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SETTING UP A
SINGLE FAMILY OFFICE
Sharing a few lessons and experiences
2011-2013 © Geoffroy Dedieu
© Geoffroy Dedieu 2013 2 Setting up a Single Family Office Sharing a few lessons and experiences
Legal disclaimer
This publication is intended for information purposes only. It should not be construed as advice of any nature or an offer or recommendation or solicitation for sale, purchase or engagement in any transaction and was drafted solely to provide informative material on the subjects addressed and for educational purposes only. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but all material is provided without express or implied warranties or representations of any kind and no liability is accepted. Opinions and comments therefore reflect current views of the author only and are subject to change without notice.
This document is not intended to be a comprehensive statement, nor a study, nor to provide strategic, financial, legal or tax advice and it should not be relied on or treated as a substitute for specific qualified advice concerning individual situations. Readers should consult competent professional advisors before adopting - or drawing inferences from - any of the suggestions or ideas expressed in this publication. The author and publisher assume no obligation or responsibility for any loss, risk or liability incurred as a consequence of use and/or application of any of the contents of this publication with or without proper independent professional advice.
Laws and regulations of various countries may also restrict the distribution of this publication. Persons in possession of this document should inform themselves about possible legal restrictions and observe them.
Subject to copyright with all rights reserved.
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
1
© Geoffroy Dedieu 2013 4 Setting up a Single Family Office Sharing a few lessons and experiences
KEY MESSAGES (1)
CAN WE / SHOULD WE?
Why set up a Single Family Office?
• Despite the media and political (somewhat demagogical) perception that wealth is passed on from a privileged few to
their privileged descendants, the reality is that 95% of family businesses do not survive the 3rd generation of family
ownership and a majority of FO’s have typically served no more than 3 generations.
• So Family Offices endeavor to :
• better manage the multitude of risks associated to great wealth;
• cover the full wealth / asset spectrum, of which financial assets are only a part;
• in-source key skills & capabilities to be leveraged by the family.
How should a family take this decision?
• Just like any other business decision: draft a business plan and calculate precisely costs, benefits and savings.
• Ultra-High Net Worth families (UHNW) made their fortune in business, so they have the skills and ability to make their
own decisions when it comes to setting up a family office.
• They need an adequate Governance structure, experienced people, standard processes and specialised information
systems... just like any business.
Beware of temptation to avoid Governance, controls and policies!
• Controls & Compliance make sense for the family as “investor”, do not trust people who tell you that they are
unnecessary administrative chores.
• Have strong internal controls and processes to ensure the interests of the family are safeguarded.
• Make sure your board is on top of the control/compliance agenda.
• Remember: you are likely to be considered a “sophisticated” or “accredited investor” in several of your banks’
jurisdictions. Hence you get little regulatory protection against inappropriate sales pitches.
• Use industry standards, there is no need to try to reinvent the wheel!
• IFC Family Business Handbook, UK Combined Code on Corporate Governance, United Nations PRI, CFA-Institute
Asset Manager Code of Professional Conduct.
© Geoffroy Dedieu 2013 5 Setting up a Single Family Office Sharing a few lessons and experiences
KEY MESSAGES (2)
STAFFING AND OPERATIONAL PLATFORM.
Use scenarios and precise financial models to compare costs of a SFO vs MFO’s or banks
• Key distinction: Single FO’s are cost centers, all the rest are profit centers. They are businesses selling something for
a profit so there is always some form of conflict of interests.
You can find the right talent in London, New York, Singapore etc.… and you can afford it!
• Recruiting the right people can be done with specialised FO consultants and FO head-hunters.
• Define robust incentive plans for employees, avoid conflicts of interest => no carry, no shares, deferred bonuses (3
years), claw-backs.
• Not everybody wants to spend their whole career in a bank! Family offices, especially from Emerging Markets, offer
fascinating challenges for dynamic executives.
You can build a better IT platform than most banks.
• Close to 60% of the code lines used in banks’ IT backbones dates back to the 1980’s….
• Most private banks still use black-screen, green cursor systems … forget the mouse.
• Family offices can start from scratch and buy a best-in-class system. There are several IT platforms specialised for
Family Offices.
You can deliver better reporting on assets, performance and risks than most banks
and fund managers.
• Family offices using their own IT systems and accounting can report according to international best-practices: IFRS
and GIPS. Most banking statements are not GIPS compliant.
• A FO that manages its own fund will have the unique advantage of delivering to family members and trustees a set of
audited statements. Bank statements are NOT independently audited.
• A FO equipped with industry-standard portfolio management software and a proper accounting package will rapidly
realise that financial complexity is pushed by banks and results in high costs and lower performance*.
* For a statistical confirmation, read: “What Drives Financial Complexity?”, Claire Celerier & Boris Vallee, 2013
© Geoffroy Dedieu 2013 6 Setting up a Single Family Office Sharing a few lessons and experiences
KEY MESSAGES (3)
INVESTMENTS AND RISKS MANAGEMENT
If you setup a family office with the right talent pool and operational platform, you do not need to delegate portfolio management to costly “asset managers”.
Have clear investment beliefs and processes
• Describe what you fundamentally believe in and write it into the investment guidelines.
• What is your World outlook?
• What is your perception of asset management?
• What are your key strategic beliefs?
• The same beliefs can guide investments in financial securities, real estate, new businesses, etc.
• There are broad industry standards that you can use to set up your FO: ESG, UN-PRI.
Do not hesitate to develop clear product biases (and tell the banks and asset managers!)
Have a risk and return targets
• Example of an absolute return target is the USD 6M LIBOR rate + 2%
• Example of an adequate return level is twice the target: (USD6M LIBOR + 2%) x 2
• Beyond this level of return, at any point during the calendar year, the Investment Management Committee is entitled
to cut all positions and switch to cash and equivalent.
• Example maximum tolerable loss is 5% in any calendar year.
• Monitor VaR and Sharpe Ratio : Sales people (MFO’s, banks, fund managers) sell on promised returns, not on risks.
Any product sales pitch which would not contain a full risk analysis should be rejected.
Don’t worry about the jargon
• This language can be learned, most terms we use are on Wikipedia…
• And if you still do not understand something … do not invest in it, when banks push complex structures, its is usually to
costs less transparent.
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
2
© Geoffroy Dedieu 2013 8 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 1 CHALLENGE OF WEALTHY FAMILIES IS …
“DEMOGRAPHICS” (1)
• UK and USA show signs of severe demographic strain on
younger generations
• The USA are helped by immigration inflows from the
South.
• In Singapore, demography will be driven mostly by
immigration.
• Population of 3.2 mio in 1995 and 5.8 million in 2012.
© Geoffroy Dedieu 2013 9 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 1 CHALLENGE OF WEALTHY FAMILIES IS … “DEMOGRAPHICS” (2)
At the family level: The entrepreneurs of the 70’s and 80’s were often baby-boomers of the late
40’s to mid-50’s age classes. The same are now pappy-boomers.
• American and European pappy-boomers will reach their sixties in the
next ten years.
• Asian and African tycoons are slightly older than boomers.
• At the “enterprise” level: Experienced executives aged 50-60 are
“reservoirs” of resources and expertise, especially valuable to
younger entrepreneurs aged 25-50 for them to develop their
businesses.
• Looking at data from Norway: 60% of sales are lost and 17% of jobs
cut during the first 4 years after the death of a founding
entrepreneur (2013 research from Warwick University & University
of Bergen).
• In 2050, there will be 1M people aged 100+ in the USA, over 275M
aged 55+ in the EU, over 400M aged 50+ in China, ...
• Demographics will soon have a serious impact on businesses and
private wealth in Asia.
Financial Times 12 March 2013
© Geoffroy Dedieu 2013 10 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 2 CHALLENGE OF WEALTHY FAMILIES IS …
“FAMILY DYNAMICS” (1)
Wealthy families, like most families have to face daunting challenges posed by the interaction
of emotions and psychologies between different generations.
• Read Family Business on the Couch by Manfred Kets de Vries, Randel
Carlock & Elizabeth Florent-Treacy.
http://www.youtube.com/watch?feature=player_embedded&v=Tde7Y36RNQE
• According to Mosby’s Medical Dictionary published in 2009, family dynamics
is defined as “…the forces at work within a family that produce
particular behaviors or symptoms…”
• It is the way in which a family lives and interacts with one another that
creates the dynamic.
• That dynamic, whether good or bad, changes who people are, it forges their
individual psychology, ultimately influencing how they view and interact with
the world inside and outside of their family.
© Geoffroy Dedieu 2013 11 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 2 CHALLENGE OF WEALTHY FAMILIES IS …
“FAMILY DYNAMICS” (2)
Wealthy families are often multi-cultural, international: they have face both cultural challenges and generation conflicts.
• The concept of family is eminently culturally dependent. Anthropologists have defined many models of family:
matrilocal (a mother and her children); conjugal (a husband, his wife, and children; also called nuclear family); and
consanguineal (also called an extended family). All of these models are evolving and they are not necessarily
compatible.
• Example*: “… the family, a natural society, exists prior to the State or any other community and possesses inherent
rights which are inalienable.”
The historical (Western) model of family faces severe sociological pressure.
• Wealthy families are no exception to these mega sociological trends.
• The Divorce to Marriage rate in the UK is 47% and USA 53%**.
• The 1960 United States Census reported that 9% of children were dependent on a single parent, a number that has
increased to 28% by the 2000 US Census.
* The Charter of the Rights of the Family of the Vatican (1983)
** Source: Wikipedia
Family Dynamics in wealthy families present challenges due to psychological pressures,
cultural divergence between generations and sociological trends … wealth alone will not solve
these issues.
© Geoffroy Dedieu 2013 12 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE …
OFFSHORE STRUCTURES (1)
• KYC rules were developed
initially to use the
international financial
system (banks) to fight
Money-Laundering and
Financing of Terrorism.
• Since the early part of the
decade, KYC rules were
greatly boosted and banks
and service providers now
have detailed records and
data on client families, their
assets and business
activities.
• Since 2005 banks have
been used by OECD
countries (higher-tax
jurisdictions) to fight tax
evasion.
• Families need to use robust
structures with clear
objectives and strong tax
compliance.
For decades many international families were lured into complex, shady structures with a view to
hide their assets or evade taxes: that was the wrong way to structure wealth and manage
succession.
© Geoffroy Dedieu 2013 13 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE …
OFFSHORE STRUCTURES (2)
There are right ways and wrong ways to use certain international structures for specific – well
defined – purposes, including in low-tax jurisdictions.
What is “offshore” ??? What does a trust really look like?
Most often the term “offshore” is used
erroneously or without proper definition.
• An offshore company, corporation or trust is an
entity or trust recognised by law in its home
jurisdiction.
• If a company / corporation, then it is as a
separate "entity" with limited liability. As such
the company has the option to sell shares, the
right to sue and be sued, and has perpetual
existence.
• An IBC (International Business Company) is the
most popular type of offshore corporation for asset
protection and privacy purposes.
• An IBC is usually a tax-exempt corporation that can
do business all over the world except in the country
where it has been incorporated: that is what defines
an “offshore” structure.
• Popular IBC jurisdictions include the British Virgin
Islands, Anguilla, Mauritius and the Seychelles.
• Trusts are often created for good succession &
wealth planning reasons and not necessary in
“offshore” jurisdictions.
Independent Tax & Legal Advisor
ABC
Trust
Pote
ntia
l Cash D
istrib
utio
ns
(regula
r or fro
m tim
e to
time)
Other Properties
(Real Estate)
Trust Deed
and Letter of
Wishes
include
specific
conditions for
distributions
Sub-
Trust
Purpose Trust or Charity
OR
(more often)
Mr & Mrs Wise
Settlors
Mr True
(as trustee)
ABC Trustee
Company
Bank A
Beneficiaries
as Named
from time to
time
Mr & Mrs Wise
Beneficiaries
Children
Others
123 Company
Ltd
Portfolio Business Holding
Company
ABC Trustee
Company
Deed s
igned b
y settlo
r(s)
& tru
ste
e(s
)
Tra
nsfe
r of A
ssets
& P
ropert
ies
© Geoffroy Dedieu 2013 14 Setting up a Single Family Office Sharing a few lessons and experiences
THE No 3 CHALLENGE OF WEALTHY FAMILIES ARE …
OFFSHORE STRUCTURES (3)
In the 21st Century, tax evasion is simply no longer an option. Using an offshore entity /shell to
simply hide assets or revenues will lead to failure. International family-office or family-trust
structures must be created with clear objectives and robust tax and legal structures.
Consequences of Tax Evasion Global Offshore Centers Map
• Using offshore structures purely for tax
evasion or to hide assets results in
fragile structures that are easily
attacked by tax authorities, creditors
and disgruntled family members.
• Such structures lack robustness.
• A family needs to define their
objectives and rationale for each
international structure.
• Use structuring with parsimony.
Example in the UK.
• Tax evasion is a crime, so anything to
do with evaded taxes is Money-
Laundering.
• Handling that money is a criminal
offence (POCA 2002):
• Concealing, Acquiring, Possessing and
Assisting - 14 years prison.
• Tipping Off – 2 years prison.
• Generally, any failure to comply with ML
Regulations – 2 years prison.
The map below* includes jurisdictions with true IBC models i.e. “offshore” as per our definition
and countries that simply have a lower overall tax levels than OECD countries.
* Source: OCRA 2012, www.ocra.com
© Geoffroy Dedieu 2013 15 Setting up a Single Family Office Sharing a few lessons and experiences
WHEN THE STARS ALIGN:
PAPPY-BOOM, PARIS HILTON SYNDROME, SHADY OFFSHORE TRUSTS
Over the next 50 years, the world will see the greatest
transfer of wealth in its history … but …
• … 80% of Asian wealth will transfer to the 2nd generation from 2005 to
2020*.
• Yet it is estimated that 70% of cross-generational transfers of wealth in the
USA have failed to achieve their desired objectives**.
• Likewise, among HNW families in Asia, 70% of parents thought that they
had done a good job of communicating issues surrounding family wealth.
Only 20% percent of their children agreed.***
Some recent family successions in Asia have turned into major
family fights, with lawsuits, wealth destruction, business paralysis
and major public embarrassment.
• The main catalyst of this increase in family issues is again,
DEMOGRAPHICS: more successions.
• But the causes of failed cross-generational transfers are largely
PSYCHOLOGICAL – family fights – and
• LEGAL – shady, fragile legal structures result in family fights and public
embarrassment: the truth always comes out!
The stars are aligning: Refusal to plan, poor next-generation
mentalities, cheap ill-adapted legal structuring. * Source: PwC Jan 2007
** From Strategy for the Wealthy Family by Mark H. Daniell
*** 2002 JP Morgan Survey
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
3
© Geoffroy Dedieu 2013 17 Setting up a Single Family Office Sharing a few lessons and experiences
SOME DEFINITIONS …WHAT IS A FAMILY NOWADAYS?
• In human context, a family (from Latin: familia) is:
A group of people affiliated by consanguinity, affinity, or co-residence. In most societies it is the principal institution for the socialization of children.
• Anthropologists classify family organization in various ways as there are numerous models in the World.
• The family is also an important economic unit. Economic aspects of family are the subject of the family economics
branch within economics field.
• The systems of interaction between family members are called family dynamics.
• The concept of the family is more and more commonly defined in terms of strongly supportive, long-term roles and
relationships between people who may or may not be related by blood or marriage.
• The conceptual frameworks developed by family therapists, especially those of family systems theorists, have been
applied to a wide range of human behaviour, including organisational dynamics.
• Laws applicable to family relationship and family members vary per jurisdiction
Examples
• Divorce laws;
• No concept on a Patriarch or “family head” in most OECD countries since the 1980’s.
Source: Wikipedia
There are as many types of family offices as there are types of families. The definition of a family
is highly dependent on culture, religion and position in the wealth cycle.
© Geoffroy Dedieu 2013 18 Setting up a Single Family Office Sharing a few lessons and experiences
SOME DEFINITIONS …WHAT ARE FAMILY OFFICES?
• There is no “official” definition of UHNW. Most banks place the bar at USD 50 million. We found that most FO’s
manage assets above USD 100 million. These figures are for “investible” assets, i.e. money managed by financial
institutions.
• Example: Law of 21 December 2012 relative to Family Offices (Luxembourg). « … providing, on a professional level,
patrimonial related advice or services to individuals, families or to patrimonial entities owned by these individuals or
families or of which they are founders or beneficiaries … »
• Example: http://en.wikipedia.org/wiki/Family_office
• FO’s have been around since the late 19th century in the USA and, arguably, the 18th in Europe. They can be found
in many countries, but primarily in New York, London, Geneva, Zurich, Luxembourg and Monaco.
• As Asian and African economies grow rapidly, new wealth is being created at an unprecedented pace and families
now face complex wealth planning issues.
• Since 2000 more family offices have been set up in London, Singapore, Dubai and Hong Kong to represent “emerging market”
families.
• A majority of FO’s have typically served no more than 3 generations*.
* 67% for members of the FO Exchange 2012.
Family offices are dedicated structures set up by ultra high net worth (UHNW) families to
manage their assets.
© Geoffroy Dedieu 2013 19 Setting up a Single Family Office Sharing a few lessons and experiences
WHERE DOES UHNW WEALTH COME FROM?
Taking a factual view of the inheritance versus self-made debate.
Some Figures
• “the vast majority of today’s rich didn’t inherit their money, but
made it themselves.” Robert Frank, Wall Street Journal, 10
January 2008.
• According to a study of Federal Reserve data conducted by NYU professor
Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for
only 9% of their net worth in 2001, down from 23% in 1989. (Credit Suisse
cites 21% in 2007)
• According to a study by Prince & Associates, less than 10% of today’s
multi-millionaires cited “inheritance” as their source of wealth.
• A study by Spectrem Group found that among today’s millionaires, inherited
wealth accounted for just 2% of their total sources of wealth.
• Worldwide, less than a third of Forbes billionaires inherited some
of their wealth.
• On the 2012 USA Forbes list, 69% were self-made billionaires.
• If we exclude China, Russia and other transition countries, the inheritors’
figure is still 38%. (Credit Suisse Wealth Report 2012)
• Fewer than 3% of Forbes list billionaires in 2012 had inherited
wealth for over 3 generations.
Wealthy Families derive their wealth mostly from entrepreneurship and hard work … and
keeping the wealth in the family past 3 generations is extremely hard work.
Percentage of Inherited Fortunes
(Forbes List 1982-2007)
0
5
10
15
20
25
30
35
40
0
50
100
150
200
250
300
350
400
450
Billionaires Inheritors %
% No
© Geoffroy Dedieu 2013 20 Setting up a Single Family Office Sharing a few lessons and experiences
PERCEPTIONS OF UHNWI
There is much political posturing and flawed debates around Ultra-High Net Worth Individuals
(Families) … unfortunately some of these arguments influence tax policies and add pressure
onto the “offshore” debate.
• The public debate around
wealth is generally
unhealthy, based on
sentiments and emotions
rather than facts.
• When ask to express what
they perceive, most
respondent show political
orientation rather than
rational analysis.
• Wealthy individuals /
families are perceived to
pay too little taxes when in
fact (as an example) their
share of the US income tax
is 40 times their share of the
population.
• When Democrats are asked
whether wealthy people are
likely to be hard working,
only a small minority says
yes. Yet 69% of Forbes
USA billionaires are self-
made men.
55
42 49
33
65
38
0
10
20
30
40
50
60
70
Republicans Democrats
% s
ayi
ng,
com
pare
d w
ith t
he
avera
ge p
ers
on, rich p
eople
are
more
lik
ely
to b
e …
Sources: Pew Research Center 2012,
Forbes, US-IRS
How
Fo
rtu
nes a
re M
ade
(Forb
es U
SA
bill
ionaires 2
012)
% s
ayi
ng u
pper
incom
e p
eople
are
payin
g …
in taxes
What th
e T
op 1
% taxes r
eally
repre
sents
(2007, U
SA
)
69
1
30
31
Self-made
Over 3 Generations
14
44
33
4 13
78
0
10
20
30
40
50
60
70
80
90
Republicans Democrats
PE
RC
EP
TIO
N
RE
AL
ITY
23 40
99 81
60
0%
20%
40%
60%
80%
100%
Top 1% Rest 99%
Inherited Wealth
© Geoffroy Dedieu 2013 21 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT THE FAMILY OFFICE DOES FOR THE FAMILY WILL DEPEND ON
WHERE THE UHNW FAMILY IS IN THE FAMILY-WEALTH CYCLE?
