Family office 2.0: Meeting the needs of today’s high-net-worth families

Family offices are still being used for the traditional reasons of preserving wealth and managing a family’s financial affairs, but they’re also helping families fulfil philanthropic and ESG-related goals.

To get a better sense of how family offices are changing and why they’re so important, we interviewed four Vistra experts.

Chris Marquis is based in London and is the global head of Vistra’s private wealth sector. Simon Bernet is an executive director in Zurich and a team leader responsible for private wealth clients in Brazil. Christine Tan is managing director, Asia, overseeing private wealth clients in the Asia Pacific region. ​​​​​​Carly Thorpe is director of private wealth in the Middle East.

There are different definitions of family offices and different related terms, such as multi- and single-family office. How do you define a family office?

Simon: A traditional family office is a family business founded and managed by the same family and passed on to the next generations. There are professional family offices that advise a single family, taking care of their wealth and all family affairs, including personal and professional matters. Multi-family offices provide the same services but for various families.

Chris: A professional family office can separate the family members from the office itself, providing a greater degree of objectivity, professionalism and cost efficiency through collective wealth investment. Depending on a family’s needs, the office may coordinate all legal, financial, fiscal, insurance, medical and lifestyle services. Frequently, a family office engages third-party service providers to manage consolidated reporting, governance, risk, compliance, property, accounting and payroll services.

Christine: I’d add that a single-family office may be used by families with more than US$100 million in investable assets to institutionalise a succession strategy. The office typically embodies the DNA of the founding generation of the family, including shared values, financial objectives and the aspirations of the next generation. Over the last decade, there has been a proliferation of single-family offices [SFOs] set up in Asia due to the exponential UNHW [ultra-high-net-worth] population growth and a gargantuan increase of new wealth in China. We are already witnessing wealth transfer to second and third generations.

Carly: I would define a family office as a solution that is dedicated to managing the family’s wealth as well as looking after the family’s affairs. However, every family is different, and there is not one family office set-up that fits all. In the Middle East, we are seeing the concept of a single-family office being understood and considered more than ever before, largely due to the involvement of the next generation and philanthropy becoming a focus for many families.

How have the challenges, needs and values of UHNW families changed in recent years? How are they addressing these through family offices?

Chris: UHNW families have become more geographically and culturally diverse, and hold complex asset classes, often as a result of realising liquidity from the sale of all or part of a family business. These families are increasingly aware of the need to create a forum for transparent dialogue, information-sharing and collective decision-making to understand the opinions of different generations and sustain the wider, multidimensional family enterprise.

Simon: Ensuring compliance is also important. Cross-border business gets more complex every year, and families are finding they need professional support to successfully navigate regulatory and legal challenges.

Christine: The understanding and appreciation of family offices in Asia is still in its relative infancy. What many Asian families term a family office may seem to be nothing more than an extended private investment arm of their companies. These models typically have a single investment focus to achieve the highest portfolio return rate, generally exceeding 15 percent per year.

In contrast, SFOs outside of Asia are primarily set up as a one-stop shop for investment and wealth management that includes tax planning, estate planning, philanthropic and charitable giving, and a governance framework that integrates educational goals and social values. This full-service model of a family office has yet to take a firm hold in Asia.

There is also often a lack of trust, vision and forward planning in many Asian families. That could be related to innate cultural values or to UHNW families’ natural tendency to have the patriarch run the business until death to maintain control over the family’s wealth.

Finally, many next-generation family leaders in Asia have been educated in the top universities in North America and Europe and have established successful and independent careers outside of the family business. As the current generation of Asian entrepreneurs approach retirement and demise, we are witnessing a changing of the guard. The next generation — who might be trailblazers — may find it extremely challenging to educate senior family members on the concept of the family office and institutionalizing it to achieve a bigger vision and aims. There can be internal challenges when younger family members try to impose current global best practices and industry standards on a more traditionally run family office.

Carly: There are also new investment forms, such as cryptocurrency. There are more regulations, laws, costs, taxes, compliance requirements and sustainability concerns that UHNW families can — some would say must — be addressed by a family office.

