlement

I, Mr Wise of street, town, country CONFIRM AND DECLARE as follows:

• I am aware of Country A’s commitment to safeguarding its financial system from being used to harbour

or launder tax evasion monies or proceeds from serious tax offences. Serious tax crimes include

omissions, falsifications or fraudulent conduct perpetrated with wilful intent to evade tax or to assist

others in evading tax;

• I have sought appropriate legal and tax advice and/or am aware of and have fully considered my tax and

other regulatory reporting obligations in all applicable countries with regards to the Trust and its

underlying entities and I undertake to comply with these obligations;

• All assets which I have settled and/or will be settling into the Trust and its underlying entities (whether

directly or indirectly) are sourced from legitimate sources on which all applicable taxes have been paid

and / or declarations made to the relevant tax authorities;

• Upon your request, I will promptly provide any information relating to my tax affairs as may be

reasonably required for the purpose of verifying the tax status of the assets settled into the Trust and its

underlying entities;

• Upon your request, I will promptly provide, as far as I am able to, any information relating to the Trust

(including any trust relevant party of the Trust) as may be reasonably required for the purpose of

verifying that the Trust and its underlying entities are not used in connection with any serious tax

offence;

• To the best of my knowledge, the Trust and its underlying entities are not used in connection with any

serious tax offence, my tax affairs are fully compliant with all applicable laws, and I have not been

convicted of any serious tax offence in any country; and

I will notify you immediately if there is any change to the circumstances declared above.

DECLARED by Mr Wise at (place) __________________________ on (date)_________

Signed ____________________

• This is an example of the

sort of declaration that ALL

beneficial owners will need

to sign in most jurisdictions

in the proximate future.

• Thinking that one could use

offshore tax structures to

evade taxes in one’s

country(ies) of tax

residency is ludicrous ...

that era is over.

• There are however all sorts

of other good reasons to

use international structuring

in a compliant way.


Agencies Involved Instruments Available for International

Cooperation

INTERNATIONAL COOPERATION AGAINST TAX CRIMES (1)

• Tax-related instruments • Bilateral treaties (OECD Model Tax Convention).

• Tax information exchange agreements.

• Conventions: Conv. on Mutual Administrative Assistance in Tax

Matters, Conv. on Customs Offences.

• EU Council Directive on Taxation 2011.

• Anti-money laundering (AML) and anti-terrorism financing

(CFL) instruments • UN Palermo convention against organised crime.

• UN Vienna convention on narcotics.

• UN Strasbourg convention on proceeds of crime (AML)

• EU 3rd AML directive 2005

• Anti-corruption instruments • UN convention against corruption

• OECD convention on combatting bribery of foreign public officials

• Local financial regulation and supervision • Basel Committee principles for effective banking supervision.

• International Organisation of Securities Commissions, IOSCO.

• Mutual legal assistance • Since tax evasion is now criminalised in most jurisdictions, many

treaties and conventions relevant to international crimes apply.

• Tax administration • Recent trends gave included the creation of task forces specialised

in offshore structures.

• Customs administration • They naturally tuned to international aspects of offshore structures.

• Customs agencies have vast powers of investigation and

intervention.

• Financial Intelligence Units • They were set up in the 1990’s to deal with money-laundering and

(later) terrorism financing.

• Police and Prosecution • Both are often specialised: tax crime, organised crime, terrorism …

• Financial Regulators / Supervisors • There role is not typically to focus on tax matters, more to promote

financial stability and security in the jurisdiction.

• But they do supervise AML/CFT regulation.

• Specialised Agencies

As demonstrated by the OECD’s analysis of international cooperation against tax crimes, Anti-

Money Laundering systems are core to the emergence of global tax compliance. It is the

implementation of AML and KYC rules that has recently catalysed new international tax evasion

tools.

Source: OECD, International Cooperation against tax crimes and other financial crimes. 2012


Developments in the British Overseas Territories Consequences of Offshore Leaks

INTERNATIONAL COOPERATION AGAINST TAX CRIMES (2)

In May 2013, the UK HMRC announced that:

• It is working with the Australian and US authorities to examine

data regarding companies and trusts in a number of territories

including Singapore, the BVI, the Cayman Islands and the Cook

Islands.