1G
Acquisition
Wealth Builders
• Self-Taught
• Entrepreneurial
• Frugal Lifestyle
• Generous and Charitable
• Effective Decision Making
• Cognizant of Legacy or Family
History
2G
Retention & Growth
Status Quo
• Professional
• Well Educated
• Understand 1G’s effort and
sacrifice
• Systematic, Business and
Venture - style approaches
• Want to build on parents’ legacy
of charity but only after wealth
is secured
3G
Disposition & Succession
Decay
• Well Educated
• Sometimes have lower work
ethics
• Less Appreciation of 1G’s effort
& sacrifice
• Searching for a Purpose
• Inwardly Focused
Asian and African Families
• Mostly 1G
• Some 2G
Build a Value Succession Plan
• Define Objectives for Succession Plan
• Define Principles to live together & communicate well
• Define Precise Steps & Milestones
© Geoffroy Dedieu 2013 22 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT ALL UHNW FAMILIES ARE UP AGAINST: ENTROPY
To maintain wealth and perpetuate the family business, Families need new energy to revitalise
dynamics between members and new members must bring new / renewed strengths.
• There is a universal tendency in
nature to the dissipation of energy.
• The second law of
thermodynamics states that the
entropy of an isolated system
never decreases.
• Consequence of the second law:
Perpetual motion machines are
impossible.
The Second Law of Thermodynamics Key Success Factor: New Energy
• In thermodynamic terminology, families may be
described as systems, which can only last and flourish
by receiving and consuming new energy in
transformations .
• Unless new energy is regularly brought into the family
dynamics, family wealth and family businesses, they
will come to a standstill and disappear.
• “Shirt-sleeve to shirt-sleeve in 3 generations”.
• Thankfully, families are not isolated systems, new
members join existing members and create new
generations.
• Families are dissipative systems, similar to
thermodynamically open systems. They operate far
from thermodynamic equilibrium in environments with
which they exchange energy.
Lord Kelvin originated the idea
of universal heat death in 1852
© Geoffroy Dedieu 2013 23 Setting up a Single Family Office Sharing a few lessons and experiences
FROM MONO-NUCLEIC TO POLY-NUCLEIC …
THE EFFECT OF GENERATIONS
As families evolve, even the simplest family structure becomes highly complicated in two
generations. Managing successions and transitions is an ineluctable necessity.
Snapshot of Family Structure
(F) Female
(M) Male
MN Maiden name
P Passport
Tax Tax residence
Principal (M)
01/01/1960
P: HK, Tax: UK
Daughter (F)
01/01/1990
P: UK, Tax: FR
Ex-wife (F)
01/01/1960
P: UK, Tax: FR
Marriage:
01/01/1980
Divorce:
31/12/2000
Son (M)
01/01/2000
P: FR, Tax: FR
Ms. A (F)
14/11/1969
P: UK, Tax: UK
Daughter
(F) 31/07/2010
P: UK, Tax: UK
Grand-Father (M)
01/01/1940
P: HK, Tax: UK
Brother (M)
01/01/1950
P: UK, Tax: USA
Grand-Mother (F)
01/01/1940
P: HK, Tax: UK
Sister (F)
01/01/1960
P: UK, Tax: HK
Evolving Family Structure
1G
2G 2G 2G
3G 3G 3G 3G 3G
1G
2G 2G 2G
Founder, 1st Generation
Outside of family
Male
Female
© Geoffroy Dedieu 2013 24 Setting up a Single Family Office Sharing a few lessons and experiences
FROM MONO-NUCLEIC TO POLY-NUCLEIC …
IMPACT ON FAMILY BUSINESS AND WEALTH
As family businesses become multi-generational, issues related to ownership, control and
management / employment need to be addressed. To the founder / 1G, these issues may seem
abstract or irrelevant, but the family needs guidelines and processes to handle them without
conflicts.
Snapshot of Family Structure Family Sphere
e
ale le
• As time passes, UHNW families separate ownership from
management/control.
• Not al family members will be owners.
• Some families chose to allow family members to become
employees, others not (see later slides).
• There is a certain level of impatience in many UHNW
families as to the timing of wealth transfers and distribution
of wealth and shares to the NextGen: 72% of family
members 30-39 years old are little or not at all comfortable
with timing decisions, vs. 84% very or completely
comfortable amongst of 40-49 years old.
(Morgan Stanley PWM / Campden Research Next-Gen Study 2012)
Business Sphere
Business Owner
Non-owner
Employee / Manager
Board Member
1G
2G 2G 2G
© Geoffroy Dedieu 2013 25 Setting up a Single Family Office Sharing a few lessons and experiences
FROM MONO-NUCLEIC TO POLY-NUCLEIC …
IMPACT ON FAMILY DYNAMICS
Family dynamics refer to a system of behaviors and psychological processes occurring within a
family.
• The Patriarch directs;
• Structures and
Processes are unclear;
• Influence of external
advisors tends to be
greater;
• Some family members
may be disenfranchised.
Improving Dynamics Increasing Skills Patriarch Rules Family Trouble
• Family is in conflict;
• Discussions or disagreements about structures and process;
• Attempt to involve all family members;
• This is a stage where advisors can act as bottlenecks or barriers.
• Patriarch participates;
• Processes are put in
place;
• Family members learn to
function as a team;
• A few family members
are building up skills.
• Patriarch is able to step back;
• Strong but flexible structures and processes are in place;
• Family members are committed;
• Several members are developing skills;
• NextGen starts to join.
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
4
© Geoffroy Dedieu 2013 27 Setting up a Single Family Office Sharing a few lessons and experiences
HOW DO UHNW FAMILIES TAKE THE DECISION TO BUILD
A SINGLE-FAMILY OFFICE?
Have a Business Plan
• Background: the Family and its principles/beliefs
• Corporate Structure
• Description of Business and Activities • Financial Investment / Portfolios
• Private Equity / Art
• Properties Business
• Revenues / Sources of Cash and Costs
• Corporate Governance & Compliance • Initial Governance & Compliance Architecture
• On-going monitoring & external support arrangements
• Apportionment & Oversight of duties and responsibilities
• Staffing • Chief Executive Officer / Chief Investment Officer
• Chief Operating Officer
• Portfolio Managers
• Compliance & Governance
• Chief Financial Officer
• Risk Management & Capital Requirement • Company’s management organisation
• Strategic and Financial risks
• Business Continuity Risks
• Financial Plan • Forecast P&L
• Cashflow
• Assets under Management & Assets under Supervision
• Scenario Planning (scope of services and changes in
cost assumptions)
Key Questions*
• Why do we want to work together as a family to manage
our wealth?
• How will we make decisions together as a family?
• What are our key guiding principals?
• What are our goals (and mission) for the family office?
• How will the family office be owned and structured?
• How will the office be organized and managed?
• What roles and responsibilities belong to the owners vs.
the office executives?
• What services will be provided?
• What technology do we need?
• How will we pay for the family office services?
• How will we measure the success of the office?
*Source: Family Office Exchange
© Geoffroy Dedieu 2013 28 Setting up a Single Family Office Sharing a few lessons and experiences
WHERE ARE FAMILY OFFICES LOCATED ?
Single FO
Single FO Concentration by Area (100% for each region)
*Source: Barclays Strategic Consulting, Campden Research
SFO Approximate total numbers
• USA 500+
• LatAm 30
• Europe 170
• MEA 20
• APAC 100
© Geoffroy Dedieu 2013 29 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (1)
Roles of the Family Office Key Roles & Principles
• A single-family office is a structure that works exclusively for
one family, all team members are employees, they do not own
shares or interests in the FO.
• The FO's core role is to manage risks. • Financial risks;
• Insurance coverage;
• Physical security of people and assets;
• Reputational and image risks.
• It should manage relationships with banks and key advisors.
• Measure the FO's performance in terms of the family’s wealth
preservation objectives.
• Consolidate portfolios managed by separate institutions and
provide analysis and advisory support.
• Help the family with its “dynamics” issues, its family charts
and ground values through: • new business coaching,
• next-generation training, and
• mediation.
• Support the Family Business with corporate finance deals and
strategic agenda management.
• Foster, coordinate efforts to build a family legacy and develop
a philanthropy infrastructure.
Family Portfolio Management
Family Values & Dynamics
Tax, Accounting & Estate Planning
Trust
Deed
Portfolio
Business
Units
Corporate Finance Support
Fam
ily
Off
ice
© Geoffroy Dedieu 2013 30 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT DOES A FAMILY OFFICE DO FOR THE FAMILY? (2)
Roles of the Family Office
In-sourced vs. Outsourced
Comments
• There are all sorts of Family Offices in
the World; some do it all, some do not
even handle investments and wealth
planning.
• Most FO’s handle wealth-planning and
Investment Management tasks
internally, but the use of advisors in
both areas is predominant (FO’s get
help).
• Understanding the costs of in-sourcing
vs. outsourcing, inclusive of risks is
essential in this debate on in- or out-
sourcing.
• In the long run, emerging Governance
principles would indicate that Trust
activities will increasingly be separate
from Family Office tasks in order to
ensure proper separation of
management and ownership.
• Emerging-markets FO’s are likely to
be more involved with the Family
Business and Special Projects.
0
20
40
60
80
100
120
In-sourced (incl. with advisors) Outsourced
%
* Source FOX 2012 Survey
© Geoffroy Dedieu 2013 31 Setting up a Single Family Office Sharing a few lessons and experiences
YOU CAN LEVERAGE YOUR FO RESOURCES AS …
an internal Corporate Finance Team (1)
• A family with an existing business
will need corporate finance
advice, which the SFO can
provide without conflict of
interest.
• The Single-FO can work
alongside outside advisors (and
supervise their costs and service
levels…)
• A Single Family Office acting as
advisor in corporate finance
transactions does not incur
additional charges and
prevents conflicts of interests
(see discussions on Fixed Costs
and Gorvernance).
The FO can support the family business with key corporate finance decisions and processes ….
liquidity events, M&A, IPO … free of charge and without conflicts.
Example: Reverse Take-over operation Key Support from the SFO
Potential
Institutional
Investor
Target Co.
4. Family has the
OPTION to sell a
15% stake in BU
International to a
potential
institutional
investor.
3. Family controls
85% of Target Co
and decides to
rename it BU1 as
International.
Family
Investors
1. Family sales /
brings shares in BU1
to Target Co.
Family
Investors
Family
Investors
2. Target Co pays
Family not with cash
but with new shares
in Target Co.
Family
Investors
Business
Unit 1
BU
International
Assets of
Target Co. Old BU1 New Assets
Shares
Shares
Shares
Shares
© Geoffroy Dedieu 2013 32 Setting up a Single Family Office Sharing a few lessons and experiences
LEVERAGE YOUR FO RESOURCES AS …
an internal Corporate Finance Team (2)
• At any point in time, each Family Business
Unit and the Family Group should have
• An agreed strategy that is being
implemented;
• An agreed management agenda of the
highest priority strategic and
organizational issues and opportunities;
• Initiatives in place to address the
management agenda; and
• An on-going dialogue with the Group
about the Business Line’s management
agenda.
The FO can support the family as active investors in the family business to drive an agenda-
management process. Keep it integrated and continuous as a means for ensuring superior
decisions and actions in the family business group.
Initial Strategic Position
Assessment
Management Agenda for
Change
Continuous Evaluation of
Strategic Position
Performance Management
Approval of Strategic Plan & Resource
Allocation
Evaluation of Alternatives
Generation of Alternatives
Dialogue between
Business Lines & Group
An Integrated Management Process for the Group A Continuous Process
* Source: Marakon Associates
© Geoffroy Dedieu 2013 33 Setting up a Single Family Office Sharing a few lessons and experiences
YOU CAN LEVERAGE YOUR FO RESOURCES TO …
build a family legacy.
• Define a clear Philanthropic Focus.
• Ensure involvement of family members in the
charitable giving process.
• Develop clear guidelines for funding.
• Create sustainability for the families’ charitable
giving and strong legacy for years to come.
• Identify other granters who have similar interest.
• Recruit professionals who understand the
charitable sector (in-sourced model).
The FO can support the family as it develops and consolidates it philanthropic objectives and
processes.
Boosting and Structuring Family Philanthropy Linking Legacy & Philanthropy
• Community capacity building
• Strategic resource planning
• Private planning sessions for Families
• Drafting policies and procedures
• Design implementation plans
• Investment and spending policies
• Trust structuring
Governance
• Vision and Mission
• Board & Volunteer Structure
• Public Accountability & Transparency
• Board policies including conflicts of interest, gift acceptance, investment & spending
• Human & Financial Resources
• Fundraising Strategies and Programs
• Database management systems
Strategic Planning
• Enunciation of values and mission
• Priority setting
• Resource & environment assessment
• Organisational Infrastructure
• Financial resource utilisation
• Fundraising – annual gift, major gift, planned gift
Implementation Value
Succession Philanthropy
Succession
planning
© Geoffroy Dedieu 2013 34 Setting up a Single Family Office Sharing a few lessons and experiences
YOU CAN LEVERAGE YOUR FO RESOURCES TO …
monitor and manage the family’s risks.
• Manage relationships with key brokers.
• Ensure adequate insurance coverage for all properties.
• Review property values to match coverage.
• Ensure compliance with local employment laws.
• Centralise international medical protection policies and monitor
coverage and costs.
• Ensure all board memberships have relevant D&O protection.
• Liaise with risk specialists.
• The FO can ensure safe document management and retention:
• Use appropriate safes and armored cabinets (fire and theft): define your
required safety levels and buy adequate equipment. For example a
2mx1m armored cabinet costs around USD 2,000 so the cost is not an
issue.
• IT systems need to have adequate backup and firewalls: use
independent penetration tests.
• Define your Business-Continuity requirements: how fast would you like
to be up and running after a fire? 1 day or 1 week?.
The FO can map key risks for the family and handle risk-mitigation task … this is not just about
filing papers and sorting insurance policies.
Understanding Risks Key Considerations
1G
2G 2G 2G
• Insurance protection for
properties and vehicles.
• Adequate contracts and
background checks on
employees (house, drivers etc.)
• Wills, trusts, estate plans, advisor
agreements, deeds, contracts,
tax returns, passports, birth
certificates, marriage certificates,
prenuptial and postnuptial
agreements, and other
paperwork.
• Insurance protection for family
members
• Medical insurance
• Directors & Officers (D&O)
• Kidnapping risks
• Physical protection
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
5
© Geoffroy Dedieu 2013 36 Setting up a Single Family Office Sharing a few lessons and experiences
WHO DOES WHAT ON …
THE FINANCIAL PLATFORM?
Family Family
Office
Private
Investment
Company
Private
Fund
Family
Member
Bank A
Family
Office
Insurance
Trust
Central
Custodian
Custody & Banking Platform
Brokers
Custodian 2
Bank B
Custodian 1
Investment
Fund
With or without a grouped (fund)
portfolio
Portfolio Management
Platform
Fund
Manager (if not the FO)
Portfolio
© Geoffroy Dedieu 2013 37 Setting up a Single Family Office Sharing a few lessons and experiences
WHO DOES WHAT …
WHEN USING A FAMILY FUND
Bank A
Family
Office
Central
Custodian
Brokers
Custodian 2
Bank B
Custodian 1
Investment
Fund
OR Fund
Manager (if not the FO)
Portfolio
Most UHNW families have the required scale to set up their own fund(s) to group and manage
their financial and non-financial assets. The pooled structure will generate substantial
economies/savings on various fee levels. The investors/family will also benefit from better
governance (independently audited NAV and accounts) and greatly improved visibility on risks.
Trustee
(if unit-trust
fund)
Fund
Adminis-
trator
Auditors
Sollicitors
© Geoffroy Dedieu 2013 38 Setting up a Single Family Office Sharing a few lessons and experiences
WHO DOES WHAT IN …
REAL ESTATE, ART AND PRIVATE EQUITY / NEW PROJECTS?
• Family wealth planning and
management should include a
broad array of asset classes for
which the family needs support
from its FO.
• Properties (personal use and
investment);
• Art collections;
• Private equity investments
and projects.
Corporate Structure
Consolidation
Comments
Properties Ltd
(property vehicle)
Family Office
USA
NextGen
project 1
Family Members NextGen
Trust1
Family
Foundation
Investment Fund
(managed by FO)
Portfolio
Private Equity Ltd
(new projects)
Art Ltd
(buying & trading)
Asia UK
NextGen
project 2
Business
Projects
NextGen
Trust2
© Geoffroy Dedieu 2013 39 Setting up a Single Family Office Sharing a few lessons and experiences
POSSIBLE ORGANISATIONAL STRUCTURE OF A SFO
(in-sourced model)
Board of Directors
Chief Executive
Officer
CEO
Chief Operating
Officer
COO
Compliance &
Governance Officer
Chief Finance
Officer
CFO
Chief Investment
Officer or
Portfolio Manager
Assistant Family
Officer
Compliance support:
Specialised firm
Accounting, VAT &
Payroll support
Assistant
Accountant
Possible Structure Governance Principles
• Depending on the roles undertaken
by the SFO, the resources allocated
to Investment Management,
Financial Reporting / Accounting, Tax
/ Legal and Operations (including
sometimes Concierge) will vary.
Composition of the Board of
Directors.
• Non-Executive Directors
• Principal (Chairman of the Board);
• Senior Family Members;
• Senior Independent Director (Chair
of Audit Committee).
• An independent director should be free of
links to management, controllers (family),
and others that could influence his/her
judgment*.
• Executive Directors
• CEO, COO, CIO.
• Supported by: External Auditors,
Audit Committee, Company
Secretary.
* IFC Family Business Governance Handbook
© Geoffroy Dedieu 2013 40 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT KIND OF PEOPLE DOES A SFO NEED?
Comments
A new FO created for an Emerging Market family
should look for people interested in new challenges
(not a comfy private banking job).
Since the beginning of the Financial Crisis, more
talent has been available on the market … but top
people are still hard to get.
• Hiring experienced Family Office managers helps
speed integration;
• Knowledge of fund middle-office and fund
administration is a plus for accounting, reporting and
control functions => understand your costs and risks!
Compensation benchmark*
• CEO for London SFO: GBP 150K to 390K + bonus
• CFO for London SFO: GBP 70K to 230K + bonus
• CIO for London SFO: GBP 100K to 250K + bonus
Roles
Chief Executive Officer / Chief Investment Officer
• Emerging Markets families are likely to want a SFO
that actually is able to buy/sell securities and manage
portfolios … vs. the Old World model of “manager
selection” i.e. a FO that only selects funds to invest
with.
• Therefore the CEO / CIO needs to have asset
management skills and a good understanding of
underlying risks and costs (including execution risks
and costs).
Chief Investment Officer / Portfolio Manager
• In a larger team, there should be 2 Portfolio Managers
(a CEO/CIO + junior PM).
• The PM should experience of a fund’s middle-office
(hedge fund or classic fund).
Chief Financial Officer / Accounting Manager
• Preferably from another FO or a fund house. Required
knowledge of fund reporting.
• Preferably with a good understanding of international
trusts and private investment vehicles.
* Source: Sulger Buel UK Survey 2012
© Geoffroy Dedieu 2013 41 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT DO FO EMPLOYEES SPEND TIME ON?
Example Employee Time
Allocation*
* Source: 2008 Family Office Exchange
Wealth Planning
15%
Portfolio Manage-
ment 18%
Business Manage-
ment 5% Lifestyle
Manage-ment 8%
Family Continu-
ity 4%
Trusts 6%
Accoun-ting,
Reporting &
Compli-ance 27%
Philianth-ropy 5%
General FO
Adminis-tration
9%
Special Projects
3%
What do you spend time on?
Time is money: although most Single-FO costs are “fixed”, it is important to understand to which
tasks / roles / projects these costs are allocated.
Task Description*
• Wealth Planning • Financial Planning
• Tax Planning
• Estate Planning
• Portfolio
Management • Investment Policy &
Strategy
• Asset Allocation &
Rebalancing
• Manager Selection &
Monitoring
• In-House Portfolio
Management
• Custody Settlement
• Lifestyle
Management • Bill Paying
• Cash flow Management /
Budgets
• Loans & Leverage
• Payroll for Personal Staff
• Insurance Oversight
• Family Continuity • Client Communications
• Family / Board Meetings
• Owner Education
Programs
• Family Risk Assessment
• Family Strategic Planning
• Business
Management • Airplane/Yacht
Management
• Aircraft Leasing Company
• Personal Property
Management
• Operating Business
Management
• Private Trust Company
• Trusts • Serving as Trustee
• Trust Administration
• Executorship
• Philanthropy • Foundation
Administration / Compliance
• Strategy / Grant-Making • Investment Diversification • Board Development /
Governance
• General FO Admin. • Family Office Strategy • General Office
Management • Technology • Payroll/HR Administration
• Special Projects • Philanthropic Ventures • Political or Social Events • Executorships • Legal Disputes • Property Construction • Other Special Projects
• Accounts, Reports & Compliance • Tax Compliance
• Regulatory Compliance
• Accounting / Reporting
• Partnership Accounting
• Investment Performance
Reports
© Geoffroy Dedieu 2013 42 Setting up a Single Family Office Sharing a few lessons and experiences
WHO IS TYPICALLY AROUND THE TABLE?
