Switzerland: How To Choose A Family Office?

Last Updated: 16 June 2016
Article by Jan van Bueren and Thomas Ming

In this article we will discuss 5 major pitfalls to watch out for when moving from standard wealth management services (provided by a private bank) to dedicated family office services.

According to recent market research, the number of billionaires and Ultra High Net Worth (UHNW) families around the globe continues to grow year after year. This development has clearly affected demand for wealth management services, and more and more families are now turning to family offices to manage their wealth. There are currently two types of family offices in existence:

  1. Single-family office (hereinafter referred to as "SFO"), which is a private company that manages investments and structures for a single family.
  2. Multi-family office ("MFO"), which is an organization that supports multiple families to manage their entire wealth.

As a result of this development, all manner of wealth managers, financial advisors, trust companies, consultants and financial service providers are entering the family office market with the aim of getting in on the action, with most of them providing one or several types of MFO service. It is important to note that they are driven not only by increased demand, but that they find the family office environment appealing due to the regulatory demands they face, the consolidation of the private banking industry, cost pressure, the hunt for wealthier clients, and the "hype" surrounding family office services over the last few years.

Pitfall 1: Making the transition from wealth management to family office services

One of the most frequently asked questions is what amount of wealth is necessary for it to make sense to set up an SFO or to start using MFO services. This is also the question that many families ask when they first approach us, but there is no one right answer to this.

Before considering an SFO or using an MFO, a family must pinpoint:

  • Its goals
  • What type of family office it aims for
  • What type of services it needs
  • Why a family office would actually be needed
  • Which budget is available
  • Whether it expects family members to be actively involved in the family office.

As there are so many aspects involved in the decision to establish an SFO, this thought process is the only way for a family to choose the right structure for its circumstances and needs.

Most families start thinking about an SFO because they would like to have full control over their family wealth. Furthermore, it enables them to establish the family office according to their exact wishes and to ensure it delivers the precise services they need. But having full control also means having your own, recruit, and manage that staff. Providing the long list of services needed in an SFO requires a large staff and a numerous costs. Furthermore, an SFO needs to develop its services by itself, whereas families selecting an MFO dip into existing set of services and structures. All these aspects are often forgotten at the start of the process.

Now let's consider the families who might desire the services of an MFO. These families are looking for a provider without any conflict of interest, better services, and more tailored advice. But where an SFO is never commercially driven, MFOs mostly are. Only a small number of MFO providers originate from an existing SFO, having changed to the MFO model just to share costs with other families. The majority of MFOs are out there to make money, just like traditional wealth managers and your current provider. There is absolutely nothing wrong with that, but as a client you need to be well aware of the fact that many of the services are often just a client acquisition tool for MFO providers.

Which Country is Best for Setting Up a Family Office?

While families ponder the question of whether to set up their own SFO or use the services of an existing MFO, they often overlook the matter regarding the jurisdiction where the family office should be located or established. In reality, this is an essential element of the process that deserves a serious look.

Pitfall 2: Choosing the jurisdiction for a family office

There are quite a few questions that need answering when deciding on the jurisdiction for a family office:

  • In which jurisdiction does the family need to receive support?
  • What are the family's goals?
  • What should the office's legal form be?
  • Which of the family's (corporate) entities need to be managed, and by whom?
  • Which assets need to be preserved/protected?

All these considerations apply when establishing an SFO or using an MFO.

A common mistake families make is to choose or create a family office located in the same jurisdiction as where they live. Although this can be very practical from a communication point of view, this is often not the best choice when examined from a wealth-preservation perspective.

One of the primary roles of a family office is to safeguard assets and to be able to assist the family under all kinds of circumstances. This means that the family office needs to be able to protect the family's assets against geographical, political, religious, personal and economic risks, while remaining fully operational under any circumstance. Therefore, it is only logical that the family office be located in a secure jurisdiction. Because the number of unstable and unsafe jurisdictions outnumbers the stable and safe ones, the majority of families' family offices will need to be located outside their home jurisdiction. This does not necessarily mean that the entire staff or services must be located in foreign territory; roles as local secretarial support, lifestyle management services and local real estate management can be based in the family's original jurisdiction.

In addition to stability, the jurisdiction of the family office must also:

  • Allow the office to manage the family's entities (holding companies, trusts, foundations, etc.)
  • Provide competent staff
  • Have a solid infrastructure
  • Be easily reachable
  • Be tax-efficient.

