Insight / 15 December 2019
Getting the basics right through independence by John Harris, Chairman
A look at current trends in the global family office space will highlight quite clearly that the modern family office structure is getting more complex, more global, more sophisticated and more digital.
There is no doubt that Single Family Offices (SFOs) are growing more and more ambitious in their activities. The Global Family Office Report, for instance, suggests that family offices are moving increasingly into diverse areas such as alternative assets – private equity investments have become crucial to family offices’ investment strategies, for instance, now representing around a fifth of the average portfolio, with family offices looking set to disrupt a sector traditionally reserved for institutional investors.
Equally, more and more SFOs are indicating that they are likely to increase their philanthropic allocations over the coming months, with different generations of a family looking to align themselves with different green financing, impact investing and purpose-driven activity that chimes with their own personal persuasion – on average, 34 percent of all SFOs have an interest in sustainable investing (Global Family Office Report, 2019).
At the same time, all this is happening against an increasingly complicated regulatory backdrop. The raft of reporting requirements including the OECD’s Common Reporting Standard (CRS) as well as the US’ FATCA and a multitude of other disclosure requirements around the world are all adding complexity to the SFO model – and bringing with it a need for a great deal more resource and expertise.
In a nutshell, SFOs are trying to do more, and are doing it in a much more complex environment, and this in turn is putting an ever-greater emphasis on governance - both on the part of the SFOs themselves, and on the part of any third-party service providers that are supporting them.
It is a difficult operational challenge for SFOs, that has the potential to prevent them from focusing on their core objectives and the strategic aspects of their business; but it is also a challenge for family office suppliers, partners and outsourced service providers.
It seems a paradox that an SFO is established with a view to taking control of a family’s affairs and bringing them under one roof, but that doing so creates a number of challenges and obstacles that can make it feel like the family is losing control of the very things it is trying to protect and grow - it could even be said that the family office controls the family rather than the other way around.
In conversations with SFOs, a number of common challenges are frequently cited – struggling with the speed of regulatory and fiscal change; a reliance on outdated IT and not having access to software; an inability to source and retain talent, expertise and experience; and personal conflicts between family members and SFO employees.
The reality is that few SFOs will actually ever be able to cover all of their responsibilities in-house, which is why outsourced service providers have risen as a key component of the family office landscape. Inevitably, there will come a time in the life cycle of an SFO when it needs to seriously determine those area of responsibility with which they need help with.
These are key decision points for an SFO. In a hugely complex landscape, over-stretching an SFO team risks neglecting the basics, and that could come at a significant cost further down the line.
Whether it is engaging a tax accountant to prepare VAT returns, utilising a professional trustee, or employing a discretionary manager to manage an investment portfolio, investment in expertise or outsourcing to a regulated provider will become vital – particularly in the areas of accountancy and corporate governance.
In terms of outsourced support, the options open to SFOs today are increasing – from bank-owned organisations and listed firms to private equity-backed outfits and independent players. They all offer something different and all have their own advantages, so it is really important that a family chooses an option that is closely aligned to its objectives, a good fit and that can guarantee good, solid, neutral advice to provide the SFO with a solid foundation.
In a world where objectivity and transparency are absolutely critical, an independent provider can often be well placed to meet an SFOs objectives – offering flexibility, discretion, a personalised service and total neutrality and optionality when it comes to structures, product and service selection. That sort of independence and transparency can be invaluable when it comes to getting the basics right, and help avoid any conflict of interest.
From a compliance and governance perspective, for instance, in an environment of ever-increasing regulation and complexity, being able to rely on a team that is agnostic when it comes to jurisdictional selection can be priceless. Equally, relationships with advisers built on merit rather than stakeholder interests can prove much more valuable to a family and help engender trust.
Crucially too, just as an SFO needs to acknowledge its own limitations, so too can an independent provider be better placed to identify where it can add value and where an alternative option would be preferential – free from an agenda driven by investor stakeholders, shareholders, subsidiaries and sister businesses.
These are the basics, but getting them right is vital in a sea of complexity.
With SFOs adopting an increasingly sophisticated and international approach, drawing on the support of an independent third party which has good governance, objectivity and neutrality at its core, can not only take the headache out of an SFOs administration or operations, but also free up its time to pursue its intended objective – the development of a purposeful and successful strategy for the family.
This article was first published in ePrivateclient Jersey report December 2019.