(out-sourced model)
Corporate
Trustees
1
Insurance
Advisors
3
Custodians
2
Attorneys
4
Accountants
2
Investment
Consultants
1
Investment
Managers
11
External
Board Members
1
Other
Consultants
2
Family
Office
CEO
FOX 2008 Survey
(sample of 21 families)
• USD600+ Million of family assets
• 2nd to 4th Generation
22 Adult Households
46 Family Members
• 12 Family Office Staff
• 1 Corporate Trustee
• 14 Family Trustees
• 27 External Advisors
* Source FOX 2008 Survey
© Geoffroy Dedieu 2013 43 Setting up a Single Family Office Sharing a few lessons and experiences
WHO IS TYPICALLY AROUND THE TABLE?
A FEW WORDS OF CAUTION ABOUT ADVISORS…
• Most 1G / Patriarchs
built their wealth with
the help of smaller
firms of lawyers,
financial advisors and
other service providers;
• For these advisors, the
1G and his businesses
often represent a large
share of their own
revenues.
UHNW family disenfranchising is often the result of a massively under-studied phenomenon:
Stakeholders’ conflict of interests and the impact on family dynamics. The scenario is now
familiar and is described below.
Deteriorating Dynamics 1G Becomes Wealthy,
with the help of
trusted advisors
2G or NextGen start
joining the business
Me
& m
y A
dvis
ors
ve
rsu
s T
hem
• When 2G / NextGen becomes
old enough to play a role in the
family business or family
governance, they may threaten
the advisors position;
• The arrival of 2G could be a
time when governance and
control gaps are identified;
• Opinions on strategy and the
future of the business may
diverge.
• In several reported cases, the presence of legacy,
smaller advisors with a disproportionate personal risk /
stake, has coincided with deteriorating family dynamics
or even generational conflicts.
• UHNW families should set up as early as possible
guidelines on the maximum revenues they should
represent for advisors: max 20%-30% of their turnover.
• Families should use a mix of small and large firms. The
larger firms will have their own internal conflict and
compliance rules to prevent their employees from
acting unfairly.
• In case of tensions, use a new advisor as mediator!
© Geoffroy Dedieu 2013 44 Setting up a Single Family Office Sharing a few lessons and experiences
Forbes March 2013 – Liliane Bettencourt & family
At age 90, Liliane Bettencourt is the world's richest woman, and returns to the top ten wealthiest for the first time since 1999.
She and her family own more than 30% of L'Oreal, which her father founded. They've gotten far richer this year, thanks to a
boost in the French cosmetics powerhouse's stock. However she had her fortune placed under the guardianship of her
daughter Francoise Bettencourt-Meyers in 2011 following a very public three-year legal battle. The elderly widow, who suffers
from dementia, was replaced on the company's board by her 25-year-old grandson Jean-Victor Meyers in February 2012.
The family has waged numerous legal battles against one another. In 2008, Bettencourt-Meyers petitioned courts to
investigate a reported $1 billion in cash and gifts her mother allegedly gave to a friend, Francois-Marie Banier, a well-known
photographer, writer and painter. Francoise claimed, and Liliane hotly denied, that Banier had taken advantage of her mother.
Reuters 23 March 2012 - L'Oreal heiress's ex-wealth manager held in custody
… Patrice de Maistre, who had already been placed under investigation in December over allegations of fraud, conspiracy,
money laundering and possession of stolen goods, was previously alleged to have made a 150,000 euro ($198,000) payment
to former French budget minister Eric Woerth on Bettencourt's behalf…
A FEW WORDS OF CAUTION ABOUT ADVISORS… (2)
© Geoffroy Dedieu 2013 45 Setting up a Single Family Office Sharing a few lessons and experiences
BBC 28 July 2013 – Daughters win maharaja's $4bn assets in court battle
The daughters of a former Indian maharaja have won a 21-year court battle to inherit more than $4bn (£2.6bn) worth of
assets.
A court in the northern city of Chandigarh said the will of Harinder Singh Brar, Maharaja of Faridkot - who died in 1989 - had
been forged. It had left his wealth in the care of a charitable trust set up by some of his servants and palace officials. The
assets include a 350-year-old royal fort and a private aerodrome. But his daughter Amrit Kaur claimed the will had been
written under duress, at a time when the maharaja was suffering from depression.
The court ruled in her favour, declaring the document void. The will came to light following the death of Harinder Singh Brar.
His two surviving daughters will now inherit all the assets, which also include a property on one of Delhi's most expensive
streets as well as gold and vintage cars.
Harinder Singh Brar was the titular ruler of the Faridkot area of Punjab before India became independent in 1947.
A FEW WORDS OF CAUTION ABOUT ADVISORS… (3)
© Geoffroy Dedieu 2013 46 Setting up a Single Family Office Sharing a few lessons and experiences
The Telegraph 23 August 2013 – Sven-Goran Eriksson: I hate only one person on earth - the man who cost me
£10 million
Sven-Goran Eriksson, the former England manager, has spoken emotionally of his financial problems after allegedly losing
£10 million through the actions of his former financial adviser, Samir Khan.
He’s probably the only person on earth I hate,’’ said Eriksson.
Now 65, Eriksson is currently coaching Guangzhou R&F, who face Marcello Lippi’s Guangzhou Evergrande in the Chinese
Super League on Sunday.
After training on Thursday, the Swede’s thoughts strayed to his financial concerns and his anger at Khan, who denied the
claims but was taken to court by Eriksson to compensate him for his losses and who was last month declared bankrupt.
“Yes, that’s right, £10 million,” confirmed Eriksson…”I feel let down, angry and disappointed because I trusted this man for
many, many years. I gave him too much freedom. I gave him all the authorities he needed to take care of my economy.” Khan
was introduced to Eriksson in 2004 and took control of his affairs in mid-2007. In 2009, Eriksson grew concerned and asked
Deloitte to run checks on Khan, which led to Eriksson terminating his professional relationship with him a year later. In May
2010, Eriksson’s solicitors obtained a worldwide freezing order in the High Court against Khan and the Swede formally
launched legal proceedings against him. Court documents claimed that Khan had access to confidential details “including
mandates to bank accounts which gave him unlimited access to Mr Eriksson’s wealth”, adding that: “About finances, Mr
Eriksson is not especially knowledgeable nor particularly interested, except to the extent that he wants to secure the financial
future for his family and for himself, expecting his money to be invested soundly and rationally.” Eriksson claimed that his
money was lost on a range of negligent investments including a residential and leisure development of 92 flats in Southsea,
Hampshire, and a proposed development of two plots of land at the Royal Westmoreland Golf Club in Barbados. The money,
according to the court papers, was used to fund a property for Khan and his family in Barbados, on building work on Khan’s
own family home and “to earn secret profits that have been paid to himself’’. Khan also “bought expensive artworks and
sculptures”, according to Eriksson’s lawyers. Court documents allege Khan “misappropriated money for a variety of improper
purposes, including unsecured loans to other companies for secret profits” and “undertaking loss-making speculations on
foreign currency markets”. As for what Khan has allegedly done with the money, Eriksson replied: “I think he has spent it.”
A FEW WORDS OF CAUTION ABOUT ADVISORS… (4)
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
6
© Geoffroy Dedieu 2013 48 Setting up a Single Family Office Sharing a few lessons and experiences
THE IN-SOURCING / OUTSOURCING DEBATE:
MISLEADING COST ESTIMATES …
What they tell you
Most MFO’s and Banks (private banks) would claim that it is too expensive to run a Single FO - to
better manage the multitude of risks associated to great wealth - if AUM / FUM < USD 50 mio.
• MFO’s charge anything
between 40bp and 1%.
• Banks target 1%-1.5%
net banking product (NBP) on
Assets Under Management
(AUM).
Financial Times 2012
© Geoffroy Dedieu 2013 49 Setting up a Single Family Office Sharing a few lessons and experiences
THE IN-SOURCING / OUTSOURCING DEBATE:
MISLEADING COST ESTIMATES… (con’t)
What they do not tell you
Brokerage, administration and custody costs within a fund are most often charged to the
FUM/AUM, i.e. they are charged to your money.
• Count an additional 20bp for conservative funds and 40bp for aggressive asset allocation (SAA).
• The fund management industry is one of few in the World where managers are not incentivised to keep their own
internal costs low.
• The reason is that those costs are charged to clients’ money, directly before the calculation of the Net Asset Value
(NAV) reported to clients.
• It is OPM! Other People’s Money … those costs are usually not well disclosed to clients / investors.
Did you know that structured products are sold with a haircut?
• The dealing desk of banks can make 2% to 4% on a structured note and most often the client / investor is not informed.
• Either your Front Office manager - your banker, your relationship manager - gets a share of the undisclosed haircut or
he/she will make an extra margin for his/her own - internal - P&L and bonus.
• See later slide about “ What Drives Financial Complexity?”
The most risky products for the clients are often the most juicy for fund managers and banks
(cf. Lehman mini-notes sold in retail bank branches in Singapore).
© Geoffroy Dedieu 2013 50 Setting up a Single Family Office Sharing a few lessons and experiences
VIEWING THE ASSET MANAGEMENT PROCESS
AS A VALUE-CHAIN?
• In many countries, MFO’s and
External Asset Managers or IAM can
still negotiate with banks an
undisclosed retrocession of up to 40%
of the Net Banking Product (NBP).
• The client in these situations tend to
end up with aggressive portfolios that
generate more fees for all parties
involved.
• US-type FO’s tend to act as Asset
Allocators: their role is to select fund
management houses and funds.
• Hence the pervasive terminology:
“manager selection”
• Most emerging market investors /
families view this part of the value
chain as redundant and costly.
• Investors / Families who do not
operate their own FO (SFO) would
most often not realise the full extent of
the cost of managing their financial
assets “down to the securities lines”.
• These costs are rarely reported by
funds.
• These costs are charged to your
money, the NAV.
Top line: Private Bank, IAM or MFO
0.5% - 3%
Asset / Fund Manager Costs
1% - 3%
Below the line: Charged to NAV
0.4% - 0.8%
3% Haircut
on Structured
Notes
Advisory or
Mandate fees
0.8% to 1%
MFO fees
30-50bp
Cost of
PIC and
Trusts
0-30%
Performance
1%-3% Fund
Management
Fees
Brokerage
bonds 5-
10bp,
Equities 10-
30bp Administra-
tion
5-10bp
Custody
2-7bp
Audit Fees
Costs charged to the NAV “inside” funds are typically not transparent to the investor / family
In some countries, undisclosed kick-backs from fund managers are still legal and even
“Compliant”.
© Geoffroy Dedieu 2013 51 Setting up a Single Family Office Sharing a few lessons and experiences
FUND SELLING IS A “RIP 0FF”
Financial Times 2012
© Geoffroy Dedieu 2013 52 Setting up a Single Family Office Sharing a few lessons and experiences
FUND CHARGES ARE A “RIP 0FF”
Financial Times October 2013
© Geoffroy Dedieu 2013 53 Setting up a Single Family Office Sharing a few lessons and experiences
FIGURES CAN BACK OUR MESSAGES ON COSTS
(Example based on 10-12 people)
SFO Budget (GBP) Your People Salaries & Benefits 1,200,000 Entertainment, Travel & Subs. 95,000 Training (Industry & Professional) 35,000 Training IT 13,000 Your External Advisors Legal Fees 35,000 Professional Fees (non IT) 55,000 Audit Fees 25,000 IT Consulting 30,000 Your Operational Capabilities Software 25,000 License Fees 150,000 Telephone & Internet 5,000 Printing Postage Stationery 10,000 Your Office Rentals and Maintenance 100,000 Utilities 6,000 Charity 35,000 Total 1,819,000
Considerations
• There are 4 main cost buckets to think of: • Salaries;
• IT;
• Legal and consulting fees; and
• Rental.
• Use benchmarks for salaries • i.e. 2012 Sulger Buel & Co compensation
survey.
• Define quantitative bonus plans • Use different formulas for portfolio managers
and private equity.
• Categorically ban all conflicts of interests • No carry, no shares;
• Use claw-backs and deferred bonuses.
• Define and budget your IT platform ex-
ante.
X 10
© Geoffroy Dedieu 2013 54 Setting up a Single Family Office Sharing a few lessons and experiences
Understand how SAA is defined in order to understand why families end up with different
allocations depending on whether they work with banks, Multi-FO or Single-FO.
HOW DOES YOUR PORTFOLIO ASSET MANAGEMENT STYLE / STRATEGIC
ASSET ALLOCATION (SAA) INFLUENCE YOUR COSTS?
Managed Risk
Management Style
Asset Class
Geography
Risk Appetite
Asset A Asset B Asset C Asset D
Euro Bonds
Asia Equities
Macro Hedge Fund
Portfolio Construction Asset Selection
Risk/Return Profile
Strategic Allocation
Tactical Allocation Picking Stocks &
Products
Realised Risk &
Volatility
• Define your financial objectives and needs in the medium and
long term.
• Develop and maintain an economic and financial outlook
tailored to your beliefs and positions
• Formulate the investments split between asset classes:
Strategic Asset Allocation (SAA)
• bonds, shares, hedge, real estate, commodities..
• Select securities you
want to buy and monitor
volumes on the markets.
• Keep a separate
watchlist for future picks.
• Monitor risk levels in
view of your objectives,
time horizon and your
outlook.
© Geoffroy Dedieu 2013 55 Setting up a Single Family Office Sharing a few lessons and experiences
HOW DO WE COMPARE COSTS?
Use Scenarios – What if you had these portfolios?
What sort of portfolios do we compare?
a) Using a Private Bank: high costs assumptions, i.e. aggressive mandate given to the bank.
b) Using a Multi-Family Office in a transparent jurisdiction (i.e. NO back-door commissions, so not in
Switzerland, Bahamas, Liechtenstein, but rather in the UK, USA, Singapore). Balanced portfolio
mandate.
c) Using a single FO with CEO/CIO, CFO, 2 accountants. Balanced mandate, with buy-to-hold strategy for
bonds (less turnover, so lower brokerage costs).
Cash 25%
Fixed Income 75% Cash 10%
Fixed Income 40%
Equities 30%
Commodities / ETF 5%
Alternatives / Hedge 10%
Cash 5%
Fixed Income 5%
Equities 50%
Commodities / ETF 20%
Alternatives / Hedge 20%
Conservative Balanced Aggressive
© Geoffroy Dedieu 2013 56 Setting up a Single Family Office Sharing a few lessons and experiences
COMBINE IT ALL … ASSET MANAGEMENT STYLE / SAA + VALUE CHAIN
… TO ASSESS COSTS DOWN TO SECURITIES LINES.
Top line: Private Bank, IAM or MFO
0.5% - 3%
Asset / Fund Manager Costs
1% - 3%
Below the line: Charged to NAV
0.4% - 0.8%
3% Haircut
on Structured
Notes
Advisory or
Mandate fees
0.8% to 1%
MFO fees
30-50bp
Cost of
PIC and
Trusts
0-30%
Performance
1%-3% Fund
Management
Fees
Brokerage
bonds 5-
10bp,
Equities 10-
30bp Administra-
tion
5-10bp
Custody
2-7bp
Audit Fees VA
LU
E C
HA
IN
SA
A
Conservative Balanced Aggressive
© Geoffroy Dedieu 2013 57 Setting up a Single Family Office Sharing a few lessons and experiences
Conservative Balanced Aggressive
WHAT WOULD THE FULL COSTS LOOK LIKE? (PRIVATE BANKING)
Using a Private Bank: Aggressive mandate
Undisclosed Haircut 120,000
Management Fees 1,500,000
Administration Fees 50,000
Brokerage 227,500
Custody 200,000
Other fees 10,000
Total USD 2,107,500 or 2.11% of assets
Private Banking (USD$ 100 mio portfolio)
Due to pressure on the revenue target of bankers, it is likely that “client” families will end up
with a more aggressive portfolio, which generates higher fees for the bank. Total down-to-
securities costs are rarely understood, calculated and/or disclosed to clients.
© Geoffroy Dedieu 2013 58 Setting up a Single Family Office Sharing a few lessons and experiences
Conservative Balanced Aggressive
WHAT WOULD THE FULL COSTS LOOK LIKE?
(MULTI-FAMILY OFFICE)
Using a Multi-Family Office in a transparent jurisdiction
(i.e. NO back-door commissions)
Undisclosed Haircut 0
Management Fees 1,000,000
Administration Fees 100,000
FO Costs 500,000
Brokerage 60,000
Custody 100,000
Other fees 10,000
Total USD 1,770,000 or 1.77% of assets
MFO’s are on average less “sales” oriented and likely to take into account the risks appetite and
long term risk management interests of the family, resulting in generally more balanced
portfolios.
Multi-Family Office (USD$ 100 mio portfolio)
© Geoffroy Dedieu 2013 59 Setting up a Single Family Office Sharing a few lessons and experiences
Conservative Balanced Aggressive
WHAT WOULD THE FULL COSTS LOOK LIKE?
(SINGLE FAMILY OFFICE)
Using a Single FO with CEO/CIO, CFO, 2 accountants: Balanced mandate but with the ability to enforce a buy-to-
hold strategy on fixed income (low rotation = low brokerage)
Undisclosed Haircut = 0 Management Fees = 0
Administration Fees 100,000
FO Costs 900,000
Brokerage 34,000
Custody 100,000
Other fees 0
Total USD 1,134,000 or 1.13% of assets
Single-Family Office (USD$ 100 mio portfolio)
Single-FO’s are free to integrate all aspects the of risk-return trade-off when defining the
adequate Strategic Asset Allocation of the family portfolios, resulting in generally more
conservative portfolios and lower down-to-securities costs.
© Geoffroy Dedieu 2013 60 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT WOULD THE FULL COSTS LOOK LIKE?
(SUMMARY)
Based on our example USD 100 mio portfolio
Annual costs USD %
Private Bank 2.1 mio 2.11%
(Aggressive mandate)
Advertised / listed fees usually communicated to clients 0.8 to 1%
Multi-family Office 1.8 mio 1.77%
(Balanced portfolio, transparent jurisdiction)
Advertised / listed fees usually communicated to clients 0.4 to 1%
Single-Family Office 1.3 mio 1.34%
(Balanced Portfolio, buy-to-hold bonds)
Costs anticipated by the family: as per the FO business plan!
Industry data indicates Single-FO costs are in the range of 0.70% (top level) to 1.20% (down to
securities lines). SFO costs are largely “fixed”, which means that the office can generate
economies of scale and scope.
Summary on Cost Comparison Observations
Note that the lager portion of the SFO costs are
mainly FIXED
• Using the same data as previous slide, for a USD 200mio
portfolio, the Single-FO’s costs would be USD 1,368,000
or 0.68% of assets.
• Family Office Exchange (FOX) 2012 Survey: Single-FO
average size USD461 mio, costs 0.64%.
https://www.familyoffice.com/
• The team in place can be leveraged for:
• Private equity deals or new business projects,
• Family-business corporate transactions,
• Assistance to family foundation or family philanthropic
projects,
• Coaching and supporting NextGen.
… free of charge and without conflicts of interests !
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
7
© Geoffroy Dedieu 2013 62 Setting up a Single Family Office Sharing a few lessons and experiences
WE LIVE IN A WORLD OF INCREASED RESPONSIBILITIES AND PRINCIPLES
• Labour issues
• Health and safety
• Workplace practices
• Human Rights
• Forced labour
• Child labor
• Freedom of speech
• Freedom of
association
• Some environmental
concerns to take into
account when investing.
• Pollution, waste,
natural resources
depletion, biodiversity.
• Climate Change
• Carbon emissions,
physical impact of
industrial activity.