Of course this is all closely connected to the actual assets of the family and the location of those assets. Finally, most family offices prefer to be located in a jurisdiction known for having a reputable financial centre. It considerably simplifies the activities of a family office when it is in the vicinity of stable banks and financial specialists with solid reputations and lots of experience.

The essential requirements highlighted above ultimately limit the best possible jurisdictions to only a few and that is exactly why you will find the majority of SFO's and MFO's in only a handful of jurisdictions, such as the United States of America, Switzerland, the United Kingdom and Luxembourg. As such, those four countries along with about a dozen others are also the only jurisdictions in which native families could consider establishing their family office in their home jurisdiction rather than relying on foreign territory.

What Services do Family Offices Provide?

Also important is to discuss what type of family office services one might actually need or want. For families considering setting up an SFO, this is a topic that is closely connected to the actual costs of the overall set-up. But for families opting for an MFO, it is much more about managing expectations and selecting the right provider.

Pitfall 3: What type of family office services do you actually need or want?

At face value, it seems very easy: identify the services you want and need as a family, and choose the appropriate family office. But in practice this isn't quite so simple. Analysing the actual needs of the family from a family office is a process that takes time and should be taken very seriously.

Every wealth owner arrives at this juncture with a unique set of circumstances; the family may possess wealth as a result of selling the family business, or the family business might be experiencing robust growth and remain the core of the family's wealth. The wealth may be in the hands of only one person (such as the founder/patriarch), or multiple generations might need support with a broad range of services. Once the family's background is identified, it must be appropriately matched with the goal of its family office: is the primary goal wealth-preservation, wealth-creation, or philanthropy? Depending on the outcome of this analysis, various core services can be identified while discarding the unnecessary ones.

There is an almost unlimited assortment of services that can be provided by family offices. Among others, they include:

  • Investment management
  • Asset allocation
  • Risk management
  • Book-keeping
  • Tax assistance
  • Wealth planning
  • Family governance
  • Lifestyle management
  • Philanthropy
  • Relocation support

But which of these services do you really need? How often will those services be used and which ones are you willing to actually pay for? In the case of an SFO the main question to ask will be how many staff you need and whether that still makes financial sense. Whether these services should be provided internally or outsourced is a topic unto itself.

In addition, it is also not uncommon that a family already has a number of family office services in place via a dedicated advisor, staff employed in the family business, or their existing wealth manager. Then the questions become:

  • Does the family want to continue to work with those persons?
  • Can they be integrated in the new set-up?
  • Should alternatives be considered?
  • In the case of an SFO, are these persons willing to become dedicated staff of the SFO?
  • If the family intends to work with an MFO, will that MFO be willing to cooperate with those persons or be better positioned to take over their services?

In practice, many families move towards family office services not because they are attracted to family office services or the concept of a family office, but primarily because they are dissatisfied with the level of services they receive from their existing advisors or wealth managers.

This automatically means that an MFO is not necessarily the answer for them. In many cases, a change of provider, a small adjustment to the existing set-up, or the addition of an external service to the set-up could benefit the family the most, especially when there is not a lot of wealth involved. It is therefore important to thoroughly analyse the actual needs of the family before any decisive move is made.

Once the wish list of services is decided on, the next challenge is finding the right persons to provide them. In the case of an SFO this means finding the right CEO and staff willing to take the job and having the right connections to provide and coordinate the services. Where an MFO is opted for, the challenge will be to find the provider that fits the family's background and wishes. In the next part of this series of articles we therefore discuss the challenges in selecting the right MFO provider and learn 'Which provider provides what?'

Making the Selection - Choosing a Multi-Family Office

Once the family has decided what kind of services it needs from a family office,the next challenge is finding the right persons to provide them. In the case of an SFO this means finding the right CEO and staff willing to take the job and having the right connections to provide and coordinate the services. Where an MFO is opted for, the challenge will be to find the provider that fits the family's background and wishes. As MFOs are surprisingly varied, this is definitely not an easy part of the process.

Pitfall 4: Which provider provides what?

Currently, there is a growing number of providers offering MFO services. While a large number of providers is generally considered a good thing in a free-market economy (as this normally generates a variety of benefits, such as decreasing prices and a more competitive choice for consumers), the same does not automatically apply to the MFO industry.

The main reason is that the MFO industry is not at all transparent. There is no industry standard for what range of services an MFO should offerand most MFOs tend to operate discreetly without giving an insight into their actual activities or their real offerings.