• It has already identified over 100 people who benefit from these

structures and that over 200 UK accountants, lawyers and other

professional advisors who advised on setting up these structures

will also be scrutinised.

• A total of 17 EU nations intend to pilot a common standard for

automatic multi-lateral exchange of account information and invite

the rest of the EU to join them.

In September 2013, the French Government announced it was

black-listing the BVI, Jersey and Bermuda.

• April 2013, the Cayman Islands announcing their

intentions to exchange account information bi-laterally

with the UK and the US.

• May 2013, Anguilla, Bermuda, Montserrat, the BVI and

the Turks & Caicos Islands announced their intention to

share account information with the UK, France, Germany,

Italy and Spain.

• Under the Memoranda of Understanding ("MOU") signed

between each of the Crown Dependency ("CD") Territories

and the UK: • The UK will provide disclosure facilities to UK taxpayers with

outstanding UK tax liabilities;

• The Government of each CD will require Financial Intermediaries

("FIs") to make clients who are known to be "relevant persons"

aware of the disclosure facilities prior to 31 December 2013; and

• Remind their clients of the disclosure facility in the period between 1

April and 30 September 2016.

• In addition, there will be exchange of account information between

each CD and the UK with effect from 2016.

International cooperation is picking up on the ground …

Source: DLA Piper (2013, Lifting the Lead on Tax Evasion, Simon Airey)

Chapters

1. Key Messages

2. Key Challenges










b) Comparative Law



11d


LEGAL ISSUES WITH OFFSHORE STRUCTURES

• In Common Law countries, offshore trusts are recognised for

material legal effects (transfer of assets, no forced heirship) but not

necessarily for tax purposes.

• Civil Law countries would most often not recognise trusts at all.

• 1985 Hague Convention on the Law Applicable to Trusts and their

Recognition

• Closest connection test applies : where are the assets,

beneficiaries and settlor ?

• The Hague convention specifically excludes taxation from the

scope of the recognition => Civil Law countries will not recognise

trusts for tax purposes.

• Ratified by Australia, Canada, Cyprus, France, Holland, Hong

Kong, Italy, Luxembourg, Malta, UK, USA.

• The Brussels Convention between EU countries imposes the

automatic recognition of judicial trusts, example : testamentary

executor acting as trustee for under aged children.

Recognition of offshore trusts

• Offshore companies are usually recognised for material legal

effects (transfer of assets) but not for tax purposes.

• Despite legislative efforts of offshore jurisdictions.

Recognition of offshore companies

Company

Child 1

Child 2

Wife 1

Wife 2

Mr. Wise Mr. Wise was married and divorced in Australia, re- married in France and lives in the UK. Wife 1 lives in Australia Wife 2 in UK Child 1 in UK (1st wife) Child 2 in France (2nd wife) Bahamas Trust setup for the kids and Wife 2 when they all were residents of Hong Kong BVI company now owned by the trust has a bank account in Singapore, which holds cash, deposits and US. Europe and Asia securities. Mr. Wise owns a French SCI (transparent real-estate company)

Sub-

Trust

Bank A


BASIC TRUST STRUCTURE

ABC

Trust

Pote

ntia

l Cash D

istrib

utio

ns

(regula

r or fro

m tim

e to

time)

Other Properties

(Real Estate)

Trust Deed and

Letter of Wishes

include specific

conditions for

distributions

Sub-

Trust

Purpose Trust or Charity

OR

(more often)

Mr & Mrs Wise

Settlors

Mr True

(as trustee)

ABC Trustee

Company

Bank A

Beneficiaries as

Named

from time to time

Mr & Mrs Wise

Beneficiaries

Children

Others

123 Company Ltd

Portfolio Business Holding

Company

ABC Trustee

Company

Deed s

igned b

y settlo

r(s)

& tru

ste

e(s

)

Tra

nsfe

r of A

ssets

& P

ropert

ies


ESSENTIALS OF A TRUST

• Trusts are an Equity concept, a creation of UK Chancery

Courts (since the 15th Century), whereby knights going

to war (the settlor) could entrust their property to a

person (trustee) and that person would be bound to fulfill

certain fiduciary duties (fiduciary from the Latin “fides”,

meaning faith).