• Business ethics
• Integrity, anti-bribery
and anti-corruption
• Fraud prevention
• Product responsibility
• Transparency
• IFRS, annual reports
• GIPS
Environment Social Governance
If you have been reading the newspapers lately you probably have heard of Corporate Social
Responsibility and Environmental, Social and Governance principles: CSR and ESG need to be
embedded into the Family Office principles and governance processes.
Impact on FO Governance Principles
• Family Offices need to embrace universal
principles and build robust governance and
control processes around leading global
trends.
• Adopting responsible investment and
governance principles makes your life easier:
no need to reinvent the wheel, all these
principles are supported by clear guidelines
from the United Nations (UN-PRI), the
International Finance Corp. (IFC, part of the
World Bank), international accounting bodies
(IFRS), international investment institutions
(GIPS) and national regulators.
© Geoffroy Dedieu 2013 63 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY STRUCTURE & FAMILY GOVERNANCE
Corporate Structure
Family Office
Family
Members
NextGen
Trust1 Family
Foundation
NextGen
Trust2
Family Structure
(F) Female
(M) Male
MN Maiden name
P Passport
Tax Tax residence
Principal (M)
01/01/1960
P: HK, Tax: UK
Daughter (F)
01/01/1990
P: UK, Tax: FR
Ex-wife (F)
01/01/1960
P: UK, Tax: FR
Marriage:
01/01/1980
Divorce:
31/12/2000
Son (M)
01/01/2000
P: FR, Tax: FR
Ms. A (F)
14/11/1969
P: UK, Tax: UK
Daughter
(F) 31/07/2010
P: UK, Tax: UK
Grand-Father (M)
01/01/1940
P: HK, Tax: UK
Brother (M)
01/01/1950
P: UK, Tax: USA
Grand-Mother (F)
01/01/1940
P: HK, Tax: UK
Sister (F)
01/01/1960
P: UK, Tax: HK
Family
Businesses
Combining healthy family dynamics, sound family governance and best-practice corporate
governance is extremely arduous.
* 67% for members of the FO Exchange 2012.
Despite the media perception that wealth is passed on from a privileged few to the privileged
descendants, the reality is that 95% of family businesses do not survive the 3rd generation of
family ownership and a majority of FO’s have typically served no more than 3 generations*.
© Geoffroy Dedieu 2013 64 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY GOVERNANCE & FAMILY BUSINESS GOVERNANCE
Family Charter
• Draft a statement of the principles that
outline the family commitment to core
values, vision, and mission of the family
business (IFC / World Bank, Family
Business Governance Handbook).
• Family values, mission statement, and vision.
• Family institutions, including the family assembly,
the family council, the education committee, the
family office, etc.
Source: IFC /World Bank, Wikipedia
A well-governed FO requires a well-designed Family Governance.
Shareholders Agreement
• Shareholders Agreements should be used at the
Business level and at the Family Office level to frame
important discussions, handle issues of exit and shares
sell/buy and prevent disputes.
• The family office is owned by “the family” meaning
family members of various generations and family
trusts, all these shareholders need to have a
framework of ownership of the shares in the FO and
other family entities.
• Key features:
• Regulate the ownership and voting rights of the shares in the
company;
• Control and management of the company, which may include
power for certain shareholders to designate individual for election
to the board of directors;
• Making provision for the resolution of any future disputes
between shareholders.
• Board of directors (and board of advisors if one exists).
• Senior management.
• Authority, responsibility, and relationship among the family, the
board, and the senior management.
• Policies regarding important family issues such as family members’
employment, transfer of shares, CEO succession, etc.
• There are strong cultural aspects to family charters, c.f.
The Charter of the Rights of the Family of the Vatican
(1983).
© Geoffroy Dedieu 2013 65 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY GOVERNANCE STRUCTURES : THE FAMILY COUNCIL
What is a Family Council?
• It is the top governing body of the family.
• The council can take many shapes and forms, there are no
prescribed formats.
• The notion does exist in a prescriptive legal form in certain
jurisdictions (France Code Civil Art 407 cc and Art. 477 cc).
• The composition, structure and functioning of family
councils differ from one family business to another.
• The size / membership should allow fair representation
and meaningful debates.
• The council will be the forum for discussion and drafting
of the Family Charter and other key documents such as
Shareholder Agreements.
Source: IFC /World Bank, Wikipedia
To ensure sound family governance, a Family Council acts as the Family’s top cooordination
and decision-making institution.
Family
Charter
Shareholders
Agreement
Family Office
Family Council
Governance Structure
© Geoffroy Dedieu 2013 66 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY MEETINGS : ENSURE A FAIR PROCESS
*Source: Randel Carlock , INSEAD
Fair process during meetings is critical to sound family dynamics. It must be actively and
openly managed to avoid conflicts.
Communication 101 Key Steps of a Fair Process*
• Listen.
• Let all members speak.
• Do not judge or finger-
point.
• The most senior members
should be careful to not
make comments that
frustrate or mute younger
members.
• Encourage
Participation.
• Training and coaching are
important for the family to
understand what this is all
for.
• Chose location well.
• No sleeping!
• Deal with conflicts.
• Try to identify potential
areas of conflicts and faulty
family dynamics in
advance, with the help of a
neutral party if necessary
(useful).
• Identify who will
organise the
meeting
• Collect input from
family members.
• Agenda items.
• Place, time.
• Send meeting
material to all
participants.
• Why do we need
to meet?
• Anybody should
be able to ask
for an item to be
discussed.
• The family
council or Board
of Directors
should decide on
actual notice of
meeting.
• Family members
should be
motivated to
attend and
contribute.
• Listen to
everybody.
• Chair.
• Voting and
discussion
process.
• Minutes to be
taken, circulated
and approved by
circulation or at
the next meeting.
Meeting
Preparation Meeting
What is the
Need
Meeting
Procedure Next Steps
• Present agenda
and rules.
• Listen to all,
within discussion
guidelines.
• Make clear
decisions.
• Agree Next
Steps.
• Next meeting
dates and
minutes review.
• Who should do
what?
• Timeframe.
• Reporting to
whom?
© Geoffroy Dedieu 2013 67 Setting up a Single Family Office Sharing a few lessons and experiences
Family Office
EXAMPLE OF KEY SINGLE-FO GOVERNANCE PRINCIPLES
Example FO Mandate
• Our No1 priority is to identify
and manage risks for the
family.
This goal is reflected in a
conservative investment profile
as well as in the FO’s corporate
governance.
FO Governance Principles
• Transparency and Accountability.
• Compliance and Regulatory Oversight.
• Strong Internal Controls with Separation of Powers.
• The effective segregation of duties is an important element in the internal
controls of the family office.
• Internal controls are at par with listed businesses to ensure the reliability of the
FO's financial reporting.
• In particular, it helps to ensure that no one individual is completely free to
commit the family’s money or incur liabilities on its behalf.
• Segregation also helps to ensure that the family receives objective and
accurate information on financial performance, the risks faced by the family
and the adequacy of the FO’s monitoring systems.
• Separation of Family, Ownership, Board and Management roles*.
• These roles entail different incentives and interests, which increases
Governance challenges for the Single FO.
The OECD defines Corporate Governance as … “Procedures and processes according to which an organisation is directed and controlled. The corporate governance
structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such
as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-
making.“
* IFC Family Business Governance Handbook
Family Owner
Family
Employee
Family
Director
Family
Member Family
Charter
Shareholders
Agreement
© Geoffroy Dedieu 2013 68 Setting up a Single Family Office Sharing a few lessons and experiences
CORPORATE (FO) BOARD RESPONSIBILITIES
• General Organizational
Requirements
• Employees, Agents &
relevant Persons
• Compliance, Internal
Audit & Financial Crime
• Risk Control
• Outsourcing
• Record Keeping
• Conflict of Interest
• Liquidity Risk Systems
and Controls
• Whistle-Blowing
• The Board is deemed to
be ultimately
responsible &
accountable for
compliance and risk
management.
• The Board sets up
control policies and
creates the required
environment to promote
a strong compliance
culture.
• The Board should
ensure that staff is
aware of this duty and
that a "compliance
culture" exists within the
Company, starting at the
top.
• The Board may
determine any matter it
wishes in full session
within its statutory
powers
• Regulation & Control
• Appointments
• Policy determination
• Strategy and Business
Plans and Budgets
• Risk Management
• Direct Operational
Decisions
• Financial and
Performance Reporting
Arrangements
• Audit Arrangements
Senior Management
Arrangements
Systems and Controls
Board Performance
Evaluation
Compliance
Responsibilities of
the Board
Matters Reserved
for Board Decision
Board Review of
arrangements
The Family Office’s Board of Directors has a significant amount of responsibilities towards
establishing and maintaining adequate Corporate Governance and Compliance.
• Follow international
governance standards to
ensure the performance of
the Family Office board is
assessed on a regular
basis and with adequate
accuracy / transparency.
• The process should be led
by the Chairman with
support from the
Company Secretary or
Compliance.
• In the UK the review
should be annual and
supplemented every three
years with an external
review (UK Corporate
Governance Code,
Financial Reporting
Council, www.frc.org.uk)
© Geoffroy Dedieu 2013 69 Setting up a Single Family Office Sharing a few lessons and experiences
CORPORATE (FO) BOARD CAPABILITIES & TRAINING
The UK Combined Code on Corporate Governance refers (in supporting principles) to the board’s
role as:
“to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which
enables risk to be assessed and managed.”
Walker Report (2009)
“The FSA’s (now FCA) on-going supervisory process should give closer attention to the overall balance of the board
in relation to the risk strategy of the business, taking into account the experience, behavioural and other qualities of
individual directors and their access to fully adequate induction and development programmes.
Such programmes should be designed to assure a sufficient continuing level of financial industry awareness so that
Non-Executive Directors are equipped to engage proactively in banks and other financial institutions board
deliberation, above all on risk strategy.”
Ensuring adequate level of skills and continuing training of board members is key to
maintaining efficient governance.
© Geoffroy Dedieu 2013 70 Setting up a Single Family Office Sharing a few lessons and experiences
Financial Times, 6 June 2013
© Geoffroy Dedieu 2013 71 Setting up a Single Family Office Sharing a few lessons and experiences
KEY CONCEPTS OF ANTI-MONEY LAUNDERING
• The origins of Customer Due Diligence (CDD) rules are to be found
in 1980’s prudential law and internal risk management within financial
institutions. Practice have shown that understanding the client’s
activities and conducting due diligence verifications is the most
effective way for banks to minimise their exposure to risks.
• The Basel Statement of Principles (BSP, 2003) addressed the issue of
'know your customer' (“KYC”) as a base in merging the CDD with
the Anti Money Laundering system.
• The international response to the underground economy was
coordinated by the FATF whose original 40 principles form the basis of
most international countermeasures to money laundering activity. A
further 8 principles, designed to counteract funding to terrorist
organizations, were added on June 30, 2003, with another added 22
October 2004, to form what is now known as the "40 + 9" principles of
Anti-Money Laundering and Combating the Financing of
Terrorism (AML/CFT).
• Money Laundering is the filtering of proceeds from an illegal activity,
through a series of transactions designed to disguise the funds as the
proceeds from a legitimate activity.
• International initiatives to curb and deter terrorism have intensified
since 2001 by targeting its funding and procurement structures.
• Banks must collect enough information from their client to understand
the clients’ business activities in order to identify any unusual
transactions or patterns of transactions.
• The client profile (KYC) must allow the bank to establish the source of
wealth of the client and also to profile the future transactions against
the original client profile to detect any unusual transaction or
inconsistent activity as opposed to the client’s principal account
activity.
History of the KYC
H M L
H
M
L
Geographical Risk
Pro
du
ct
Ris
k
Composite Risk Model
Based on the three risk factors; Client Risk, Country Risk and
Product Risk; the bank will assess the composite risk of the client
and classify it as a low, medium or high risk account
This approach is now used by law firms, audit firms, financial
institutions … it will soon be used by real estate agents, car
dealers, airlines, hotels.
© Geoffroy Dedieu 2013 72 Setting up a Single Family Office Sharing a few lessons and experiences
A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE
CLASSIFIED AS PEP: IS THIS AN INSULT? (1)
“Politically Exposed Persons” (PEPs) are defined as persons holding (or previously holding) prominent public positions,
members of a government of any country or state or sub-section of such a government, senior politicians on the national
level, senior government, judicial, military or party officials on the national level, or senior executives of state-owned
enterprises of national importance individuals, companies and legal entities having close connections to such
persons/entities, either through family ties, personal or business connections.
Who are PEP’s ?
PEP is not a bad word, it is a risk classification. Being a PEP means you need to have the right
people and procedures in your family office to handle the additional requests and queries of
banks, other counter-parties and service providers.
© Geoffroy Dedieu 2013 73 Setting up a Single Family Office Sharing a few lessons and experiences
A UHNW FAMILY FROM AN EMERGING MARKET IS MORE LIKELY TO BE
CLASSIFIED AS PEP: IS THIS AN INSULT? (2)
• “Politically exposed persons” risk corresponds to the
risk associated with providing financial and
business services to public or government
officials.
• This risk is particularly important where PEPs are
from countries with widely-known problems of
bribery, corruption and financial irregularities. See
Transparency International’s Corruption Perceptions
Index (for details on the CPI, see http://transparency.org/).
• For countries with high corruption levels, individuals
in power have the ability to build large fortunes by
looting their country’s funds, diverting international
aid payments, disproportionately benefiting from the
proceeds of privatizations, or taking bribes
(described by a variety of terms such as
commissions or consultancy fees) in return for
arranging for favorable decisions, contracts or job
appointments.
What is the targeted risk?
Being a PEP means you will be monitored by all counter-parties as a “high-risk” client. Your FO
needs to help your counter-parties understand and measure these risks accurately.
What it means for the FO
• The Family Office will need to deal with counter-parties
who apply “high-risk” monitoring to everything the FO
does.
• It is likely the FO will need to have its own Compliance
team to respond to queries and requests for
documentation.
• The FO will monitor reputational risks: all new business
partners need to be screened by the FO. New suppliers
as well.
• Conduct full and regular web searches and database
searches on your own profile. Understand what the
Compliance people within banks will think when they do
a search.
• All investment or banking instructions need to be
accompanied with relevant documents, contracts,
invoices and explanations … the FO needs to help the
front office managers on the counter-party side with
their own Compliance process. Make sure they have
all the information they need before they ask for it.
© Geoffroy Dedieu 2013 74 Setting up a Single Family Office Sharing a few lessons and experiences
A TYPICAL COMPLIANCE / CONTROL WORKFLOW
• To embed compliance processes into the Family Office, the FO’s IT team and Compliance & Governance can
implement an intranet and a workflow platform to ensure that internal controls / compliance forms, declarations, tasks
and reports are prepared, delivered and approved on time.
• This example is based on the latest Microsoft SharePoint platform.
© Geoffroy Dedieu 2013 75 Setting up a Single Family Office Sharing a few lessons and experiences
A TYPICAL COMPLIANCE / CONTROL WORKFLOW (cont’d)
Automated email to
approver
Document not
approved
Automated email
sent to Compliance
with details
Document
changed, new-
version number
Previous document
archived in library
Compliance
initiates a change
in a control form
Signature on-
screen
Workflow Development Workflow Implementation
© Geoffroy Dedieu 2013 76 Setting up a Single Family Office Sharing a few lessons and experiences
Chief
Executive
Officer or COO
Chief
Operating
Officer
DEALING WITH BRIBERY, CORRUPTION & WHISTLEBLOWING
Fighting Bribery & Corruption
• In the UK, the Bribery Act 2010 not
only makes bribery and corruption
illegal, but also holds UK companies
liable for failing to implement
adequate procedures to prevent such
acts by those working for the
company or on its behalf, no matter
where in the world the act takes
place.
Example Statement of Anti-Bribery
Policy: “The Office has a zero tolerance of bribery
and corruption, this policy extends to all
business dealings and transactions in all
countries in which it or its subsidiaries and
associates operate. This policy will be given
force in a detailed anti-bribery programme
which is regularly revised to capture
changes in law, reputation demands and
changes in the business. All directors and
employees are required to comply with this
policy.”
• Penalty for Bribery in the UK is up to
10 years of jail and unlimited fine!
Whistleblowing Policy
What this policy does
• Ensure that all members of staff can
blow the whistle on (suspected)
criminal or unethical conduct.
How?
• By encouraging staff to make
disclosure of Criminal or Unethical
conduct;
• By ensuring that disclosures will be
treated with discretion and utmost
confidentiality;
• By explicitly protecting the individual
who makes a disclosure in good faith;
• Complies and concurs with the
provisions of the UK Public Interest
Disclosure Act 1998 ("PIDA");
• Communicated to directors and
employees appropriate internal
procedures for handling their concerns
as part of an effective risk
management system;
• The office should appoint a
whistleblowing officer.
Internal Reporting
Procedures
Security
Incidents
Security
Incidents
Compliance
Incidents,
Suspicious
Activities
Compliance
Incidents,
Suspicious
Activities
Compliance &
Governance
Officer
Report
Whistle-
blowing
Whistle-
blowing
Report
Report
Any employee within the FO
© Geoffroy Dedieu 2013 77 Setting up a Single Family Office Sharing a few lessons and experiences
CONFLICTS OF INTEREST
Defining & Identifying Conflicts within the
Family Office
• A conflict of interest occurs when the private interests of
an employee or Director (board member) interfere, or
appear to interfere, with the performance of his or her
duties.
• Two or more parties have misaligned interests.
• Conflicts of Interest is anything that might impact on
your ability to make an independent judgement.
• This policy should establish a common understanding of
appropriate conduct expected of all Board members and
staff in relation to gifts, benefits and hospitality.
• The objective is to ensure that no material conflict arises
with any duty that a firm owes to its customers.
• Entertainment, hospitability or other benefits given and
received by any director or employee are to be reported
to the Family Office and a log should be maintained.
(there should be a threshold i.e. USD100).
Preventing & Managing Conflicts of Interest
• Relationships with family (customers) and all service
providers / suppliers must be open and fair;
• The Family Office should have proper controls for
identifying and managing conflicts of interest;
• Employees and Directors disclose personal business
interests when such could be in conflict with the
performance of their duties;
• When a conflict arises with different relationships the
Family Office should reallocate responsibilities and/or
where a relationship is inappropriate it should be
terminated.
• Identified conflicts should be documented (!) and should
clearly evidence how the conflict was managed
Special Case: Gifts & Entertainment (Hospitality)
© Geoffroy Dedieu 2013 78 Setting up a Single Family Office Sharing a few lessons and experiences
Business Owner
Non-owner
CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (1)
The Issue
• Appointing family members to the business or FO may
seem to other members to represent an unfair advantage
for the person hired/employed: Extra income is generated
and extra power is granted.
• The appointment process may not seem fair process to
the rest of the family. How was this family member
selected for that job?
• Whatever the position of the family charter / constitution
on the issue, it needs to promote wealth preservation and
successful succession.
The Options
When to have (or not) family members as employee of the business or the family office is a
thorny issue for all families: there is an embedded conflict of interest and it needs to be
addressed.
Employee / Manager
Board Member
© Geoffroy Dedieu 2013 79 Setting up a Single Family Office Sharing a few lessons and experiences
CONFLICTS OF INTEREST: SPECIAL CASE FOR FAMILY EMPLOYEES (2)
Option A
• Allow family members to be employed
• This is the more frequent choice in emerging-market families with 1 or 2 generations.
• The family and the FO needs to be aware of the trend to move to Option B as time and generations pass.
• In the long run, Option A is viable only if the family sets clear guidelines regarding required qualifications (MBA from
certain schools) and experience (outside jobs with A-list banks, consulting firms or successful entrepreneurial project).
• Fair process needs to be maintained: special hiring committee.
Option B
• Do not allow family members to be employed.
• Certain families make 1 exception for an exceptionally talented family member to represent the family, as CEO or
Chairman.
• The family has a Governance and directorship role.
• The issue of director fees will pose the same issues as in Option A. If family members receive fees as directors, this
needs to be tabled, discussed and agreed. The access to directorships should be based on merits and competence, not
birth rights.
Different Families make different choices when it comes to allowing employment in the Family
Office or Family Business.
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
8
© Geoffroy Dedieu 2013 81 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT IS WRONG WITH THIS PICTURE?
© Geoffroy Dedieu 2013 82 Setting up a Single Family Office Sharing a few lessons and experiences
THIS IS WHAT MOST BANKS’ IT BACKBONE LOOKS LIKE!
THIS IS THE CORE TOOL USED TO DELIVER SERVICES TO CLIENTS
The code in most banks’ IT, especially Private Banks, dates back to the 1980’s.