Moreover, the use of the term "family office" is, in most jurisdictions, neither regulated nor supervisedand even if it is, it is only done lightly. MFOs also originate from very diverse backgrounds, which mean they tend to offer completely different ranges of services. As a result, every family office has a different service offering that can only be experienced from the inside. Or, as it is also sometimes put, "if you've seen one family office, you've really only seen one family office".

Most MFOs only provide a small core of services in-house, strongly connected to the background of the founder(s) and coordinate a small number of other services on your behalf. Almost no family offices provide a very wide range of services. Some MFOs are, for example, very focussed on wealth management; others primarily deal with wealth planning structures and tax/legal issues. Finding out what an MFO really can offer you can be a burdensome task, not to mention judging the quality of that offering.

In this context, it is essential for the family to establish what type of services are offered in-house and which services are (only) coordinated with external providers. The next question to ask in this respect is whether the MFO is actually able to coordinate those services. Do you expect it to only coordinate, or do you want it to monitor the external providers as well? And does the MFO have the necessary expertise for such type of in-house service?

It is also quite unknown to the public that most MFOs only work with clients out of a single or limited number of jurisdictions. Such a family office will not accept a client out of a jurisdiction it does not cover because it will not be able to provide an optimal service. The same applies to the level of wealth a prospective client should have to be accepted as a client. Some MFOs accept clients regardless of their actual level of wealth; others only serve clients as of a minimum asset level. This difference is also often reflected in the quality of the service provided. Pricing can also play a role in this. The client needs to find the Mercedes or Volkswagen that he is looking for.

Another issue, besides finding a provider for the services you seek, is to check that the chosen office is actually able to provide those services in the way you would want them to. For example, if a provider states that it can provide investment services and can also support you with philanthropy, this does not automatically mean that it is able to support you with impact investments, which is a combination of both.

Finally, families should also be aware when using MFO services that it is not guaranteed that they will always be advised objectively or that their assets are exposed to less investment risk. Because this depends very much on how the MFO is providing its services and how the MFO is actually set up. In this regard too most family offices have a different approach.

Finding the Family Office That's a Perfect Fit for Your Family

Last but not least we discuss the personal element involved in working with a SFO or a MFO. How necessary or unnecessary is it to have a cultural and/or personal affinity with the (staff of the) family office?

Pitfall five: How essential is a dedicated family office staff and how important is cultural and/or personal affinity?

The biggest challenge for families intending to set up an SFO is finding the right staff members and deciding how much staff would actually be necessary:

  • Will the SFO be managed by a family member or by a non-family member?
  • Where do you actually find somebody that will run your SFO?
  • Will they be able to provide support with all the services you have selected?
  • How high should their financial compensation be?

Those are just some examples of how complicated this issue is.

With larger families, it is not uncommon for a family member to run the SFO or is at least involved in some of its functions such as being a member of the investment committee. In this sort of situation, it is paramount that appropriate family governance is in place so that all family members know their exact rights and responsibilities. There is also the added challenge of ensuring that the family member has the right education to perform their tasks professionally.

In the case of first-generation wealth owners, the SFO often originates from the operational business as key staff members get involved in organising "private" matters for the business owner. This is often the case especially in emerging markets where there is no clear distinction between what is business and what is private. The problem that can arise in such a case is that the staff will simply not have the time they need to deal with both the private and the business issues, resulting in mistakes and oversights. Often the staff lacks the necessary knowledge to deal with specific private matters, such as acquiring real estate abroad or managing an investment portfolio. This set-up is therefore clearly not an advisable one. But making the step toward a standalone SFO is quite a challenge for many wealth owners because of the high costs involved.

In the case of selecting an MFO, there must be a professional, cultural, and personal compatibility between the family and MFO staff. In other words, the client needs to fit the MFO. When the MFO has more of a coordinating function, it is also important that the external providers click with the clients. This need for a special relationship is also one of the reasons why we believe families should not just follow a recommendation for a family office from someone they know; the families in their circle might also be wealthy, but they will in most cases not have the same character or needs.

Finally, families should note that some of the better MFOs do not simply take on every and any client. In these cases, you end up seeing common features among their client base. For instance, their clients may all come from a specific region, have a similar business background, or share the same interest. If the MFO does not feel comfortable with a prospective client, in most cases it will not accept them.

This concludes our article about the process of moving from standard wealth management services to dedicated family office services. There is no denying that families wanting to take this step are confronted with quite some challenges, but they can overcome them without much trouble if they are well advised and take the process seriously.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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