• A trust is merely an obligation (not a legal entity) which

can be enforced in law against a person (the trustee) in

respect of certain property (trust property or the trust

fund) by persons beneficially interested in that property

(the beneficiaries). It is not an independent legal entity in

the same way as a corporation.

• In most cases, it brings a solution to a problem requiring

the separation of assets from personal ownership. This

can be handled in several different ways, but the most

flexible and advantageous is a Trust.

• (hence the US expression : Asset Protection Trust, APT)

• Identifiable trust property • Transfer of legal ownership and control

• Identifiable and mandatory terms of the trust • in our practice there is always a deed.

• Legal capacity of settlor/transferor

• Clear intention

• Identifiable object • identifiable beneficiaries

• Named or by class

• or purpose, which can only be a charity.

• Relief of poverty, religious advancement, education, community as

a whole.

• Powers must be exercised in beneficiaries’ best interests,

not the trustee’s

• Investments should be cautious and placed with

appropriate institutions

• Trustee must avoid breach of trust by making investments

from which it profits personally - investment with group

companies permissible but caution needed

• Beneficiaries can sue a trustee for breach of trust • Failure to act prudently

• Incurring losses

• Family dispute/difference between beneficiaries

• Bank trustees are best target - deep pockets

Where did trusts come from and what are they? The 3 basic elements of a trust

Fiduciary obligations of the Trustee


NATURE & TYPES OF TRUST RELATIONSHIP

• Assets do not “belong” to the “client” • Either as settlor or beneficiary

• Trustee must administer assets: • In best interests of beneficiaries

• According to the terms of the trust

• Trustee cannot be compelled to take a course of action

unless in exceptional circumstances

• Trustee must act as a “prudent man” • Professional trustee is held to a higher duty as a “reasonably

prudent businessman”

• Must take reasonable care and avoid excessive risk when

investing trust property

• Trustee is liable to make good for losses incurred as a result of

bad investment

• Tax liabilities and creditor claims may be faced by the trustee

• Duty to get in and assume control over the trust property • Must demonstrate ownership of the trust assets

• Duty to protect trust property and administer it according

to terms of the trust

• Trustee cannot be mere custodian of assets • Need for detailed information - particularly with respect to private

• companies/real property

• Standards required : • Standards of behaviour for trustees are required by the law -

prudent man/man of business rule.

• Decisions and actions must be defensible and reasonable but

need not necessarily be the same as those a court would reach

• Trustees should avoid hazardous investments

• Trustee should not rely on blanket authorisation but should

consider all circumstances at the time an investment is to be made

• Revocable / Irrevocable trusts

• For a given term or Life • Generally there can be no perpetuity but some offshore legislators

made exceptions.

• Discretionary trusts • Trustee has discretion as to timing and amount of distributions

• Beneficiaries’ interests are not fixed

• Beneficiaries may be added or removed

• More suitable for tax planning purposes

• Can respond to changing needs & circumstances

• Settlor guides trustee by “letter of wishes”

• Voluntary, Constructive, by Law • We are only concerned with trust voluntarily established by deed

– voluntary and in writing.

• Fixed trusts (vs Discretionary) • Beneficiaries have a fixed identifiable right to trust property -

“interest in possession”

• Beneficiary with right to income - “life tenant”

• On life tenant’s death “remainderman” will receive benefits /

assets

• There may be different provisions for capital and income

distributions

Common pitfalls Other duties of the Trustee

Various Types of Trusts


SOME RELEVANT TRUST CASES

• The 3 certainties

Knight v Knight : certainty of the intention of the person

who creates the trust, certainty of the subject matter

(beneficiaries), certainty of the objects.

McPhail v Doulton : For a discretionary trust, it is

sufficient to have beneficiaries designated by classes,

provided these classes are defined through express

tests.