Black screen, no GUI, no mouse.
© Geoffroy Dedieu 2013 83 Setting up a Single Family Office Sharing a few lessons and experiences
BANKS & FINANCIAL INSTITUTIONS’ IT SYSTEMS ARE FALLING APART!
RBS
• Lost at least GBP 125 mio in June 2012 due to retail software failure
• Botched an overnight upgrade installation
NASDAQ
• Unspecified losses incurred by brokers during Facebook IPO on 18 May 2012
• Apparently due to capacity constraints and failsafe failures
Knight Capital
• Lost USD 440 mio in 45 minutes on 1st August 2012
• Botched an upgrade installation
• Thousand of erroneous orders sent
Banks’ legacy systems are hugely complex and piled up over 30 years
(where complexity theory needs to be applied…). Strong internal resistance to change.
Entrenched vested interests. Lack of top-management IT skills. Short term focus.
Lack of political will to fix the situation.
© Geoffroy Dedieu 2013 84 Setting up a Single Family Office Sharing a few lessons and experiences
ADVANTAGED DECISION MAKING
“The most meaningful way to
differentiate your company from your
competition, the best way to put
distance between you and the crowd,
is to do an outstanding job with
information. How you gather, manage
and use information will determine
whether you win or lose.”
Bill Gates, March 1999
Source: FT IT, October 18, 2000
© Geoffroy Dedieu 2013 85 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE FAMILY OFFICE TECHNOLOGY MODEL
The cost of this model is approximately 10% of the office budget.
Portfolio / Assets Report
• Consolidated view of wealth and assets
• Consolidated view of income and
succession planning
Family Owner
Family
Employee
Family
Director
Family
Member
Report Distribution
• To external end users.
Family
Foundation Trust
External Trade
Data
Trade Allocation,
Broker/Custody
Notification
Shares
Prime
Broker Custodians Family Office Database
Market Price Updates
Online verification
& correction at
Family Office
Consolidation & Reporting
Final Rendering
PDF, XL,
SharePoint
Final Rendering
PDF, XL,
SharePoint
Report Definition
Intermediate
Formatting
Layout Layout
Incorporate / Interface
Accounting & Planning
Data
• IFRS compliance
• Audited Annual Reports
• Tax / Planning / Trust allocation
• Insurance / Endowment allocation
SAA
Input from Internal Risk
Models
Trading
Order Management
Liquidity
Portfolio
Construction
Asset Allocation
Portfolio Modelling
Trade data is reported to
Custodians
• Confirmation, Settlement
• Delivery vs. Payment (DVP)
Family
Office
Virtual
server
host
Firewall
Firewall
Remote
Access
Server
Family Office
Family Office
© Geoffroy Dedieu 2013 86 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE SINGLE-FO IT ARCHITECTURE NETWORK DIAGRAM
Communications / Internet
• Secure access to Internet.
• Data replication route for Backup / Business Continuity with additional firewall.
• 3 Internet data lines. 1 dedicated to backup.
Backup / Business Continuity Environment
• Remote location.
• Weekly replication of the full functional system and data.
Production Environment
• Over 8 Terabytes (TB) of data storage.
• 3 SQL databases: Accounting, Portfolio Management, Document Management.
• Virtualised servers.
• Data backed up to tape and separately backed up to disk.
© Geoffroy Dedieu 2013 87 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE FAMILY OFFICE IT SYSTEMS & BUDGET
Example IT budget for 3 main IT packages relevant to FO functions
• Advent/Bloomberg: Portfolio Management, GIPS compliant;
• Sage 200: accounting package, IFRS compliant;
• SharePoint: Internal Workflows for compliance and controls, internal communication, and file management.
IT Budget (GBP) first year
Hardware Purchase 35,000
Software Maintenance and Licensing 150,000
Software Purchase 15,000
IT Consulting Fees 55,000
IT Training 10,000
Telecoms 5,000
Total 270,000
Inte
rfa
ce
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
9
© Geoffroy Dedieu 2013 89 Setting up a Single Family Office Sharing a few lessons and experiences
UNDERSTANDING THE RISK VS. RETURN TRADE-OFF
Looking at long term return trends vs. our own expectations
Historical Performance (assumptions)
• As an example, we have mapped Strategic Asset Allocation pies that would match expected return levels:
1. Preservation, or up to 5% Returns;
2. 5% Returns (5-10%);
3. 10% Returns (10-15%); and
4. Above 15% Returns.
Based on these return rates
Cash 3.0% Equities 8.0%
Bonds - AAA 4.5% Real Estate 11.0%
Bonds - AA-A-BBB 6.5% Commodities 7.0%
Bonds - HYB 12.0% Alternative 5.0%
Leverage -4.0% (interest)
• To achieve 15%, a portfolio would have to include a massive amount of debt/leverage or beat the long term rates of return
in one or several asset classes.
• Over 10 or 20 years hardly anybody has ever managed to beat the market.
Understand that there is no such thing as higher expected returns without higher risks.
© Geoffroy Dedieu 2013 90 Setting up a Single Family Office Sharing a few lessons and experiences
Up to 5% 5% Target 10% Target Above 15% Target
-70.0%
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
UNDERSTANDING THE RISK VS. RETURN TRADE-OFF
Mapping the Portfolio against expected / desired returns
Mapping the Portfolio (Asset Allocation) vs. the Desired / Target Return
The more returns you “want”, the more risks you will be taking.
30%
3%
15% 15%
16%
6%
5%
10%
65%
20%
10%
2%
1%
3%
80%
12%
12%
7%
15%
? No Identified
portfolio
Cash
AAA
AA-A-BBB
HYB
Equities
Real Estate
Commodities
Alternative Leverage / Debt in the Portfolio
Target / Expected Return
Expected /
Desired Return
© Geoffroy Dedieu 2013 91 Setting up a Single Family Office Sharing a few lessons and experiences
UNDERSTANDING THE RISK VS. RETURN TRADE-OFF
Calculating additional risks for each additional percent of desired return
Key Take-Aways
• An investor cannot expect to make a
higher return without taking
additional risks.
• Calculate your risk metrics: Value-at-
Risk, Max-drawdown, etc.
• Although 84% of family offices cite
“Capital Preservation” as a very
important driver of investment decisions
and 76% cite “Investment Risk” as a
major concern, their investment target
over the medium term do not match
those concerns: 63% target returns
above 5%, including 20% targeting
more than 10%.*
• UHNW families and their FO’s need
to re-define rational target returns
and acceptable risks levels.
Mapping the Risk-Return Trade-off of Single-Family Offices
And … remember that there is no such thing as higher expected returns without higher risks.
*FT Family Office Survey September 2013 -70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Up to 5% 5% Target 10% Target Above 15% Target
% of SFO''s targetting this Level Leverage / Borrowing
VaR (weekly at 97% confidence) Lehman Default 2008
Target / Expected Return
% of SFO’s which
target this return
level*
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9a
© Geoffroy Dedieu 2013 93 Setting up a Single Family Office Sharing a few lessons and experiences
KEY STEPS TO DEFINE YOUR INVESTMENT GUIDELINES
Why have Investment Guidelines?
• To provide a framework for the management of the assets of the FO;
• To assist the Board of the Company in effectively supervising and monitoring the investments.
Why have Investment Beliefs?
• Investment beliefs are a clear view on how the SFO and the Family perceive the way the Economy and capital
markets work; and
• How the Family Office can add value to portfolios and strive for excellence in fund/asset management.
• The FO’s global view should be defined by aggregate sector & country based on research findings.
Why define principle-based investment guidelines?
• Principles reflect the family’s preferences beyond economic and financial aspects, including social responsibility and
environmental concerns.
Roles & Responsibilities?
• Role and responsibility of the Board • Define and agree Investment Beliefs of the family and FO.
• Define and agree Investment Targets.
• Role and responsibility of the Investment Management Committee (IMC) • Define and approve Investment Strategy
• Propose necessary updates to the Company Investment Management Process & Guidelines, subject to Board approval.
• Discuss any breach of the Investment Policy or Stop-Losses. Overrides shall be reported and discussed at the IMC, subject to board
approval on a bi-yearly basis.
• Define Strategic Asset Allocation
© Geoffroy Dedieu 2013 94 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT IS YOUR WORLD OUTLOOK?
Do you see the World like this? … … or still like that?
© Geoffroy Dedieu 2013 95 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT IS YOUR WORLD OUTLOOK?
Changing balance of power
Share of World GDP
Source: IMF 2011,
© Geoffroy Dedieu 2013 96 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE: THE PENSION BOMB (1)
Fund Country Assets
Japan Government Pension Japan 290,991
Singapore GIC (CPF) Singapore 248,000
Temasek Holdings Singapore 158,000
ABP Netherlands 142,084
California Public Employees USA 128,678
Local Government Officials Japan 101,020
Federal Retirement Thrift USA 96,020
New York State Common USA 95,951
Postal Savings Fund Taiwan 95,818
California State Teachers USA 88,125
Florida State Board USA 78,718
National Pension Corporation Korea 77,300
General Motors USA 73,600
Texas Teachers USA 67,095
New York State Teachers USA 66,360
New York City Retirement USA 65,928
National Public Service Japan 65,230
New Jersey USA 57,506
Public Schools Employees Japan 54,768
General Electric USA 54,002
Employees Provident Fund Malaysia 51,726
A Challenging World Outlook Pension Funds (2010, USD million)
Pauperisation in Europe will come from a
combination of 6 factors:
• High public debts (state and regional);
• Continuing public deficit to finance welfare systems;
• Pappy-boom (impact on pensions and health
systems);
• Persistently low economic growth rates;
• Unfunded pension plans (insufficient capitalisation);
• Defined benefit pension systems.
• Three of these factors are related to pensions: pappy-
boom, unfunded pension schemes, defined-benefit
(instead of defined contribution as in the case of the
CPF in Singapore).
• In the long run, the pauperisation created by pension
issues will impact property values in all sectors.
© Geoffroy Dedieu 2013 97 Setting up a Single Family Office Sharing a few lessons and experiences
BBC 13 July 2011 – UK Public sector pension liabilities top £1 trillion
The report is designed to give a more accurate picture of the liabilities facing future generations. The UK's total liability for
funding public sector pensions has reached £1.13 trillion, according to official data. The figure, for the end of March 2010, is
£332bn higher than the previous year, although £260bn of the rise is due to a fall in bond yields. Ministers are expected to
use the data to reinforce their argument that pensions must be reformed.
The data was published by the Office for Budget Responsibility. The OBR report also disclosed that the total liabilities for
Private Finance Initiative contracts were about £40bn, or 2.9% of GDP, as of March 2010. Only £5.1bn of these were on the
public sector balance sheet in the National Accounts. Publication of the first OBR Fiscal Sustainability Report is designed to
give a more accurate picture of UK liabilities that that have been built up for future generations.
Future payments
Most public servants, with the exception of local government staff and university lecturers, are members of unfunded pension
schemes in which the pensions are paid for out of general taxation. The OBR's figure for pension liabilities, at £1.13 trillion, is
an estimate of the stock of assets the government would need now, if an investment fund had to be established to generate
the cash to make all the future public sector pension payments. The OBR makes that point that its calculation of the
taxpayers total liability to pay public sector pensions "had nothing to do with changes in the size of prospective pension
payments". Instead, its calculation is heavily influenced by a recent government decision to assume that, in theory, it would
need more assets than before to fund the pensions. The OBR points out that if future pension payments are compared to the
size of the UK's total economic output (gross domestic product) the cash value of public sector pensions will probably fall
from 2% of GDP in 2015-16 to 1.4% in 2060-61.
"These costs fall as a result of the decision to up-rate pensions in payment by CPI rather than RPI, the current pay freeze
and planned workforce reductions," the OBR said.
EXAMPLE: THE PENSION BOMB (2)
© Geoffroy Dedieu 2013 98 Setting up a Single Family Office Sharing a few lessons and experiences
Telegraph 08 Sep 2009 - Pension liabilities break through £1 trillion mark Liabilities in defined benefit workplace pensions in the UK have broken through the £1 trillion mark.
The Pension Protection Fund (PPF), which oversees the assets of nearly 7,400 defined-benefit occupational schemes and
administers payments to members of schemes where employers have gone bust, said ballooning liabilities were driving up
deficits despite the recent stock market rally which has improved asset values.
Deficits – liabilities minus assets – worsened during August by £16bn to £195bn, while the value of the FTSE All-Share Index
rose by 7.1pc. This time last year, deficits stood at just £93bn. The PPF said 6,304 schemes are now in deficit – representing
85pc of the total.
Surpluses in those schemes which still have them have also plummeted, from £53bn this time last year to £21.4bn now.
Although rising share prices caused the value of assets in pension funds to increase by 3.3pc, lower gilt yields forced pension
scheme liabilities to rise by 5.2pc.
A spokesman for the PPF said: “Over the past year, falling equity markets and bond yields have led to an overall worsening of
the funding position. Lower bond yields resulted in a 9.6pc increase in aggregate liabilities, while weaker equity prices reduced
assets by 3.1pc over the year.”
Pensions consultant John Ralfe warned that pension liabilities will continue to grow, in spite of recovery in the stock market.
The Government’s appetite for quantitative easing is one factor causing them to expand.
Mr Ralfe said: “It is easy to focus on asset growth, but we need to look at what has happened to pension liabilities. Higher UK
share prices have been largely driven by falls in bond yields, which have also increased pension liabilities. UK pension plans
have been running to stand still. UK plc continues to run a huge asset and liability mismatch through holding equities to meet
bond-like pensions.”
Growing pension liabilities have already caused nine out of 10 final-salary schemes to close the doors to new employee
members. Many employers are now closing schemes to existing members as well.
Steve Webb, Liberal Democrat work and pensions spokesman , said the plight of workplace pensions will put intolerable
pressure on the state in future to support people who had expected to rely on them in old age. “With public sector pensions
likely to be reined back along with their private sector counterparts, more and more workers will find themselves facing means-
testing in old age,” he said. “If the Government really wants to give people dignity and security in old age, it should guarantee
a more generous basic state pension.”
EXAMPLE: THE PENSION BOMB (3)
© Geoffroy Dedieu 2013 99 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE: THE PENSION BOMB (4)
The Pension “black-hole” will impact all sectors in the UK
Financial Times, 26 November 2012
© Geoffroy Dedieu 2013 100 Setting up a Single Family Office Sharing a few lessons and experiences
A SOFTER VIEW: ECONOMIC COMPLEXITY EVOLUTION (1964-2008)
• One way of describing the economic world is to say
that things are made with machines, raw materials
and labour.
• Another way is to emphasize that products are
made with knowledge.
• Markets and organizations allow the knowledge that
is held by few to reach many. In other words, they
make us collectively wiser.
• Countries whose economic complexity is greater
than what we would expect, given their level of
income, tend to grow faster than those that are “too
rich” for their current level of economic complexity.
In this sense, economic complexity is not just a
symptom or an expression of prosperity: it is a
driver.
Quotes Change in Economic Complexity
-
0.50
1.00
1.50
2.00
2.50
1964 1968 1978 1988 1998 2008
Singapore USA UK China
Source: The Atlas of Economic Complexity, 2011, MIT / Harvard.
http://atlas.media.mit.edu
© Geoffroy Dedieu 2013 101 Setting up a Single Family Office Sharing a few lessons and experiences
A SOFTER VIEW: ECONOMIC COMPLEXITY AND GDP PER CAPITA
Expected Growth in GDP per Capita based on Economic Complexity
Singapore No 7 (1,639)
UK No 9 (1,558)
USA No 13 (1,447)
China No 29 ( 894)
Economic Complexity
SGP
GBR
USA
Source: The Atlas of Economic Complexity, 2011, MIT / Harvard.
http://atlas.media.mit.edu
© Geoffroy Dedieu 2013 102 Setting up a Single Family Office Sharing a few lessons and experiences
Negative Selection Positive Selection
WHY SHOULD THE FO DEFINE PRINCIPLE-BASED
INVESTMENT GUIDELINES
• Companies which bring sustainability into the heart of their
business strategy, outperform their counterparts over the
long-term, both in terms of stock market and accounting
performance (Robert G. Eccles, Ioannis Ioannou, and
George Serafeim, Harvard Business School: The Impact of
a Corporate Culture of Sustainability on Corporate Behavior
and Performance, Working paper, 4 November, 2011).
Positive Screening Methods:
• Positive screening involves preferentially investing in
companies or sectors on the basis of criteria relating to their
products, activities, policies or performance.
• Best-in-class involves preferentially investing in companies
with better governance and management processes and
ESG performance.
• Thematic investment involves selecting assets on the basis
of investment themes such as climate change or
demographic change.
• Investment guidelines can incorporate a clear set of
exclusion criteria for businesses (equities and fixed
income) and countries (fixed income and commodities).
• The Family Office may not have the internal resources to
monitor compliance with these rules but it can use its
information systems (Bloomberg ESG data) and
specialised consultants (Oekom Research).
Examples:
• Child labor: Ban any manufacturer in breach of the
International Labor Organisation rules.
• Alcohol. • Avoid producers and retailers
• Ban depending on sales thresholds (>10% or > 20%)
• Arms. • Avoid manufacturing and sales of weapons systems >10%
• Totally ban any company involved in manufacture or sale of
outlawed weapons as per the Rome Statute of the International
Criminal Court.
Principle-based investment recognises that the generation of long-term sustainable returns is
dependent on stable, well-functioning and well governed social, environmental and economic
systems.
Source: UN Principles for Responsible Investment, Oekom Research AG
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9b
© Geoffroy Dedieu 2013 104 Setting up a Single Family Office Sharing a few lessons and experiences
• Securities
selection /
picking
• Trading and confirmations
Construction &
Execution
INVESTMENT MANAGEMENT PROCESS
Have clear investment beliefs and processes
Beyond your own beliefs, there are now key industry
standards: • ESG - Environmental, social and corporate governance.
• PRI – Principles for Responsible Investment.
• United Nations Global Compact.
Some examples: • “… In the long run, asset mix (the Strategic Asset Allocation –
SAA) is the main determinant of portfolio return and risk…”;
• “… We believe the use of derivatives, hedging and shorts
would reduce understanding of our risks. Therefore currency
hedging will not be used…”;
• “… We believe the pauperisation trend in Europe will be
accentuated by demographic issues (Baby-boom to Pappy-
boom)…”;
• “… We do not believe funds-of-funds or bank mandates add
value. Performance of such solutions, net of fees, is inferior to
direct management…”
Investment Management Process
A family office should develop a rigorous Investment Management process. Its independence from
fund managers’ “benchmarking” mentality allows the SFO to define distinct Product Biases.
• Performance
• Limits
• Asset classes & securities picking
• Risk metrics
• Macro research/strategy
• Discussed with external managers
• Macro research/strategy
• Discussed with external managers
Annual
Strategic Asset
Allocation
Quarterly Asset
Allocation &
Monthly Review
Monthly
Performance &
Risk Review
© Geoffroy Dedieu 2013 105 Setting up a Single Family Office Sharing a few lessons and experiences
A sound portfolio construction process is based on a Top-Down approach and strong focus on
Strategic Asset Allocation (SAA).
TOP-DOWN PORTFOLIO MANAGEMENT PROCESS
Asian Investors’
Focus
Management Style
Asset Class
Geography
Risk Appetite
Asset A Asset B Asset C Asset D
Euro Bonds
Asia Equities
Macro Hedge Fund
Risk/Return Profile
Strategic Allocation
Tactical
Allocation
Picking Stocks &
Products
Realised Risk &
Volatility
European
Investors’ Focus
© Geoffroy Dedieu 2013 106 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT IS ALL THIS TALK OF SAA ABOUT?
Asset allocation between bonds,
equities, alternative and cash helps
manage portfolio volatility and
losses.
• The Asset Allocation is the percentage
of total assets invested in different asset
classes.
• Do not invest all assets into one type of
asset class. Spread or diversify risk by
investing in different types of
investments.
• When one asset class is performing
poorly, another may be doing well and
compensating for the poor performance
in the other.
• Each broad asset class
has various subclasses
with different risk and
return profiles.
• The more return an asset
class has historically
delivered, the more risk
that its value could fall as
well as rise because of
greater price volatility.
• To earn higher potential
returns means to take
higher risk.
High-level asset allocation matters more to investment success than the choice of investments
within the allocation (stock-picking).
Risk What is Asset Allocation?
Bonds & Cash
• See the bonds section regarding the construction of a
laddered bond portfolio.
• Manage the opportunity risk with a cushion of cash.
