Wealth conscious



Recent global events such as the economic crisis and the UBS and Liechtenstein bank LGT Group sagas, together with the fallout from the Madoff and Stanford frauds, have had a ­significant impact on worldwide attitudes to wealth and wealth management.

The Family Office Channel – a new, not-for-profit online information resource supported by 100 international partners from leading organisations, including ­Withers Worldwide – has sought to collate the experiences of some of the world’s ­wealthiest families to these events in a survey of more than 100 family offices, private banks and wealth management professionals. The results of the survey demonstrate a shift in emphasis in such families’ concerns, with corresponding implications for private client practitioners.

The survey

Of the respondents, 92.1 per cent felt that recent global events have led to a loss of trust in institutions and investment ­advisers. Madoff’s fraud in particular reflected badly across a range of professionals, with some families viewing it as a sign of underlying systematic failures. This has led to families becoming more proactive in managing their assets and investments, with an increased emphasis on due ­diligence and investment monitoring.

Of the families interviewed, 79.8 per cent have changed their attitudes towards holding cash and other lower-risk assets, such as bonds, gold and other commodities,
balancing the benefits of security against long-term fears over inflation. A tension between an objective wish to diversify and the instinctive desire to favour security was also, however, apparent in the responses.

Unsurprisingly, tax compliance emerges as an area in which families have a keen interest, although it was noted that recent ‘amnesties’ (such as, for example, the UK New Disclosure Opportunity and the US Voluntary Disclosure Programme) are not necessarily well tailored to deal with the issues that can arise for international families and their complex structures.

The Family Office Channel survey highlights three particular areas of interest: due diligence, governance and philanthropy.

Due diligence

Enhanced due diligence is crucial to protect family offices from investment-based risk. Legal risk management is central to this process and should not be overlooked when reviewing investments or assessing the potential counterparty risk of custodians and prime brokers. The terms, material ­contracts, custodial and settlement aspects of investments should be reviewed prior to any significant investment. Tax implications, fund documentation, the structure and jurisdiction of establishment, the ­security (or otherwise) of the custodial arrangements and the degree of risk attached to the counterparties and service providers are all key issues to be addressed.

Governance

Whatever governance structure a family has in place, the decision-making system aimed at directing and controlling the ­family and its business should serve the family’s vision and philosophy. Survival of the founder’s vision through subsequent generations is often of fundamental ­concern. Longevity of this vision is reliant on the existence of a living and effective ­governance system, and so a formalised, more focused and flexible governance ­structure is now more often embraced.

While informal structures may appear to work relatively well on a day-to-day basis, they often break down during times of change and stress, most notably at the point of a generational transition, but also where external pressures are exerted, as evidenced during the recent economic downturn.

Governance structures must be ­farsighted, both in terms of the potentially foreseen (eg a liquidity event) and the unforeseen (eg an untimely death) and should act as an insurance policy against these sorts of breakdowns.

Philanthropy

Many families have felt the need to reduce their philanthropic activities in recent times, with 64.3 per cent of the families consulted believing that philanthropic activities have been affected adversely by the downturn.

However, some families recognise that they have a continuing responsibility to the causes they have committed themselves to and have made the conscious decision to actually increase their giving. This has ­limited the donation deficit that might ­otherwise have arisen for those causes and created a positive focal point in said families’ lives.

For those families looking to maintain their philanthropic commitments, tax-efficient giving is paramount. At a time when the rules in relation to charitable giving are in flux and the issues of ­’territoriality’ and ‘local benefit’ continue to be developed, those private client ­practitioners who advise on both national and cross-border philanthropy can ensure that the families’ gifts benefit their ­chosen causes to the greatest extent.

Those family offices able to move quickest towards greater transparency and independence, demonstrate high ethics, and thereby offer the prospect of improved returns, will be best placed to meet the changing needs and expectations of their respective family clients.

To do so will involve overcoming those challenges presented by the recent global events, as well as responding to the negative perceptions about cost, quality of staff and lack of family education about the family office model itself.

With private client practitioners able to add immediate value in all of these areas, initiatives such as the Family Office Channel provide an ideal forum for communication, up-to-the-minute information and invaluable advice.


Sarah Cormack is a partner in the international wealth planning team and Patricia Milner is head of the family and business planning group at Withers Worldwide