Fuelled by the wealth boom, cross border investments and population growth in Asia, the number of HNWI and ultra HNWI has skyrocketed. The region has a record 444 members according to the 2014 Forbes Billionaires List, led by three entrepreneurs from Hong Kong: Li Ka-shing, Lui Che Woo and Lee Shau Kee. Rather than Japan as the focus of attention, it's now mainland China out in front in Asia with a record 152 members. India is the runner-up to China and for the first time the top 100 are all billionaires, with combined wealth of $346 billion, up more than a third from 2013.
There is a Chinese saying, "Fu Bu Guo San Da" which means that the wealth of a family never lasts for more than three generations. In the United States, there is a similar aphorism—"Shirtsleeves to shirtsleeves in three generations"— which describes the propensity of family-owned enterprises to fail by the time the founder's grandchildren have taken charge. Indeed a large proportion of India's current wealth has been recently created and is still held by the first-generation entrepreneur. However issues of wealth preservation and succession planning in particular are starting to be considered by the UHNWIs and the concept of the Family Office which an institutionalized and well-formalized model that is dedicated to the financial, corporate and personal needs of wealthy families is thus poised to attract much interest.
The Emergence & Evolution of the Family Office concept
It is difficult to provide a definition of a Family Office as there seem to be as many Family Office definitions as Family Office providers! In a nutshell, it can be said that a Family Office provides the necessary skill, guidance and management of a family's wealth to build a structure which can help protect that heritage and pass it smoothly across generations. It is built on the premise that very wealthy require very sophisticated, independent services and a higher level of confidentiality than average HNWIs in order to achieve their financial (asset growth and preservation) and personal (philanthropy, succession and heritage) goals. The Family Office is thus the focal point of all kinds of services that may be required by the UHNWI.
The family office concept can be traced back to the 6th century with the "majordomo" ("major": highest / "domo": household) who was a person who would speak, make arrangements, or take charge for the affairs of the royal family and its wealth. Later, the upper nobility started to use these services of the "majordomo" as well. The modern concept and understanding of family offices was developed in the 19th century in the US when in 1838, the family of J.P. Morgan founded the House of Morgan. In 1882, the Rockefellers founded their family office, which prevails until today. Nowadays, there are broadly two types of Family Offices: Single Family Office (SFO) which serves the needs of one family. In general, families should have a net worth of $250-500 million to set up an independent SFO. Multi-Family Offices (MFO) are SFOs that have given access to third parties like non-family members and other wealthy families. These MFOs are still private, family-owned Family Offices but they are willing to serve the needs of more than one affluent family. It is also possible to have a hybrid structure whereby an SFO will perform certain in-house core functions and either outsource other functions to external partners or to an MFO.
Structuring a Family Office
Every family is unique and so is every family office! There is thus no set model for structuring a family office and the latter will be determined by the nature of the family and by its individual circumstances. In particular, the following will have to be considered: what are the family's service requirements; will all or any of these services be needed immediately; and which (if any) of these services can be provided most efficiently in-house and which should be procured through external parties / outsourced.
Family Offices may provide a comprehensive range of services, from financial, legal & tax advice to concierge and residence services. The types of service typically provided by family offices can be grouped into the following categories: investment-related services; tax, finance and estate-planning services; family continuity services in relation to education, family counseling and family governance; Philanthropy; lifestyle management services, such as concierge services and residence management.
A Family Office can be set-up as a limited liability company, a trust or a private foundation depending on the availability of these legal entities in the jurisdiction where the Family Office will be set-up. The choice of the jurisdiction to set-up the Family Office will depend on a number of factors. The location of a family office is not necessarily where the family members are resident especially where the family business spans a number of jurisdictions, which is likely to be the case for UHNWIs. Determining factors will include the tax regime, availability of local talent to hire, quality professional expertise (investment, legal, fiduciary, tax) amongst others.
Family Offices: The case for Mauritius
Mauritius is a recognized IFC of substance, well regulated and supportive of all international initiatives (OECD/FAFT/G20), never black (or grey) listed. Often described as India's younger sister, Mauritius has important historical, cultural and political links with India and also long experience in facilitating foreign investments in India. Mauritius has a large pool of well-educated young multilingual people, fluent in English, French and Hindi. Most of the professionals, including accountants and lawyers, are trained in Europe and are members of internationally recognized professional bodies. It has an independent and stable democracy, is a member of the Commonwealth, with the Privy Council of the United Kingdom as its highest court of appeal.
Mauritius combines the advantages of an international financial centre with no CGT, no withholding taxes, low tax base, confidentiality and free repatriation of profits and capital among others together with the ability for treaty based tax planning through its network of Double Taxation Avoidance Treaties. It offers interesting structuring opportunities for family offices which may be set-up as a company, trust or private foundation. In particular, Mauritius allows for the setting-up of a Private Trust Company which, given the right set of circumstances, can complement the Family Office or even in some circumstances be the Family Office itself. It already has a well established reputation as a high-end tourism destination, a successful Integrated Resort Scheme (IRS), cost efficiency and is only 1.5 hours behind India.
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