What significant trends are you seeing in family offices, both globally and in your respective regions?

Chris: Many families who are planning for or experiencing their first significant wealth transition and have traditionally relied on a trusted, senior executive of the family business to act as the quasi-head of the family office are now realising that is no longer sustainable. They recognise the need to build a more robust, objective governance framework tailored to the specific needs of the UHNW family but providing a platform to maintain confidentiality and to provide financial information so that informed decisions can be made. Progressive regulators have also created incentives for family offices to incorporate in their jurisdictions, leading to increased local and regional investment.

Christine: The South China Morning Post has reported that about 70,000 affluent Asians are likely to transfer an estimated total wealth of US$2.54 trillion to their heirs by 2030, the third-largest amount after North America and Europe. There is a shift from loose arrangements and informal setups to more formalised, structured and regulated family offices with licensing and fund tax exemptions. We are also seeing some older family offices from North America and Europe setting up satellite offices in Singapore to be closer to Asian investment opportunities.

Simon: Investment, succession and tax planning are now more united than ever. Crypto and metaverse investments in particular are increasingly popular and have created conflict between old and new generations. The older generation is reluctant to invest in cryptocurrency, as they don’t trust what they don’t know. Younger generations are keen to look for new opportunities with higher returns despite higher risks, and they tend to care less about succession planning, as they believe that is not yet an issue that affects them.

Carly: With the establishment and continued development of the UAE common law free zones, namely the Abu Dhabi Global Market [ADGM] and the Dubai International Financial Centre [DIFC], we are seeing more families establish their family offices in the United Arab Emirates. For families who are based or have a presence in the region, two transit airports are now available, making it easier to travel to the UAE directly from anywhere in the world. The growth of the region, particularly the ADGM and DIFC as globally recognised financial centres, has made it more appealing for family offices to be set up. With the August 2022 launch of the world’s first global family business and private wealth centre, we are expecting interest to increase.

We are also seeing local families setting up their family offices in the Channel Islands, Switzerland or Singapore, with a replicate in the UAE. Non-local families, such as non-resident Indian families, seem more comfortable setting up an office in the UAE only. It will be interesting to see how these trends develop in the coming years.

What are some of the major risks UHNW individuals face and how do they manage them?

Christine: Some of the challenges UHNW families face involve protecting their family business while adapting to global challenges. Families may strive to preserve harmony and avoid future conflict in their business succession planning. Future planning must consider differing views. For example, some stakeholders may want to cash out and sell the business, while others may wish to keep it running. Family governance and business succession planning help manage the wealth transfer process and longevity of the family legacy.

Chris: Regulatory change through global transparency initiatives — such as FATCA, CRS and ultimate beneficial owner [UBO] registers — have led to some erosion of privacy for UHNW families. Cybersecurity is one of the new emerging risks UHNW families and family offices face; it is therefore paramount that: 1) they have a clear purpose for the family’s wealth and structure the family wealth in a compliant manner; and 2) the family office has robust systems to defend against potential data leakage. UHNW families will often place reliance on third-party service providers, many of which have experienced data leaks, making that core sense of purpose to preserve the reputation of the family even more pivotal.

Are any new regulations significantly affecting family offices globally or in certain countries?

Simon: In Europe, DAC6 and ATAD 3 regulations are having a significant impact. In offshore jurisdictions, such as the British Virgin Islands and Bahamas, economic substance laws have affected family offices. Regulations like CRS and FATCA have been in place for many years and family offices have already adapted to them. But family offices still must keep pace with local tax reforms and international standards.

Christine: The past business practices of using nominees based solely on trust are gradually being replaced by contractual roles and formal relationships. Family offices now operate in an arena of high transparency and increasing regulation. There is a global movement to impose a global minimum tax rate of 15 percent for corporations. Many families are reviewing their old structures to check for restructuring opportunities that are compliant, fit for purpose and future ready.