• Generate (small) short-term returns.
• Keep a mattress of liquidity for family needs.
Equities
• Equities perform during periods of growth and
moderate inflation.
• Different return/risk characteristics: price more volatile
and higher risky investment.
• Unlimited capital gains from equity price increases.
• No vulnerability to interest rate risk.
Alternatives
• Low correlation between bonds and hedge funds.
• Overall risk reduction.
• Stabilisation of returns.
Main Asset Classes
© Geoffroy Dedieu 2013 107 Setting up a Single Family Office Sharing a few lessons and experiences
DEFINING RISK & RETURN TARGETS (NOT SIMPLY RETURNS)
Have a risk and return targets
• Example of an absolute return target is the USD 6M LIBOR rate + 2%
• Example of an adequate return level is twice the target: (USD6M LIBOR +
2%) x 2
• Beyond this level of return, at any point during the calendar year, the Investment
Management Committee is entitled to cut all positions and switch to cash and equivalent.
• Example maximum tolerable loss is 5% in any calendar year.
• Monitor VaR and Sharpe Ratio : Sales people (MFO’s, banks, fund
managers) sell on promised returns, not on risks. Any sales pitch with
minimalised Risk explanation should be thrown out.
Adopt Product Biases
• No investment in Structured notes that incorporate any type of “worse case”
outcome (this excludes 99% of the notes in the market).
• No Dual-Currency-Deposit.
• No FX option.
• No rate swap, whether Fixed/Float or FX based.
• No coverage of securities denominated in currencies other than USD (no
coverage of FX exposure).
• No funds of funds: we invest in single-strategy funds managed by single
managers.
A family office should define its target return levels and associated acceptable risk. To avoid
greed and target slippage, define an Adequate Level after which you can take all money off the
table.
Always Measure Realised Risk & Volatility
Equities 26%
Fixed Income
43%
Cash 9%
Commodities 9%
Alternatives 13%
Balanced Portfolio
© Geoffroy Dedieu 2013 108 Setting up a Single Family Office Sharing a few lessons and experiences
IN THE MEANTIME …
“BUY HIGH - SELL LOW” IS WHAT PEOPLE REALLY DO…
Sources: 2005 Fortune Magazine, Investment Company Institute
Over the past few cycles, individual investors have been investing mostly when the market is high
and selling when it is low.
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
0
200
400
600
800
1000
1200
1400
1600
Monthly Mutual Fund
Inflows in USD m (bars)
S&P 500
(line)
© Geoffroy Dedieu 2013 109 Setting up a Single Family Office Sharing a few lessons and experiences
• Why Do We Sell Low and
Buy High?, Amir Avitzur,
2012.
• Funds of funds are hurting
but they are not dead.
• People who collect UHNW
assets and park them with
other fund managers are
thriving.
• Undisclosed fund
retrocessions are still
around.
• Product sellers punt their
ware on “expected” high
returns, with little or no
visibility on risks and true
costs.
WHAT HAVE WE LEARNED SINCE THE 2008 CRISIS?
What’s New?
Source: Thomson One
Quarterly S&P 500 Stock Repurchases vs Index
© Geoffroy Dedieu 2013 110 Setting up a Single Family Office Sharing a few lessons and experiences
Comments
Financial complexity is a result of banks pushing less transparent products to generate hidden
profits. It is not a sign of market sophistication or productive innovation.
Source: What Drives Financial Complexity?”, Claire Célerier & Boris Vallée, 2013
WHAT DRIVES FINANCIAL COMPLEXITY?
• The classification of clients’ level of sophistication is largely based on assumptions, translated into bank-defined test questions that often tend towards classifying the client as “sophisticated”.
• There is no real effort to accurately test the real level of sophistication of clients.
• When in doubt, UHNW investors (families) are deemed “sophisticated” or “accredited” or “exempt” in most jurisdictions and therefore do not benefit from even the poor protection offered to other clients.
• Even with ample resources in an FO, with Bloomberg stations, several portfolio managers and years of investment experience, we should still consider that our information is no match for the banks’ structuring desks.
Key Statistical Findings
The study covers the period of 2002-2010 – therefore includes the Financial Crisis – and 15 European countries.
• The more complex the structured product, the more profitable for the bank and the less performing it is for the investor.
• These products are juicy for banks mostly because of information asymmetries.
• Hidden mark-ups average 2.5% - in addition to entry fees and management fees – and they increase with product complexity / opacity. Some products have had mark-ups of 14%.
• Structured products are sold to investors, not bought by them – push, not pull.
• The less sophisticated the investor, the more banks sell complex structures.
• The greater the competition between banks, the more they attempt to increase information asymmetry and search costs (for clients).
© Geoffroy Dedieu 2013 111 Setting up a Single Family Office Sharing a few lessons and experiences
For the overall portfolio, Strategic Asset Allocation dominates over Tactical Asset Allocation as a
driver of over/under performance
• 1996, 1997 and 1998 losses were due to an over
reliance on bonds and exposure to weak Asian
currencies.
• In 1998 and 1999 the Allocation was corrected to
increase the Equity ratio.
• 1999 gains were due to higher US equity exposure but
what about 2000, 2001 ? Remember the dotcom
bubble?
• Overall it can be seen that the fund manager has been
making “follower” decisions.
• Errors in SAA can rarely be compensated by good stock
picks
Insights on the SAA Process Example SAA/TAA Performance
Actual vs.
Assumed Return (%)
-30
-20
-10
0
10
1995 1996 1997 1998 1999
SAA
TAA
5
15
-5
-15
-25
THE IMPORTANCE OF STRATEGIC ASSET ALLOCATION (SAA)
Impact on Financial Performance
Sources: Marakon Associates Research
© Geoffroy Dedieu 2013 112 Setting up a Single Family Office Sharing a few lessons and experiences
Implementing the Risk Profile
KNOW THIS GRAPH:
If a product provider promises higher returns at no additional risk … beware.
WHAT IS POSSIBLE / IMPOSSIBLE IN THE MARKET ?
• PM : Objective Market Portfolio without any lending or borrowing.
• PA - PB • Investor Portfolios taking into
account the risk/return preferences of investors A & B.
• PA & PB have to be along the Capital Market Line (CML).
• PA & PB are at the intersection of the CML and the investors investment indifference curves.
• PA & PB contain different levels of lending/borrowing.
• PA & PB then have to be translated into Strategic Asset classes, Tactical Asset categories and individual Stocks.
Defining the Optimal Portfolio
Investor A
Risk Averse
(lends)
Portfolio
Returns Investor B
Risk Seeking
(borrows)
Risk Level
Possible Equity Market
Investments
Capital Market
Line - CML
(blue/below)
Risk-Free
Rate
(Rf)
Efficient Set
(green/above)
0
PB
PA
PM
© Geoffroy Dedieu 2013 113 Setting up a Single Family Office Sharing a few lessons and experiences
SAA EXAMPLE
Equities Neutral*
Regions North America, Emerging Markets Eurozone, Japan
Sectors Energy, Materials, Consumer
Staples, Health Care Consumer Discretionary, Financials
Styles Large cap growth Small cap value
Asset Class Rating Overweight Underweight
Cash Overweight
FX GBP, CHF USD, EUR
Convertible bonds; short-dated financial issues Long Corporates, high yield
Commodities Agriculture Industrial metals
Hedge Funds Global macro, fixed income, volatility arbitrage Equity hedge, credit long-short
Real Estate US real estate, Asian real estate Swiss real estate
FX CHF USD
* Neutral stance due to equity exposure through convertible bonds
Bonds Underweight
Overweight Alternatives
Duration & Segments
© Geoffroy Dedieu 2013 114 Setting up a Single Family Office Sharing a few lessons and experiences
FOCUS ON SOME ASSET CLASSES
Summary of Main Asset Classes
Bonds & Cash
• See the bonds / fixed income section.
Equities
• No covered here, subject of numerous reviews and easily available online information.
Alternatives
• See Hedge Funds.
• See Options.
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9c
© Geoffroy Dedieu 2013 116 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT ROLE CAN BONDS PLAY IN A PORTFOLIO ?
• Payment of specified interest rate during the life of the
bond and repayment of face value called “principal”
when it matures, or comes due.
• Although bond prices may fluctuate with the business
cycle, principle is usually returned upon maturity.
• Opportunity to generate a steady income stream that
preserves/ increases capital and provides stability to
the portfolio by diversifying across asset classes.
• Different risk exposures throughout countries,
currencies and sectors.
• Interest-rate risk controlled via active duration
management: a bond portfolio should be built with
staggered (laddered) maturities. Make sure you monitor
your Weighted-Average Duration and Maturity Ladder
(see example).
A bond is a debt security issued by a government, municipality, corporation, or other entity.
• Considered as a conservative investment for wealth
preservation.
• Not too much exposed to the equity markets’
fluctuations, although correlation increased sharply at
various points during the 2008-2009 crisis.
• In the context of a weaker and longer-stretched
economic recovery.
• Yields rising to an equilibrium level of around 2.5%
for the 10-year Treasury rate (?)
• Equities / shares expected to earn low total share
returns (TSR) over the next two decades.
• Look for a yield pickup by choosing best value
amongst issues: the official “rating” is not always the
best indicator of signature risk. Apply same “value”
principle to bond lines as you would to equity lines.
For example: check the debt/equity ration, cash
cover of coupons, major geographical drivers of
sales growth.
Portfolio Rationale Characteristics
© Geoffroy Dedieu 2013 117 Setting up a Single Family Office Sharing a few lessons and experiences
TYPES OF BONDS
• « Munis », debt obligations issued by US states,
European regions/provinces/lander and other local
governmental entities.
• To finance capital investment and cash flow needs for
the public good.
• Exemption of interest income from federal and state
taxes.
• High degree of safety with regard to payments.
• Outstanding municipal debt of more than $2 trillion.
• Approximately 50,000 issuers.
• Minimum investment of $5,000
• Over-the-counter (OTC) market, negotiation of price
rather than use of an auction system.
• U.S. Treasury securities
• The largest and most liquid debt market, where
trading occurs 24 hours a day.
• Backed by “full faith and credit” and ability to raise
tax revenues and print currency.
• No “credit risk “ with very low interest rates.
• $4 trillion in outstanding marketable Treasury debt.
• Three types :
• bills with maturities of less than 1 year;
• notes with maturities from 1 to 10 years
• bonds with maturities of greater than 10 years.
• Others Government Bonds
• Sovereign issuers and country credit ratings.
• Worldwide diversity and exposure.
• The more volume outstanding, the more liquid the
market is likely to be.
Government Market Municipal Market
© Geoffroy Dedieu 2013 118 Setting up a Single Family Office Sharing a few lessons and experiences
TYPES OF BONDS
• $5 trillion obligations in the OTC market.
• Issued by private and public companies in multiples of
$1,000 and/or $5,000.
• A wide range of structures, coupon rates, maturity
dates, credit quality and industry exposure.
• A stated rate of interest, usually semi-annually.
• Taxable interest payments.
• Capital and operating cash flow purposes.
• They do not give an ownership interest in the issuing
corporation (except convertible bonds).
• Benefits:
• Attractive yields
• Dependable income
• Diversity
• Marketability
• Purchase of an interest in pools of loans:
• Mortgage-Backed Securities (MBS)
• Created when loans are packaged, or “pooled”.
• Ownership interest in mortgage loans.
• Made by financial institutions as savings and loans,
commercial banks or mortgage companies.
• To finance residential properties.
• Asset-Backed Securities (ABS)
• Form of credit enhancement.
• Backed by financial assets: credit card receivables,
auto loans and leases or home equity loans.
• Sale to a special-purpose vehicle (SPV), usually a
corporation => sale to a trust => repackage of loans
as interest-bearing securities and issuing.
MBS/ABS Market Corporate Bond Market
© Geoffroy Dedieu 2013 119 Setting up a Single Family Office Sharing a few lessons and experiences
KEY BOND INVESTMENT CONSIDERATIONS
• Interest rate can be fixed, floating or payable at
maturity.
• Maturity is the specific future date on which the
principal will be repaid.
• Short-term notes: maturities of up to five years;
• Intermediate notes/bonds: maturities of five to 12
years;
• Long-term bonds: maturities of 12 or more years.
• Yield: return earned on the price paid and the interest
payment received.
• Current yield, annual return on the amount paid for the
bond and is derived by dividing the bond’s interest
payment by its purchase price.
• Yield to maturity and yield to call, total return received
by holding the bond until it matures or is called.
• Yield curve, the link between maturity and yield
• A line between the yields available on securities of
different maturities, from shortest to longest.
• The longer the maturity is, the greater the risk will be.
• Credit quality, issuer’s ability and willingness to make
interest and principal payment when due.
• Credit Ratings depending on issuer’s financial condition
and management, economic and debt characteristics,
and specific revenue sources securing the bond.
• Rating agencies: Moody’s, Standard & Poor’s and Fitch.
• AAA => Highest quality bonds
• AA to BBB => Investment-grade
• BB to B => High-yield bonds
• B to D => “Junk” bonds
• Redemption Features
• Call Provisions: issuer repays the principal at a
specified date before maturity.
• Puts: option of requiring the issuer to repurchase the
bonds at specified times prior to maturity.
• Assessing risk of a bond based on its return, its price
and its rating.
Rating Rates & Yield
© Geoffroy Dedieu 2013 120 Setting up a Single Family Office Sharing a few lessons and experiences
HOW TO INVEST ?
Individual Bonds
• New bonds on the over-the-counter (OTC) market in
$100,000 denominations.
• Trade of outstanding bonds (already issued) on the
secondary market in $100,000 increments.
• Bond price depends upon the size of transaction, the
type of bond, the amount of service the firm provides.
• Markup, the dealer’s costs and profit, is included in the
price as well.
Bond Funds
• To offer professional selection and management of a
portfolio of securities.
• Do not have a specified maturity date
• “Open-end” funds: buy or sell shares in the fund at
any time.
• “Closed-end” funds: specific number of shares that are
listed and traded on a stock exchange.
Money Market Funds
• To pool investments in short-term, highly liquid
securities with a maturity of three months or less.
• To offer convenient liquidity, since the money can be
withdrawn at any time.
• No assurance that the fund will be able to maintain
a stable net asset value of $1.00 per share.
• Minimum initial investment between $1,000 and
$10,000.
Bond Unit Investment Trusts
• A stable portfolio of investments across all bonds
subclasses, professionally selected.
• Not an actively managed pool of assets => no
management fee but charges to cover evaluation
expenses and trustee fees.
• Minimum initial investment between $1,000 and
$5,000.
• End of the trust upon maturity of the last
investment.
© Geoffroy Dedieu 2013 121 Setting up a Single Family Office Sharing a few lessons and experiences
Beware: if you invest with “managers” (i.e. bond funds), it is likely that they will trade their positions
more than a family office investing directly with a buy-to-hold strategy. Brokerage costs will be
charged to YOUR money, these costs will hardly ever be disclosed to the FO and they will impact
performance.
Strategies for bond investing range from a buy-and-hold approach to complex tactical trades.
FIXED INCOME STRATEGIES
• “Buy and hold” strategy
• invest in a bond and hold it to maturity means
• to earn interest: interest paid usually twice a year;
• to preserve principal: face value of the bond received at maturity; and
• consider yield-to-maturity or yield-to-call: higher yields can mean higher risks.
• Laddering
• Building a laddered portfolio involves buying bonds with maturities distributed over time.
• Low sensitivity to interest rate risk because of principal being returned at defined intervals.
• Opportunity to reinvest the proceeds from the bond maturity at the longer-term end of the ladder.
• If rates are rising, that maturing principal can be invested at higher rates.
• If they are falling, the portfolio is still earning higher interest on the longer-term holdings.
© Geoffroy Dedieu 2013 122 Setting up a Single Family Office Sharing a few lessons and experiences
BOND CREDIT QUALITY RATINGS BY AGENCIES
Credit Risk Moody’s* Standard & Poor’s** Fitch Ratings**
Investment grade
Highest quality Aaa AAA AAA
High quality (very strong) Aa AA AA
Upper medium grade (strong) A A A
Medium grade Baa BBB BBB
Not investment grade
Lower medium grade (speculative) Ba BB BB
Low grade (speculative) B B B
Poor quality (may default) Caa CCC CCC
Most speculative Ca CC CC
No interest being paid C D C
In default C D D
* The ratings from Aa to Ca by Moody’s may be modified by the addition of a 1, 2 or 3 to show relative standing within the category.
** The ratings from AA to CC by Standard & Poor’s and Fitch Ratings may be modified by the addition of a plus or minus sign to show relative
standing within the category.
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9d
© Geoffroy Dedieu 2013 124 Setting up a Single Family Office Sharing a few lessons and experiences
Two very different reasons
• Diversification: you are trying to broaden your exposure,
chase some extra performance and lower the overall risk
of the portfolio. This applies to Commodities, Art, Real
Estate… or..
• Access to skills and techniques unavailable to the FO as
direct investor: you are trying to gain access to risk/return
trade-offs which the FO cannot reach on its own for lack
of resources. You want a wider range of investment and
trading activities than what you can do in-house. This
applies to what people call Hedge Funds.
The usual pitfall is that FO’s confuse these 2 reasons.
• Some Alternative assets can offer the same level of cost
and risk management: Commodities, Art, Real Estate.
These do not necessarily require the FO to delegate
management.
• Some require a delegation of asset management and
make it difficult for the FO to consolidate its cost analysis
and compile its risk metrics: Hedge Funds.
• What the FO will and will not do in this asset class needs
to be clearly defined in the Investment Beliefs and
Guidelines.
WHY DO WE NEED ALTERNATIVE ASSETS?
Five Main Hedge Fund Styles
• Directional portfolios tend to employ top-down
analysis of macroeconomic and financial conditions
to uncover pricing inefficiencies that often arise in
countries as a result of political or economic
changes at both a regional and national level.
• Long/short equities strategies trade long and
short without any particular restriction on the
degree of net long or short exposure.
• Event Driven take advantage of special corporate
situations like M&A or distress.
• Arbitrage strategies typically exploit pricing
anomalies between related securities within and
between markets.
• Managed futures invest on both the long and short
side of the market and usually apply technical
analysis, systematic investment processes.
Understanding Hedge Funds
© Geoffroy Dedieu 2013 125 Setting up a Single Family Office Sharing a few lessons and experiences
ARBITRAGE
Convertible
arbitrage Event driven
Fixed income
arbitrage
EVENT DRIVEN
M&A Distress Strategic
Shift
DIRECTIONAL
Emerging
markets Global macro Opportunistic
HEDGE FUNDS STYLES
MANAGED
FUTURES
Discretionary Fast trading Trend following
LONG /
SHORT
Geographical
exposure Net bias Sector focus
© Geoffroy Dedieu 2013 126 Setting up a Single Family Office Sharing a few lessons and experiences
WAS MADOFF AVOIDABLE?
• In 1998, the near collapse of Long Term Capital
Management spawned a global liquidity crisis and
called for regulatory scrutiny in the Hedge Fund
industry's largely unregulated domain.
• At one time, Long-Term Capital Management was
the largest hedge fund in history with more than
$100 billion in assets. Its partners included
legendary bond trader John Meriwether, and
Nobel Prize-winning economists Robert Merton
and Myron Scholes.
• There was a general lack of transparency of the
LTCM fund and there was an extremely high level
of leverage involved, magnifying the risk
exposures.
• LTCM was essentially a one-manager hedge fund
that was open to institutions only and focused
primarily on a single strategy : Arbitrage (see later
slide).
The LTCM Debacle
LTCM and Madoff had similar issues: poor legal structuring and lack of transparency.
Central
Custodian
Brokers
Investment
Fund
Fund
Manager
Portfolio
Trustee
(if unit-trust
fund)
Fund
Adminis-
trator
Auditors
1. The FM structure
was not properly
audited and had no
functioning board of
directors.
2. Brokers were “in-
house” or handled only
a portion of the deals.
3. Custodian and
Administrator were not
separate. Custodian did
not verify the existence
of underlying assets.
5. Auditors were not a
large firm with robust
Compliance. They also
failed to audit the
underlying assets and
confirm their existence.
4. The main “fund” had
no direct assets but
only sub-funds.
Nobody verified the
existence of the sub-
fund assets.
Madoff: How to Structure a Fraud
© Geoffroy Dedieu 2013 127 Setting up a Single Family Office Sharing a few lessons and experiences
BASIC PRECAUTIONS AFTER MADOFF
• Do not use funds-of-funds.
• Prefer single-manager + single strategy funds.