• Rule against shams

Rahman v Chase Bank (1991) : Court in Jersey

invalidated a trust setup by Rahman with Chase as

trustees. Rahman was a Lebanon resident (Civil Law

country). At his death, various claimants (including

widow and mother) respectively asserted that his

domicile was Lebanon, New York and Israel. In fact

Rahman retained control of the investment policy,

perceived some moneys (interests and rent) that

should have been paid to the trust and directed

payments from the trust.

Snook v West Riding Investments Ltd. : a sham is where

there is an “intention that the acts or documents are

not to create the legal rights and obligations which

they give the appearance of creating”.

• Prudent man of business rule

Bartlett v Barclays Bank Trust Co.

• Beneficiaries cannot revoke trustee

Re Brockbank : Beneficiaries cannot change the

trustee even if they are unanimous. Unless they

apply to the competent courts and they have a

reasonable ground.

• Rule of no tracing

Re Diplock : beneficiaries cannot trace an interest

(money) into the hands of a bona-fide recipient of a

distribution.

• Doctrine of Acceleration

Saunders v. Vautier : Nephew was sole beneficiary and

should have received assets at the age of 25. Court

agreed to terminate the trust at his request at the

age of 21 (the legal majority).

• Liability of Investment Advisor for negligence

Voisin v Matheson Securities (Jersey decision) :

Matheson had recommended bonds which later

went in default. Advisor failed to take into account

the conservative investment profile of the client

(trustee). Failed to inform trustee that S&P had

placed the issuer on credit watch. Held responsible

for the loss.


FAMILY TRUSTS & PRIVATE TRUST COMPANY (PTC)

What it Does How does it work ?

Owns Assets in

Country B

Owns Assets in

Country A

• This type of structure can be useful for larger families

and large SFO’s to administer their own trusts.

• The PTC holds complex assets and businesses.

• They derive economies of scale but nonetheless allow

individual family members to benefit from their

separate trust.

• They allow for better overall management and

cohesion of the family affairs.

Requirements

• Company acts as trustee solely for family trust (no

individual trustee)

• Company can be owned and controlled by family trust

but with administrative support by professional trustee

• There may be tax/sham implications if not careful

• Legal advice mandatory

Private Trust

Company

Own shares in

the company

Funds Allocated to

Charity

Trust 1 Trust 2 Charity

Trust

Directors include

Family Members

(or directly family

members)

Family

Trust

Shares

in the

PTC

Board of Directors


FAMILY INCENTIVE TRUSTS

What it Does How does it work ?

• Avoids “remittance addiction”

• Sets key standards of behavior for beneficiaries :

• demonstrate financial independence

• engage in productive activities

• Minimum requirements for distribution : grades,

diploma, income level ...

• Incentive for specific goals or targets : grades,

creation of a business, enter a specific course of study

...

All Beneficiaries

Child 1

Child 2

Other Family

Member

Trust Deed &

Letter of Wishes

include specific

conditions for

distributions

General Conditions

Conditions A, B, C

Conditions D, E, F

No Condition

Mr & Mrs Wise

Settlors

Incentive

Trust


THE USE OF PROTECTORS

• Appointed by settlor to oversee trustee and ensure

that administration is satisfactory.

• May be more than one or a “committee”.

• Powers specified in trust deed should not be excessive

to avoid quasi-trustee/tax trap.

• Can comfort both settlor and trustee.

• May be a professional person or corporation.

• Settlor should not be sole protector.

Powers of a Protector How does it work ?

• Positive

• Ability to appoint, remove or replace trustee

• Approve or reject trustee’s request to amend

trustee’s fees.

• Power to cancel a “flee clause” (clause which

provides for the automatic relocation of the trust’s

administration and governing law in a different

jurisdiction).

• Negative, i.e. protector’s consent required

• To revoke or appoint trustee

• To add or exclude beneficiaries

• To make distributions of capital or income

• To change governing law of trust

• To make significant changes at the Strategic Asset

Allocation level.


LETTERS OF WISHES

• A letter from settlor to guide trustees on investment of

trust fund and its application to beneficiaries.

• Should be dated after the trust deed.

• Can be changed at any time.