Chris: In addition to the global drive towards greater transparency through AEOI regulations (i.e., CRS, FATCA), progressive regulatory and fiscal regimes in Singapore and under consultation in Hong Kong are looking to attract UHNW families and their family offices.

Speaking of Singapore, there has been a significant influx of family office wealth into that country. Where is this coming from and why? Are other jurisdictions experiencing similar shifts?

Christine: Singapore is one of Asia’s most politically stable, well-regulated and competitive economies, so it’s natural for UHNW families to consider centralising their family office in that jurisdiction. Simplicity, efficiency, clarity and a sound financial ecosystem are common reasons families cite for setting up family offices in Singapore.

Carly: Following Covid-19 lockdowns and how well the UAE handled the pandemic, there has been not only a considerable amount of wealth moved into that country, but also more people and businesses who wish to relocate and establish a presence within the region. In 2020, the ADGM had a record year, seeing registered licenses increase by 43 percent. In 2021, the DIFC also recorded its highest ever annual revenue and operating profit, seeing a 36-percent increase in company registrations from 2020. To me, this demonstrates the trust that families and businesses have for doing business in this region. The UAE is becoming a leading financial centre, demonstrating that companies can be established with ease and receive the support they need to engage in business and grow in the Middle East.

In what ways are family offices changing to meet the demands of the next generation?

Christine: There is growing acceptance that the next generation UHNW family members may not want to work in the family office. Families in this situation will bring in third parties to assist their family office and provide oversight of family assets. And rather than managing the entire portfolio themselves, some family offices will delegate the investment functions to external fund managers.

Simon: Personal contact remains a key factor despite the increased use of technology. On one hand new technology can facilitate a higher standard of quality in services. On the other hand, family offices must familiarise themselves with the technologies and understand the business consequences of using them. For example: What does it mean for a trustee to accept crypto assets? What are the risks? Regulations typically lag new technologies, so it’s important to keep abreast of new and changing regulations to reduce non-compliance and possible reputational damage.

Chris: Family offices must engage more directly with the next generation to ensure that the ethos of the family evolves. A good example of this is where family wealth has been created through primary industry and non-sustainable energy sources, and the next generation is looking to invest in more sustainable businesses.

ESG and related reporting requirements, along with public demands for sustainability and transparency, are changing the corporate and investment landscapes. How have they affected family office management and strategies?

Christine: ESG principles and sustainable investments are becoming increasingly embedded in the family office investment principles and portfolio theory. In this age where news can go viral in an instant, institutions, including family offices, are concerned about public perception and reputational risk. Family-office principals have increasingly looked to ensure that activities and investments are ESG-aligned.

Simon: Sustainability and charity are societal trends, and they directly affect investment decisions in wealth management and succession planning. The current generation wants to guarantee that future generations will maintain these values and choices in terms of investments and donations. Planning in this area involves consulting with several professionals and having extensive conversations within the family. There are also documents, such as family constitution and shareholder agreements, that can protect today’s agreements in the future.

Carly: In recent years, many countries in the Gulf Cooperation Council [GCC] have implemented their own visions, such as Saudi Vision 2030, Qatar Vision 2030 and Oman Vision 2040. Each ensures that sustainability is at the heart of what they do, be it policy development, investments, planning or infrastructure development.

In response, ESG has become a huge focus for families and family offices in the region. We are already seeing many GCC countries introduce incentives for companies and businesses, as well as new reporting requirements. Family offices have had to ensure that they stay abreast of these new and changing incentives and regulations. This has been a completely new area for some family offices. They have had to learn quickly and appoint partners and advisors to ensure they fulfil this new remit. We typically see these efforts being led by the next generation.

Chris: Many ESG principles are now at the core of how family offices are looking to invest, particularly given the next generation’s focus on these themes. Family offices will often be responsible for philanthropic activities, helping to administer charitable trusts addressing specific needs and engendering a clear sense of purpose. UHNW families are also trending toward private market investments, fulfilling a desire to have greater control and direct involvement in investments, many of which are aligned with ESG.