• Demand GIPS compliance.
• Ensure administrators and custodians are separate.
• Do not invest in offshore funds with low
transparency and disclosure requirements.
• Beware of funds where insider trading is a risk.
• “In 2008, the hedge fund industry lost more money than all
the profits it had generated during the previous ten years”.
Simon Lack, The Hedge Fund Mirage .
• According to Alternative Investment Management
Association (AIMA 2010), managers capture 28% of profits
and investors only 72%.
• i.e. : They play with your money, they keep almost a third of
profits and 0% of losses.
Basic Principles for the FO
To Keep in Mind …
Source: The Economist 2011
© Geoffroy Dedieu 2013 128 Setting up a Single Family Office Sharing a few lessons and experiences
FINALLY: UNDERSTAND THIS …
OTHERWISE DO NOT BUY ANY OPTION-BASED PRODUCT
Gain
Loss Premium
Share Price
Gain
Loss Premium
Share Price
Gain
Loss Premium
Share Price
Gain
Loss Premium
Sell a Put Sell a Call
Buy a Put Buy a Call
Premium
Price
Premium
Price
Premiu
m Price
Premiu
m Price
0
0
0
0
Share
Price
Strike
Strike
Strike
Strike
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9e
© Geoffroy Dedieu 2013 130 Setting up a Single Family Office Sharing a few lessons and experiences
TRADING PROCESS & PLATFORM
(with a portfolio grouped into 1 controlled fund)
Compliance
Pre-Trade
Post-Trade
Trading
Order Management
Liquidity
Connectivity
Portfolio
Construction
Asset Allocation
Portfolio Modelling
Drift Analysis
Post Trade
Allocation
Broker/Custodial
Notification
Ad
ve
nt
ove
rvie
w (
MO
XY
)
Order placed either electronically or via phone
Trade decided between FO
and Fund Manager
• Asset Allocation
• Geographic Sector
• Industry Sector
• Research
• Market available volumes &
order size
Broker receives order and
executes in market
• Execution style (VWAP, AT
MARKET)
• Market Impact
• Execution venue (Exchange,
Dark Pools)
• Cost
• Discretion
Executed trade is
reported to custodian
• Confirmation
• Settlement
• Delivery vs. Payment
(DVP)
• Consolidation
• Reporting to client
Regulatory Best-Execution rules apply
Bank A
Bank B
Custodian 1
Broker A
Indirect Order
Bank B trading platform
Broker B (Bank B broker)
Direct order
(DMA or EDA)
Portfolio Managers & Investment Management Committee
Family
Office
SAA
Fund
Manager (if not the FO) Investment
Fund
Shares
© Geoffroy Dedieu 2013 131 Setting up a Single Family Office Sharing a few lessons and experiences
TRADING PROCESS & PLATFORM
What you need to know about types of market orders.
Non-automated orders
• Market order: At the best price available at the time the order is
placed.
• Best effort order: Does not need to be executed immediately. • Rare in G7 countries.
• Market-on-open order: Order executed at the opening price. • Usually when there is a time-zone difference.
• Limit Order: Order executed when the market price reaches the limit. • Limits include Good for Day (GFD) and Good to Cancelled (GTC): if the limit is
not reached within the day or before cancellation, the order is no longer valid.
• In electronic markets, order priority rules encourage simple market
and limit orders.
Automated orders
• Most banks now offer algorithmic trading services. • These programmes allow investors to buy or sell according to pre-determined
strategy.
• The algorithms are usually liquidity-sensitive (tap volumes), price-sensitive
(benchmarked price, volatility measure), time-sensitive (pacing, weighted
average).
• Some programmes embed complex order tactics.
Family Offices need to understand (if not define) the type of orders they want and the way each
order needs to be “worked” in the market to get the best price.
* Source: Wikipedia, SEC, UK-FCA
Dark Pools What are the various types of market orders?
• Dark pools are liquidity pools that are not
available on public markets. • When investors place an order to buy or sell on an
exchange, the exchange typically makes that order
available for the public to view. With some dark
pools, however, investors are able to signal that
they have an interest in either buying or selling a
security. But that so-called indication of interest
(IOI) is communicated only to a subset of market
participants.
• Allows funds to buy/sell large volumes without
moving the market.
• Volumes traded are generally considered
Other-the-Counter (OTC).
• Controversy: when the same securities are
traded on a public exchange, does the public
get a fair deal? • In 2009 the Securities and Exchange Commission
(SEC) announced that it was proposing measures
to increase the transparency of dark pools.
© Geoffroy Dedieu 2013 132 Setting up a Single Family Office Sharing a few lessons and experiences
TRADING PROCESS & PLATFORM
What you need to know about order routing.
• The FO needs to understand leading standards (FIX) and regulatory
requirement (SEC in the USA, FCA in UK).
• FIX standards: The Financial Information eXchange (FIX) protocol is an
electronic communications protocol initiated in 1992 for international real-
time exchange of information related to the securities transactions and
markets. • FIX has become the standard electronic protocol for pre-trade communications and
trade execution.
• Direct market access (DMA) is an electronic trading facility that gives
investors wishing to trade in financial instruments a way to interact with the
order book of an exchange. • Normally, trading on the order book is restricted to broker-dealers and market making
firms that are members of the exchange.
• Using DMA, a family office (buy side) utilise the information technology infrastructure
of sell side firms such as investment banks and the market access that those firms
have, but control the way a trading transaction is managed themselves rather than
passing the order over to the broker's own in-house traders for execution.
• Best execution refers to the duty of an investment services firm (such as a
stock broker) executing orders on behalf of customers to ensure the best
execution possible for their customers' orders. • Some of the factors the broker must consider when seeking best execution of their
customers' orders include: the opportunity to get a better price than what Is currently
quoted, and the likelihood and speed of execution.
Family Offices need to monitor their trading risks. You can rely on Best-Execution rules … but
you need to understand how your orders are routed and which price you are getting.
* Source: Wikipedia, SEC, UK-FCA
How is your order executed in
the market?*
Trading
Order Management
Liquidity
Connectivity
Order placed either electronically or via phone
Broker A
Indirect Order
Bank B trading platform
Broker B (Bank B broker)
Direct order
(DMA or EDA)
How is your order executed in the market?*
A SFO needs to have a Bloomberg or Reuters
platform to monitor its own orders, prices and
volumes on the relevant exchanges.
© Geoffroy Dedieu 2013 133 Setting up a Single Family Office Sharing a few lessons and experiences
TRADING PROCESS & PLATFORM
Delivery Versus Payment
1. Trade order
by Client
3. Trade confirmation
Market
5. Cash
7. Securities DVP
4. DVP instruction
2. Dealing
Instruction
6. Purchase
Bank B
ABC Ltd
Client
Prime
Broker
Custodian 1
Bank A
OR
Broker B (Bank B’s
external broker)
Delivery Versus Payment is a common form of settlement for securities. The process involves the
simultaneous delivery of all electronic documents necessary to give effect to a transfer of
securities in exchange for the receipt of the stipulated payment amount (usually via SWIFT).
Source: Wikipedia
Start
End
© Geoffroy Dedieu 2013 134 Setting up a Single Family Office Sharing a few lessons and experiences
Bank B
Back Office
TRADING PROCESS & PLATFORM
Using a Private Bank
Market
Calls or
speaks to …
Most cumbersome and most expensive way to access the Market. Most Private Banks use internal
dealing rooms, which have no access to the market but only further access to external brokers.
Client
Start
End
Bank B
Relationship
Manager
ABC Ltd
Client
OR
Family
Fund (if not the FO)
Securities
Order
Bank B
Private Bank
Dealer
Bank B
Global Markets
Dealer
YES
NO FX, Options, SWAPs
Execution
Broker B (Bank B’s
external broker)
Confirmation
Bank B
Relationship
Manager RM sends
confirmation
to client
Client A SFO needs to understand the costs associated to a private bank’s intermediated / multi-layered trading
process: Internally the private banker (RM) will need to make a return on the transaction and the bank’s
“dealers” will have their own cut / margin added. Then the external broker will charge brokerage and other fees.
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting a) Defining your Beliefs & Principles
b) Portfolio Theory
c) Focus on Bonds / Fixed Income
d) Focus on Alternatives: Hedge Funds and Options
e) Basics of Trading
f) Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
9f
© Geoffroy Dedieu 2013 136 Setting up a Single Family Office Sharing a few lessons and experiences
PRIMER ON PORTFOLIO MANAGEMENT / REPORTING SYSTEMS
Swiss systems tend to
cater to EAM (External
Asset Managers) and
focus on calculation of
back-door commissions
for the “manager”.
• Beware of systems
catering to jurisdictions
where the main focus is on
calculating (undisclosed)
retrocessions, … rather
than providing quality
portfolio performance
reporting.
Buy a market-leading
software for family
offices.
• Focus on following
international reporting
standards and monitoring
risks (GIPS).
© Geoffroy Dedieu 2013 137 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT TELLS YOU THAT YOUR BANK PORTFOLIO STATEMENT IS
ACCURATE?
Reporting from your SFO
• If your SFO uses a regulated fund to manage your
assets, the fund can/should be independently
audited.
• The SFO, using industry-standard software, should
report performance on GIPS basis.
www.gipsstandards.org/
Reporting to Private Banking Clients
• The client’s bank is audited, but not the account
statements received by clients.
• Nobody independently verifies client portfolio
statements.
• Most private banks are still struggling with Global
Investment Performance Standards … and client
performance reports are often not compliant with GIPS.
Portfolio statements provided by banks to clients are un-audited and often not GIPS compliant
Global Investment Performance Standards
(GIPS)
• “By demanding GIPS compliance from the asset
managers they hire, asset owners promote good
practice based on the ethical principles of fair
representation and full disclosure.” CFA Institute -
Market Integrity Insight, 28 March 2013
© Geoffroy Dedieu 2013 138 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE PORTFOLIO DASHBOARD
© Geoffroy Dedieu 2013 139 Setting up a Single Family Office Sharing a few lessons and experiences
EXAMPLE WORKFLOW - FUND ADMINISTRATION AND ACCOUNTING
Shareholder
Services
Record
Keeping Trade
Processing
Financial Reporting
Tax & Compliance
Sec/Port
Valuation Recon
Income &
Exp.
Collateral
Mgmt
Reporting
& Corp.
Action
Pricing &
Risk
Mgmt
Cash &
Data
Mgmt
Trade
Capture
& Mgmt
Trade Date Reporting & Middle Office Solutions Fund Accounting Fund Administration Transfer Agency
Trade
Validation
&
Enrichment
Trade
Matching
&
Confirmation
Failed Trade
Mgmt
Reconcile
with 3rd
parties
Export and
Reconcile to
Prime Broker
Cash
Reporting &
Admin
Institutional
Portfolio
Record
Keeping
Asset
Reference
Data Mgmt
Claims
Mgmt
Asset
Pricing
Operational
Risk Mgmt
Mgmt
Reporting
Corporate
Action
Admin
Investor
Allocations
and fees
Eligibility
Analysis
Net
Exposure
Calculation
Dispute
Support
Processing
Falls Mgmt
General
Ledger
Mgmt
Budget Maintenance
Monthly
Close
Automated
fees &
Allocation
End-of-day
P&L
Recon
Trade Data
Daily Cash
Recon
Position
Recon
NAV
Calculation
Investment
Tracking
Pricing
Distribution
Integrated
Risk
Reporting
Price
Verification
Daily
Economic
Distribution
Mgmt
Perform
Fees
Tax
Services
Compliance
Annual
Reporting
Daily
Portfolio Performance
Semi-
Annual
Reporting
Track
Transaction
Cash
Processing
Record
Ownership
Changes
Maintain
Security
Holder
Records
Share-holder
Reporting
Dividend
Distribution
Anti-Money
Laundering
ERISA
Monitoring
Investor
Eligibility
© Geoffroy Dedieu 2013 140 Setting up a Single Family Office Sharing a few lessons and experiences
REPORTING BEYOND FINANCIAL ASSETS.
A Single-FO needs to combine governance and reporting standards
Emerging Trends / Best Practices
• Family Offices are now producing
statements of the value-add they
contribute to the family.
• An increasing portion of SFO’s use
secured intranet platforms to share
information, examples: http://office.microsoft.com/en-au/sharepoint/
http://www.roambi.com/
• FO’s tend to increase the customisation of
reports to family members based on
profiles.
• Asset-class look-through reports using
data aggregators (larger FO’s). In
particular, the changes in SAA over time
provides key insight into performance.
• Environmental Social & Governance
reports.
What Should be in a Comprehensive
Wealth Report* ?
• Statement of Net Worth, by asset class;
• Performance report and analysis, with market/economic review;
• Relevant Balance Sheets (follow IFRS or other common accounting
standard, use external auditors for significant entities);
• Risk report • risk metrics: VaR, Sharpe Ratio • risk dimensions: volatility, geography, currency, duration, role (liquidity / income /
growth), liquidity level, directionality, passive / active.
• Income and Expenses of family member and Family Office (as % of
assets) with benchmarks compared to UHNWI.
• Cashflow summary: income, dividends, coupons, properties rentals;
• Tax review;
• Insurance dashboard (assets covered, risks covered, people covered);
• Goals and projection models;
• Estate plan progress.
The FO must be equipped to report holistically on wealth and measure assets, cashflows, risks
and returns for family members / structures. Performance should be measured against stated
goals and targets.
*Source: Family Office Exchange
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
10
© Geoffroy Dedieu 2013 142 Setting up a Single Family Office Sharing a few lessons and experiences
UHNW FAMILIES, LIKE ALL FAMILIES, OWN DIVERSE ASSETS
UHNW Families own around 50% of their non-business assets in non-financial assets.
• The family office’s ability to manage those assets is as important as financial portfolios.
• Non-financial assets are typically not managed by private banks and multi-family offices as these businesses do
not have a clear revenue model to derive income from such assets.
• They would typically recommend fund investments, bringing non-financial assets classes back into investment
funds which generate fees.
What are you good at? What do you really know about professional real estate management or
art investing?
• Skills and information need to be developed / acquired by the Family Office.
• Hire the right people for the right asset class.
• Develop an adequate infrastructure for each asset class: IT systems (accounting, performance reporting). A good
example is the difference between Sage 200 (or 50) for general accounting purposes and Sage Construction
module (http://www.sage.co.uk/product-information/construction/index.html).
Real assets or non-financial assets need to be invested in with the same rigor and discipline.
• Define your investment targets;
• Measure performance of your investments;
• Buy and sell with discipline.
© Geoffroy Dedieu 2013 143 Setting up a Single Family Office Sharing a few lessons and experiences
LOOKING AT WEALTH BEYOND FINANCIAL MARKETS
Africa 1%
Asia 23%
China 9%
India 1%
Europe 31%
Latin America
4%
North America
31%
2012 Total Net Wealth (in USD value)
(25)
(15)
(5)
5
15
25
35
45
55
65
75
85
95
2012 Wealth per Adult (%)
Financial Other Debts
Source: 2012 Credit Suisse Global Wealth Report
%
© Geoffroy Dedieu 2013 144 Setting up a Single Family Office Sharing a few lessons and experiences
WHICH ASSET CLASSES ARE WE TALKING ABOUT?
Real Estate.
• Buy or build / develop?
• Rent or resale?
• Residential, Commercial, Industrial.
Private Equity.
• Private Equity or Venture Capital?
• What type of deal?
• What stage?
• Family NextGen incubation?
• The primary incubator function has been described as increasing the
chances of an incubated firm surviving its formative years (Allen and
Rahman 1985).
Art.
• Collection or dealing?
• Own artists or others’ artists?
• What era / style?
Others.
• ???
Some Data on SFO Asset Allocation Some Assets UHNW Families can invest in …
-
5
10
15
20
25
30
352012 Asset Allocation of US Family Offices*
(%)
Source: 2013 Family Office Exchange, data is
median and does not add up to 100%.
© Geoffroy Dedieu 2013 145 Setting up a Single Family Office Sharing a few lessons and experiences
Define target returns per asset class.
Obviously the higher the expected returns the higher the risk. Be aware of both side of the coin. There is no such world
where returns would increase and risks remain the same…
Examples:
• For a conservative investor:
If LIBOR + 200 bps makes sense for a conservative portfolio of financial assets.
Expect LIBOR + 400 bps for Residential Real Estate in a global portfolio across USA + Europe + Asia.
Expect LIBOR + 20% on early stage venture capital.
Define other benefits:
Examples:
• In the case of Private Equity: Are there synergies with existing family businesses?
• Art: can the FO leverage the family’s home connections?
• Real Estate: Can the FO start its portfolio by gathering some existing family properties and improving the management?
HOW DO WE MEASURE PERFORMANCE
ACROSS VARIOUS ASSET CLASSES?
© Geoffroy Dedieu 2013 146 Setting up a Single Family Office Sharing a few lessons and experiences
ADVANTAGED DECISION MAKING
YOU NEED TOOLS TO GATHER AND ANALYSE DATA
“The most meaningful way to
differentiate your company from your
competition, the best way to put
distance between you and the crowd,
is to do an outstanding job with
information. How you gather, manage
and use information will determine
whether you win or lose.”
Bill Gates, March 1999
Source: FT IT, October 18, 2000
© Geoffroy Dedieu 2013 147 Setting up a Single Family Office Sharing a few lessons and experiences
HOW DO WE MEASURE PERFORMANCE?
Some jargon (see Appendix for more)
• Performance Targeting
• Corporate Level
• Performance Measurement
• Corporate Level
• Performance Targeting
• Corporate Level
• BU Level Measurement
• Performance Measurement
• Corporate Level
• BU Level Measurement
• Signaling Tool - Value Creation in a single period
• Signaling Tool
• Decision Criteria - expressed as NPV of cash flow or
economic profits plus current capital employed
How We Use It
• Total Shareholder Returns -
Capital Appreciation plus
Dividends Yield over a defined
period of time
• Comprehensive single period
measure of profitability
(value creation)
• Warranted Equity Value (Intrinsic
Value)
Definition
TSRs
Economic Profit
WEV
Jargon
© Geoffroy Dedieu 2013 148 Setting up a Single Family Office Sharing a few lessons and experiences
Chapters
10a 1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets a) Example: Properties
b) Example: Art
c) Example: Private Equity and NextGen Business Coaching
11.Structuring International Wealth for Future Generations
© Geoffroy Dedieu 2013 149 Setting up a Single Family Office Sharing a few lessons and experiences
UHNW FAMILIES CAN INVEST IN GLOBAL REAL ESTATE MARKETS
Source: 2013 Jones Lang LaSalle
Highly transparent
Transparent
Semi-Transparent
Low Transparency
Opaque
As indicated by the Jones Lang LaSalle Global transparency Index (2013), UHNWI now have a
wide choice of international real estate markets to invest in.
© Geoffroy Dedieu 2013 150 Setting up a Single Family Office Sharing a few lessons and experiences
ASIAN FAMILIES HAVE ENJOYED A FORMIDABLE RUN OF REAL ESTATE
PRICES SINCE THE 1990’s
Melbourne
Sydney
Mumbai
Bangalore
Delhi Hong Kong
Guangzhou
Shanghai
Seoul Beijing
Osaka
Tokyo
Singapore
Bangkok
Source: LaSalle Investment Management
Investible Real Estate Markets in Asia (2007)
• There is a strong correlation between real estate
wealth and overall wealth creation in Asia.
• Up to the mid-80’s wealth was created /
concentrated in a handfull of cities only (Mumbai,
Hong Kong, Singapore, Taipei, Bangkok)
• Now there are dozens of cities with several million
habitants, strong local economies and “investible”
real estate markets.
Wealth Creation is Spreading Geographically
The Range of Investable Markets has Expanded and Continues to Grow.
© Geoffroy Dedieu 2013 151 Setting up a Single Family Office Sharing a few lessons and experiences
What do people use as metrics in the Real Estate world?
• Look at private portfolio companies, quasi-Private Equity (real estate restructuring) and mutual funds.
Three main metrics are used, for different purposes.
• Fair Market Value: this is a requirement under accounting and auditing guidelines (International Financial Reporting
Standards).
• FMV is compulsory “measure” as part of IFRS. It will be embedded into accounting figures.
• IRR and NPV: Internal Rate of Return and Net Present Value. This is used by all Real Estate players for decision-making
purposes. When you want to decide whether to BUY or SELL.
• The IRR is a way to include all investment elements into one ratio: rental yield, expenses, capital gains, taxes, currency.