• Must not fetter trustee’s discretion and are not legally

binding.

• Should be carefully drafted and should not contravene

terms of trust or its governing law.

• Moral obligations exist but slavish adherence should be

avoided (sham).

Example for a Discretionary Trust What the Letters do

• This letter is intended only to provide you with our general wishes and guidelines on your powers to administer the trust assets in the future.

• The Trust is established for the benefit of our family members, presently comprising the following persons (the Beneficiaries) : Name, Date of Birth, Passport No.

• Your should regard the signatories of this Letter of Wishes as your primary beneficiaries during their lifetime.

• It is our wish that you feel free to discuss with either one of us on any policy matters regarding the Trust ... In the event of our death, you should regard our son / daughter listed as beneficiary number ___ above as your primary liaison

• In such circumstances, please have regard to the following guidelines:

• The trust assets should be enjoyed by the Beneficiaries in the

following proportions : Beneficiary number __, %

• You may wish to take into consideration their respective views,

particular needs and if possible their individual tax situations.

• If all of the Beneficiaries should be dead before us, entitlement of

the trust fund should be shared equally by ----

• This letter is intended only to provide you with our general wishes and guidelines on your powers to administer the trust assets in the future.

• The Trust is established for the benefit of our family members, presently comprising the following persons (the Beneficiaries) : Name, Date of Birth, Passport No.

• Your should regard the signatories of this Letter of Wishes as your primary beneficiaries during their lifetime.

• It is our wish that you feel free to discuss with either one of us on any policy matters regarding the Trust ... In the event of our death, you should regard our son / daughter listed as beneficiary number ___ above as your primary liaison

• In such circumstances, please have regard to the following guidelines:

• The trust assets should be enjoyed by the Beneficiaries in the

following proportions : Beneficiary number __, %

• You may wish to take into consideration their respective views,

particular needs and if possible their individual tax situations.

• If all of the Beneficiaries should be dead before us, entitlement of

the trust fund should be shared equally by ----


Different Types Different Characteristics

NATURE AND TYPES OF COMPANIES (1)

• A company is usually a legal person, it has a name &

address, it owns assets in its name (not the shareholders

or the directors).

• It is created by agreement between founders (initial

shareholders) and usually it is registered in a country of

incorporation. • In Common Law countries : Memorandum and Articles (or bylaws) +

Case Law

• In Civil Law countries : “Statutes” + written Laws

• France : Art. 1832 cc and Company Law of 1966.

• It can be dissolved by the shareholders or the court. It can

also expire at the end of its legal or contractual duration.

• In Civil Law countries, enacted laws dictate the rules

applicable to companies, whereas Common Law courts

have developed a body of rules before laws where

enacted.

• Limited or unlimited liability. • Corporations / companies

• Partnerships (Common Law), Companies of Persons (Civil Law)

• Liability limited by shares or by guarantee (Lloyds).

• Private or public company.

• In Civil Law jurisdictions there are usually no Company

Seal and Secretary. It is not “abnormal” not to have a

seal.

• Companies incorporated in offshore centers most

often fall under a specific local statute for “International

Business Companies” (IBC).


NATURE AND TYPES OF COMPANIES (2)

Common Mistakes How does it work ?

Bank / Financial

Assets

Assets Owned by the

Company

• Assets belong to the company, not the shareholders.

• Shareholders must formally appoint and revoke

Directors (“ad nutum” or with a good reason).

• Directors represent the company, not the

shareholders.

• Directors are accountable to shareholders: fiduciary

duties (Common Law and statutes).

• The Beneficial Owners (BO’s) : they are the ultimate

beneficiaries of rights and privileges legally granted to

shareholders.

• Share certificates can be nominal or to the bearer. In

the first case, the company’s registers are proof of

ownership, in the second, the certificates bear

evidence of ownership.

• Rights and privileges given to shareholders must be

identical for a same class of shares : rule against

discrimination.

Shareholders

Individuals : Natural Persons

Corporates : Legal Persons)

Shareholders

own shares in

the company

Business Activities of

the Company

Shareholders

appoint &

revoke the

Directors

Company issues

Share Certificates

Founders (first

shareholders)

sign the M&A

Company

The Board Manages

the company and

Represents it to third

parties

Board of Directors

Shares

in the

Company

M&A

+ Articles or

“Statutes”

Bank A


WHICH COMPANY DO YOU HAVE?

No Legal Personality

(therefore no limited

liability)

German “Stille

Geselschaft”

French “Société de

Fait” Art. 1873 cc

French “Société en

Participation”

Art. 1871 cc

With Legal Personality

No Limited Liability With Limited Liability

UK / US Partnerships German “Komandit

Gesellschaft” France

“Société Civile” no

commercial activity,

hold real estate or

financial portfolio

“Société en Nom

Collectif”

commercial activity

allowed

Public Limited

(can raise capital from

the public)

Private Limited

(only raise capital from

shareholders)

Onshore :

UK, US, Australia,

Singapore, Hong Kong

Offshore : BVI,

Cayman, Guernsey,

Labuan, Mauritius

Most “offshore” jurisdictions

now require that all certificates

be converted or immobilised

(since 2001).

Find out what the

Memorandum or

“Statutes” say

Legally Owned by

Nominees

or Trustee

Legally Owned

by the

Beneficiaries

Registered

Shares

Bearer

Share


DO YOU UNDERSTAND THE BASIC LEGAL CONCEPTS ?

Can you describe these and explain what they are for?

Properties

or Businesses

XYZ Ltd Asset

Company

or Holding Company

ABC Trustee

Company

123

Beneficiary

Company

Share

Certificate

Trust

Deed Letter of

Wishes

Individuals

(Client, BO,

Professional)

Trusts & their

documentation

Companies

(different roles)

Assets

M&A + Articles

or “Statutes”

Mr. Wise

Settlor

Beneficiaries as Named

from time to time

Mr. Right ass

Protector

Mr. True as

Trustee

Board of Directors

Family

Trust

Bank A

Portfolio

Sub-

Trust


• Assumptions are a basis for discussion, not a scientific representation of a reality that probably cannot be assessed with

discussions … most figures are in line with 10 years or 20 years performance.

• Equities performance assumed at 8%: this is an aggressive assumption. Over 15 years (1998-2013) equities returned

closer to 0%. And over 20 years 3%.

Appendix (Chap 9) Summary of Portfolio Risk Mapping Assumptions

Past

Performance

2% Target /

Preservation 5% Target 10% Target 15% Target

Cash 3.0% 65.0% 30.0% 1.0% 2.0%

AAA 4.5% 20.0% 3.0% 0.0% 1.0%

AA-A-BBB 6.5% 10.0% 15.0% 3.0% 7.0%

HYB 12.0% 0.0% 15.0% 80.0% 40.0%

Equities 8.0% 2.0% 16.0% 12.0% 40.0%

Real Estate 11.0% 0.0% 6.0% 12.0% 25.0%

Commodities 7.0% 2.0% 5.0% 7.0% 10.0%

Alternative 5.0% 1.0% 10.0% 15.0% 35.0%

% of SFO''s targetting this Level 37.1% 42.6% 5.6% 14.8%

Leverage 4.0% 0.0% 0.0% -30.0% -60.0%

Target 4% 6.6% 12.1% 15%

No solution for

>15%


APPENDIX - A BIT OF VOCABULARY

• Advisory Wealth Management model that is characterised by a focus on the

provision of holistic advice and financial planning, as well as discretionary or advisory

portfolio management to individuals and families; typical of both offshore Private

Banking and many European onshore markets (e.g. Germany, France, Italy,

Switzerland).

• Agent Relevance: nominee directors, account signatories, trust houses. An

individual or organization appointed by a principal to act on his or her behalf with the

power to bind the principal. This places the risk of financial exposure upon the principal,

along with placing the right to bind that principal in some other party’s hands. The power

of the agent varies in jurisdictions, and the status should be verified. Certain

jurisdictions prohibit the assignment of the agent’s powers by the agent to another.

• AML Anti-Money Laundering.

• AML/ CFT Anti-Money Laundering & Combating the Financing of Terrorism.

• AGM Annual Meeting or Annual General Meeting. An assembly of

shareholders of a company/corporation in which resolutions are considered and the

financial health of the company is considered. Not all jurisdictions require annual

meetings.

• Beneficial Interest

or Ownership Not a direct interest, but rather through a nominee holding legal title

on behalf of the beneficial owner’s equitable interest. Provides privacy, confidentiality,

and convenience, and avoids use of one’s own name for transactions.

• Beneficiary The person(s), company, trust, or estate named by the grantor,

settlor, or creator to receive the benefits of a trust in due course upon conditions the

grantor establishes by way of a trust deed. The beneficiary could be a charity,

foundation, and/or person(s), characterized by “classes” in terms of their order of

entitlement or hierarchy.

• BO Beneficial Owner. (see UBO)

• Broker/Dealer Wealth Management model in which players primarily trade securities

for customers and for their own accounts. This style is characterised by a strong focus

on transactions and frequent client contacts; typical of a significant part of the US

private client business.

• CAD the Singapore Police’s Commercial Affairs Department.

• CAGR Compound annual growth rate.

• CDB Swiss Bankers Code of Conduct.

• CDD Customer Due Diligence.

• CFT Combating the Financing of Terrorism.

• Compliance Compliance with the laws, rules and standards which govern

banking or other financial activities.

• DCF Discounted cash flow valuation.

• EBIT Earnings before interest and taxes.

• EBITDA Earnings before interest, taxes, depreciation and amortisation.

• EPS Earnings per share.

• EUSD European Savings Tax Directive. a directive on the taxation of

interest income from savings within the European Union that came into effect on 1 July

2005.

• EV Enterprise value.

• FATF Financial Action Task Force.

• FATCA The USA’s Foreign Account Tax Compliance Act .

• FCF Free cash flow.

• FMV Fair Market Value. This is an IFRS standard.

• GIPS Global Investment Performance Standards. For investment portfolio

performance reporting.

• HNWI High Net Worth Individuals (individuals with investable assets of

USD1 Mio+).

• Holding Company A holding company derives its net flow through assets and worth

from the stock equity that it holds in its subsidiary companies, including from licensing

agreements, royalties, and dividends from equity holdings.

• IBC International business company. A corporation, in reality an exempt

company, formed (incorporated) under a typical company act of a low-tax jurisdiction

but not authorized to do business within that country of incorporation; intended to be

used for global operations. Owned by member(s) or shareholder(s). Has the usual

corporate attributes.

• IFRS International Financial Reporting Standards.

• Interpol International Criminal Police Organization. The network of

multinational law enforcement authorities established to exchange information

regarding money laundering and other criminal activities. Has more than 125 member

nations.

• IRR Internal Rate of Return. The rate that sets the NPV of an investment

or project to 0.

• KYC Know Your Client.


APPENDIX - A BIT OF VOCABULARY

• Letter of Wishes The settlor or the beneficiary of a trust may give to the trustees a

letter of his wishes or the trustees may prepare a memorandum of the wishes of the

settlor or the beneficiary with regard to the exercise of any functions conferred on the

trustees by the terms of the trust. Where there is a letter of wishes or memorandum of

wishes, the trustees may have regard to that letter or memorandum in exercising any

functions conferred upon them by the terms of the trust; but shall not be accountable in

any way for their failure or refusal to have regard to that letter or memorandum. In

addition, no fiduciary duty or obligation shall be imposed on the trustee in such

circumstances.

• LIBOR London Interbank Offered Rate.

• Mareva injunction A court injunction preventing a company or trustee from transferring

assets pending the outcome of a lawsuit.

• MAS Monetary Authority of Singapore.

• MV Market value. (see FMV)

• NPV Net Present Value. The present value of future cashflows. (see DCF)

• OECD Organization for Economic Cooperation and Development.

• Paradis fiscal French phrase for a tax haven.

• P/B Price-to-book value.

• P/E Price-to-earnings ratio

• PEP Politically Exposed Person

• Private Banking PB - Used interchangeably with the term “Wealth Management” in this

report; denominates the servicing of High Net Worth Individuals and is not synonymous

with the servicing of “Private Clients”, a term that is commonly used in the US to mean

the servicing of clients with more than US$150-200 K in investable assets.

• Protector A trust instrument may appoint as protector, any person of full age

and of sound mind, including the settlor, or anybody corporate, any firm, partnership or

group of persons, whether incorporate or unincorporated. The protector of a trust may

also be a settlor, a trustee or a beneficiary of the trust.

• RICO US Racketeer Influence and Corrupt Organizations Act. A

professional service provider or trust promoter who assists in money- laundering

schemes or scams may be drawn into US criminal prosecution under RICO.

• ROE Return on equity.

• Rule against

perpetuities A legal limit on the lifetime of a trust or the remote vesting of assets in

the beneficiaries of a trust. May be void ab-initio (from the beginning), a fixed term, or

determined on a wait-and-see basis. Under basic common law, there was a prohibition

against trust assets being held more than twenty-one years after the death of the last

trust beneficiary who was living at the time the trust was created. This has been

abrogated or modified in most offshore jurisdictions.

• SAR Suspicious activity reports (USA).

• Shares Evidence of an equity position in a company. Depending upon the

laws of the issuer’s country, shares may registered, bearer, voting and nonvoting,

unnumbered, common, preferred, or redeem-able. Different classes of stock may be

issued as well as no-par value shares. Limitations of the shares are in the

memorandum or in the articles of association of the company/corporation.

• Statutory That which is fixed by statutes or codes (as opposed to the

common-law body of cases, generating what is referred to as “case law”).

• STR Suspicious Transaction Report (Singapore). Comparable to SAR,

Suspicious activity reports in the USA.

• UBO Ultimate Beneficial Owner. Refer to BO.

• UCITS European (EU) Undertakings for Collective Investment in

Transferable Securities. In other words, investment funds.

• UHNWIs Ultra High Net Worth Individuals (individuals with investable assets

of USD30 Mio+).

• US Person Persons with a US personal tax exposure such as:

• American citizens and dual passport holders;

• Individuals with a place of permanent residence in the United States;

• Holders of permanent residence permit for the United States. A permanent

residence permit means, for example, a green card, an extended stay in the United

States this year and during the two past years, or a substantial physical presence

test.

• VaR Value at Risk, a statistical measure of portfolio risk.

Geoffroy is Chief Executive Officer of the TY Danjuma Family Office, based in Esher, UK. He

is an experienced Family Office manager, with a focus on the Single-Family model. Geoffroy

lived and worked in Asia from 1993 to 2009 and is now commuting between London, Africa

and Singapore. Before he was hired by one of his client-families, Geoffroy was the founder of

Family Services at Bank Julius Baer and previously founder and Head of the European Desk

in Asia for a large European Bank as well as Deputy Head of the bank for South East Asia.

He has worked as a banker with European Family Offices who bank in Singapore and for

whom he managed at one point assets in excess of USD 2.5 billion. He focuses on finding

creative solutions to complex family situations in areas as diverse as portfolio structuring,

family estate planning, trusts, next-generation coaching and Family Office management.

Geoffroy is an experienced speaker and writer. He teaches a Family Office course at the

University of Orleans (France) - Master of Wealth Management programme. Geoffroy holds

masters degrees in Law (National University of Singapore and DEA Paris) and Business

Administration (MBA INSEAD). He is the Laureate at the 1992 Freshfields Competition for

Young International Lawyers. He is a Certified Financial Planner (CFP, France) and a

Member of the Chartered Institute for Securities and Investments (UK).

This book was born out of the need to provide a reference guide for

families wishing to set up their own wealth-management structure,

drawing from experience in Singapore, Switzerland and London.

Sharing a few lessons and experiences from a family officer with a view

to provide a different perspective on issues of hiring, organisation,

structuring and costs.

2011-2013 © Geoffroy Dedieu

SETTING UP A

SINGLE FAMILY

OFFICE

131126 setting up a sfo

Economy & Finance

Transcript of 131126 setting up a sfo