• NPV allows us to re-base investment decisions on a comparable benchmark. It includes all relevant factors, not just Gross Yield: growth, costs,
interests, taxes, FX, capital appreciation.
• NPV is always comparable, whatever the Geography, rental yield, Currency and capital gains. NPV allows investors to put all go /no-go
decisions on a comparable footing (especially if we have capital allocation choices between different countries).
• Yield: this is an important metric for Cash Flow planning. It is used for loan repayment assessments. Not used to
compare properties or decide to BUY /SELL.
• The idea is: Do we generate enough Free Cash Flow to allow us to meet bank loan repayments (interests and principal) so as to be sure we do
not run a default risk.
• Gross Yields are not comparable from one market / jurisdiction to another.
HOW DO WE MEASURE PERFORMANCE?
Example : Real Estate
© Geoffroy Dedieu 2013 152 Setting up a Single Family Office Sharing a few lessons and experiences
HOW DO WE TAKE DECISIONS?
Example : Real Estate – Scenario Planning (1 – Assumptions)
152
GDP Growth
2005 2006 2007 2008 2009 2010 2011 Average
USA 3.10% 2.70% 1.90% -0.30% -3.10% 2.40% 1.80% 1.21%
UK 2.80% 2.60% 3.60% -1.00% -4.00% 1.80% 0.80% 0.94%
Singapore 7.33% 8.83% 8.88% 1.83% -0.90% 14.85% 4.98% 6.54%
Inflation
2005 2006 2007 2008 2009 2010 2011 Average
USA 3.38% 3.23% 2.87% 3.85% -0.35% 1.63% 3.17% 2.54%
UK 2.04% 2.32% 2.34% 3.61% 2.18% 3.31% 4.48% 2.90%
Singapore 0.48% 0.97% 2.09% 6.61% 0.62% 2.83% 5.24% 2.69%
Growth Rates
USA UK Singapore
Rental Yield Growth 2.54% 2.90% 2.69%
Investment Gain 1.21% 0.94% 6.54%
Tax Rate 39% 28% 17%
FXC Gain/Loss (15 years) 0% -5% 30%
Ke (using mortgage rates)
USA 3.00%
UK 3.20%
Singapore 2.50%
Base Data
Assumptions
© Geoffroy Dedieu 2013 153 Setting up a Single Family Office Sharing a few lessons and experiences
HOW DO WE TAKE DECISIONS?
Example : Real Estate – Scenario Planning (2 – Playing with Scenarios)
Investment Gain 2% USA and UK, 3% Singapore
Rental Yield Growth 2% USA and UK, 2% Singapore
FXC Gain/Loss (15 years) 3% Singapore, GBP not depreciating
Ke, Discount Rate 3% UK, USA and 5% Singapore
Investment Gain 7 years based on GDP growth
Rental Yield Growth 7 years based on Inflation
FXC Gain/Loss (15 years) based on average of last 15 years
Ke, Discount Rate Based on local mortgage rates
Capital Charge (Book * Ke) Applied on NAV
Net Present Value NPV based on Economic Profit
Based on Macro Data (USD) Singapore Adjusted Downwards (USD)
-
10
20
30
40
50
60
70
USA UK Singapore
Millio
ns
Today
NPV
-
10
20
30
40
USA UK Singapore
Millio
ns
Today
NPV
© Geoffroy Dedieu 2013 154 Setting up a Single Family Office Sharing a few lessons and experiences
USD -
USD 10
USD 20
USD 30
USD 40
USD 50
USD 60
USD 70
USA UK Singapore
USD Millions
Today NPV
• The question is : What do we need to believe to
make these figures acceptable to us and make a
decision?
• If you cannot believe it … change the assumptions and
see what happens!
• That is what scenario planning is about.
• NPV can be used even in case you need to make a
Capital Allocation decision outside of Properties (this
will happen…).
• You can play with key assumptions to model your
scenarios:
• Rental Yield Growth
• Investment Gain
• Tax rates
• FXC Gain/Loss (15 years)
• Ke : cost of equity
Using Scenarios and NPV to make Decisions
HOW DO WE TAKE DECISIONS?
Example : Real Estate – Scenario Planning (3 – Output)
Using Scenarios and NPV to make Decisions
© Geoffroy Dedieu 2013 155 Setting up a Single Family Office Sharing a few lessons and experiences
Chapters
10b 1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets a) Example: Properties
b) Example: Art
c) Example: Private Equity and NextGen Business Coaching
11.Structuring International Wealth for Future Generations
© Geoffroy Dedieu 2013 156 Setting up a Single Family Office Sharing a few lessons and experiences
THE ART MARKET IS NOW A GLOBAL MARKET (1)
China 41%
USA 27%
UK 18%
France 4%
Germany 2%
Switzer-land 1%
Others 7%
2012 Fine Art Auctions (in USD value)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,0002011/2012 New Auction Records
Contemporary Artists (USD)
New Record Previous Record
Source: 2013 ArtPrice
© Geoffroy Dedieu 2013 157 Setting up a Single Family Office Sharing a few lessons and experiences
THE ART MARKET IS NOW A GLOBAL MARKET (2)
Asian Explosion
• ZHANG XIAOGANG
bloodline series, oil on canvas
signed in Chinese & Pinyin
• dated 2001, 200×300 cm
• RMB: 16,800,000 (2012)
Who buys What
Source: Poly Auction 2013, ArtPrice
Chinese Contemporary Artists have Global Reach
Who buys Asian Art?
• Most of the « stocks » of Asian art are still kept in the USA
and Europe …
• … but new pieces coming to the market are increasingly
grabbed by Asians.
• Hong Kong is the largest market place in Asia, although
Dubai plays a major role for Indian buyers.
China 12%
Hong Kong 32%
Taiwan 15%
Indonesia
8%
Asia Other
9%
Switzer-land 1%
Where are buyers coming from? (2007 HK auctions)
© Geoffroy Dedieu 2013 158 Setting up a Single Family Office Sharing a few lessons and experiences
The Art Market is Now a Global Market (3)
The Chinese art market
• The Chinese art market has proven to be the most successful art market within any emerging economy and art
market and may, to a certain extent, act as a prototype for the characteristics and type of monetary success which
can be gained from prudent investment in other emerging markets.
• Unlike the traditional structure of the western art market, China’s initial growth occurred as a result of several auction
houses Sotheby’s and Christies included, along with local houses within China and Hong Kong, became the main
backers of the fledgling market.
• Throughout the past five years, Chinese contemporary art has featured extensively in Sotheby’s and Christies
Contemporary Evening auctions. With prominent galleries in Berlin, London, Milan, New York and Paris, this will only
serve as further exposure and increase interest in Chinese contemporary work.
• Mainland Chinese auction houses Guardian and Poly had seen their growth in their Chinese contemporary art
seasons rise from $ 397 million in 2009 to $2.2 billion in 2010. In terms of Chinese contemporary art, Christies Hong
Kong raised $24,140,220 in November 2010, which was at the top end of the pre-sale estimate of $16,773,250.
While Sotheby’s Hong Kong recorded $22,129,120 against a pre-sale estimate of $15,038,270.
• Beijing also has one of the most well known commercial centers of art in China which features the 798 Art District or
Dashanzi in East Beijing.
© Geoffroy Dedieu 2013 159 Setting up a Single Family Office Sharing a few lessons and experiences
UNDERSTANDING THE ASSET CLASS
• Wassily Kandinsky (1866-1944)
• The Archer, Print-Multiple , Woodcut , 16.5x15.3 cm
• Auction starts on 05/23/2013, Starting bid: 2,500 $
• 2024 auction records. 7 Nov 2012 Wassily
KANDINSKY who set a new personal world record of
$20.5m with his Studie für Improvisation 8.
• Check Price levels and indices.
Key Considerations for Art Investors*
Source: *Collecting Contemporary Art, Alan Lyndemann 2006
** ArtPrice
Do your Homework**
How to buy?
• Just like for share and bonds, Art has a primary and a
secondary market.
• Buying from the primary market: buying from the artist or
his dealer / gallery. That is relevant to contemporary art.
• Buying from the secondary market: buying from a collector
or on resale from a dealer.
• Buying at auction.
• Buying at an art fair.
© Geoffroy Dedieu 2013 160 Setting up a Single Family Office Sharing a few lessons and experiences
UNDERSTANDING THE INDUSTRY
• Qiu Jie: Solo Exhibition
31 September to 26 October 2013
• Art Plural Gallery, Singapore
www.artpluralgallery.com
Understand the industry and the processes*
Source: *Collecting Contemporary Art, Alan Lyndemann 2006
** Art Plural Gallery 2013
Do your footwork**
Who are the players
• Artists.
• Art critics.
• Art dealers / galleries.
• Consultants.
• Private collectors.
• Auction houses.
• Museums.
Aspects of art management
1. Cataloguing
2. Coordination of appraisals
3. Coordination with auction specialists
4. Photography
5. Shipping
6. Packaging
7. Storage
8. Insurance
© Geoffroy Dedieu 2013 161 Setting up a Single Family Office Sharing a few lessons and experiences
ENHANCING VALUE OF YOUR ART
Buy-to-Hold
• Look to hold pieces for between 3-5 years minimum.
• Acquisitions will be selected after extensive research has been conducted on each artists back catalogue of past
show and works, supplemented with inside knowledge from gallerist and auction house experts.
• Large commissions are to be taken into account when assessing acquisitions.
• Negotiate more advantageous fees and conditions from galleries.
Manage the asset mix
• The collection needs to be actively managed in order to enhance the provenance and, thus the market value of the
art assets it holds.
Promote your artists
• Lending art assets to key museums and gallery exhibitions across the globe;
• Lobbying influential curators to include artists in key biennials and exhibitions;
• Generally promoting artists in the art market and lifestyle press, and through commissions of the artists’ work;
• Collaborating with influential galleries to promote certain artists’ reputations.
© Geoffroy Dedieu 2013 162 Setting up a Single Family Office Sharing a few lessons and experiences
Chapters
10c 1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets a) Example: Properties
b) Example: Art
c) Example: Private Equity and NextGen Business Coaching
11.Structuring International Wealth for Future Generations
© Geoffroy Dedieu 2013 163 Setting up a Single Family Office Sharing a few lessons and experiences
• Fact-finding
• Financial data
• Strategic data:
analyse market
and competition
• Understand the
macro-
economic risk
in the country
(especially EM
countries)
• Understand the
Political risks
• Aggregate data
• Compare to industry benchmark
• In the case of a PE investment (into a 3rd party business), start commercial and legal due-diligence
Is the family launching a new project that requires review and validation or is the FO looking at
investing as a PE investor?
HOW DO WE TAKE INVESTMENT DECISIONS?
Example : New Business / Project
Gather
Information
Generate
Insights
Define the
Opportunity
Analyse
Information
Formulate
Business Plan
Implementation
& Review
Present
Business Plan
• Data
observations
• Understanding
of relationships
to generate
insights.
• In the case of a
PE investment:
build scenarios
to test
assumptions
and assess
expected
returns.
• Beyond the
normal
components of
a business plan,
a family office
should try to
integrate
creative
investment
solutions (debt
instruments).
During Analysis Planning & Design, analysis is the key link between market information and
insight generation for a new business idea / project. Do not shortcut the brainstorming step!
Formulate
Investment
Recommendation
OR
(more often)
Present
Recommendation
to Board
What are the key steps to preparing and reviewing a Business Pan?
© Geoffroy Dedieu 2013 164 Setting up a Single Family Office Sharing a few lessons and experiences
• What is the scope of your private equity or venture capital
investment?
• Specific sectors, Investment stage, Geography, Ticket
size, Duration
• What are your target return levels for each type of
investment?
• Examples: LIBOR + 25% for venture capital, LIBOR +
20% for PE?
• Example outline of PE Guidelines Mission Statement
Investment Scope
Supporting Family Businesses (greenhouse)
Specific sector, ticket size and geography
Specific exclusions
Roles and Responsibilities
Role and responsibility of the Board
Investment decision making process for new investment
opportunities
Due Diligence Process
Due Diligence documentation and checklist
Requirements of Investment
Post Investment
Valuation and monitoring of investment
The Family and the FO need to have a PE strategy and develop guidelines to match. What is the
scope of possible new investments? What are expected minimum returns?
What are the exit strategies?
HOW DO WE TAKE DECISIONS?
Example : Private Equity (1)
Key Steps of the Due-Diligence Key Considerations for PE
1. Fit / Compatibility with your scope and strategy.
2. Financial audit, including profitability and cashflows risks.
3. Macro and market environment analysis (use Porter
model).
4. Legal audit.
5. Production audit.
6. People & Management review.
7. Information systems audit.
© Geoffroy Dedieu 2013 165 Setting up a Single Family Office Sharing a few lessons and experiences
In any PE / Venture Capital decision, the due diligence should clearly determine the optimal capital
structure and take into account the risks associated to each type. The higher the risk, the higher
your discount rate (kE) or Expected Return. The investment or project must pay for its own risk.
HOW DO WE TAKE DECISIONS?
Example : Private Equity (2)
Equity
Unsecured
Loan Preference
Shares
Mezzanine
Cash
Senior
Debt
Second
Lien
Source: 2011 BVCA, British Venture Capital Association
High
High Low
Expected Return
Risk
© Geoffroy Dedieu 2013 166 Setting up a Single Family Office Sharing a few lessons and experiences
SPECIAL NOTE : NEXTGEN BUSINESS INCUBATION
How Can a Family office help the NextGen build its own wealth? (1)
1. Have a passion:
• Have you got a passion? An idea? A hobby that you can
turn into a business? Is there a gap in the market that you
can fill? Do you want to be your own boss? If the answer
is yes, then you could have what it takes to start your
own business. The first step is to get in touch with us by
filling out a quick application form online giving us some
basic contact information.
2. Make a plan
• Once you have applied, we will identify the most
appropriate Delivery Partner who can work with you to
turn your idea into a plan. From workshops to advisors,
our Delivery Partners will help you build the right plan that
makes sense to you and your business.
3. Present your plan
• With the idea mapped out, your business plan will be
considered for funding. We want your business to have
every chance of success so the main things they will be
looking for is confidence that your business plan makes
sense and that your numbers stack up –Obviously with
the help of the Delivery Partner, you should be in a strong
position for funding.
4. Get going
• When your plan gets the green light, you're on your way
to building your business. With the money in your own
account, it's time to put your plan into action and make
things happen. In addition, you’ll then be able to access
exclusive offers from our Global Partners including
virtual office service, free accounting software and
reduced fees with eBay and PayPal!
5. Meet your mentor
• Every business that gets funded by Start-Up Loans gets
assigned to a mentor who is on hand to help you
succeed. You will have a lot of questions to answer and
decisions to make – our mentors will be able to give you
advice and guidance on what's best for you and your
business.
What do other incubators do ? The general public view: http://www.startuploans.co.uk/ (2013)
© Geoffroy Dedieu 2013 167 Setting up a Single Family Office Sharing a few lessons and experiences
1. Have a passion:
• This is an essential concern in the family wealth cycle,
ensure the next generation is motivated.
2. Make a plan
• The FO can help NextGen build a robust business plan.
• The FO can have a series of strategic dialogues with the
NextGen to insure the plan is matured at the right pace.
1G
Acquisition
Wealth Builders
• Self-Taught
• Entrepreneurial
• Frugal Lifestyle
• Generous and
Charitable
• Effective Decision
Making
• Cognizant of
Legacy or Family
History
2G
Retention & Growth
Status Quo
• Professional
• Well Educated
• Understand 1G’s
effort and sacrifice
• Systematic,
Business & Venture
- style approaches
• Want to build on
parents’ legacy
3G
Disposition & Decay
• Well Educated
• Sometimes have
lower work ethics
• Less Appreciation of
1G’s effort & sacrifice
• Searching for a
Purpose
• Inwardly Focused
Asian and African Families
• Mostly 1G
• Some 2G
Value Succession Plan
• Define Objectives for Succession Plan
• Define Principles to live together &
communicate well
• Define Precise Steps & Milestones
SPECIAL NOTE : NEXTGEN BUSINESS INCUBATION
How Can a Family office help the NextGen build its own wealth? (2)
3. Present your plan
• The plan can be presented to the FO investment
committee, the Board or the family business.
• The FO can maintain a strategic dialogue with the
NextGen. The dialogue will serve as quality checks
on the NextGen ideas and progress status-checks.
4. Get going
• The FO and / or family can decide to (/not) invest in
the NextGen venture. Or the FO can support the
NextGen with funding rounds.
• The FO can provide a range of support services at no
additional cost and without conflict of interest.
• Physical office support.
• Accounting and Finance training and logistics.
5. Mentoring
• FO managers or external advisors can serve as
mentors.
• The strategic dialogue should be maintained to
embed training and coaching for the NextGen.
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations
Chapters
11
© Geoffroy Dedieu 2013 169 Setting up a Single Family Office Sharing a few lessons and experiences
MINIMUM LEGAL CULTURE REQUIRED TO MANAGE RISKS
FOR A UHNW FAMILY
• Conflict of laws & jurisdictions
• Conflict of laws (or private international law) is a set of procedural rules that determines which legal system and which
jurisdiction apply to a given legal situation.
• Comparative Law
• It is the study of the different legal systems in existence in the world, including common law and civil law systems.
• UHNW families need to understand the legal culture of the countries they are present in.
• The family also needs to understand the culture of its various law firms: is it right to apply a Common Law concept to a
contractual issue in … Vietnam?
• International Taxation
• International taxation is the study or determination of tax on a person or business subject to the tax laws of different
countries or the international aspects of an individual country's tax laws.
• Most studies of international taxation are the later (international aspects of 1 country’s tax laws) whereas what UHNW
families need is a good understanding of the former (understanding the tax laws of different countries).
• International Structuring
• Merchants have used international legal structures since the XVIth Century.
• Trading companies, trusts, investment companies ???
International families require international structures to manage their wealth and plan for
successions. Structuring for family offices requires good understanding of legal systems
(Comparative Law) and international private law (Conflict of Laws & Jurisdictions).
© Geoffroy Dedieu 2013 170 Setting up a Single Family Office Sharing a few lessons and experiences
WHY DO UHNW FAMILIES NEED COMPLEX, INTERNATIONAL LEGAL
STRUCTURES?
Managing successions and transitions is an ineluctable necessity. It requires good family
dynamics, strong governance, clear communication and robust legal structuring.
Snapshot of Family Structure
(F) Female
(M) Male
MN Maiden name
P Passport
Tax Tax residence
Principal (M)
01/01/1960
P: HK, Tax: UK
Daughter (F)
01/01/1990
P: UK, Tax: FR
Ex-wife (F)
01/01/1960
P: UK, Tax: FR
Marriage:
01/01/1980
Divorce:
31/12/2000
Son (M)
01/01/2000
P: FR, Tax: FR
Ms. A (F)
14/11/1969
P: UK, Tax: UK
Daughter
(F) 31/07/2010
P: UK, Tax: UK
Grand-Father (M)
01/01/1940
P: HK, Tax: UK
Brother (M)
01/01/1950
P: UK, Tax: USA
Grand-Mother (F)
01/01/1940
P: HK, Tax: UK
Sister (F)
01/01/1960
P: UK, Tax: HK
Evolving Family Structure
1G
2G 2G 2G
3G 3G 3G 3G 3G
1G
2G 2G 2G
© Geoffroy Dedieu 2013 171 Setting up a Single Family Office Sharing a few lessons and experiences
BASIC ISSUES OF INTERNATIONAL STRUCTURING
Company
Child 1
Child 2
Wife 1
Wife 2
Mr. Wise Mr. Wise is a billionaire who was married and divorced in Australia, re- married in France and lives in the UK. Wife 1 in Australia Wife 2 in UK Child 1 in UK (1st wife) Child 2 in France (2nd wife) Bahamas Trust setup for the kids and Wife 2 when they all were residents of Hong Kong BVI company now owned by the trust has a bank account in Singapore, which holds cash, deposits and US. Europe and Asia securities. Mr. Wise owns a French SCI (transparent real-estate company)
What happens if ... Wife 1 sues Mr. Wise when she learns about the trust?
• Trust says Bahamas Law applies, meaning an
Australian judge applies Bahamas Law ?
• Can Wife 1 execute a judgment against the Child 2 in
France.
• Can Child 2 plead with a French judge that the
Bahamas Trust is valid ?
Wife 2 files for divorce in France?
• French Law applies to the wedding since they lived in
France after getting married at the Paris City Hall.
• Therefore all assets acquired after the marriage are to
be shared 50/50.
Mr. Wise dies in France?
• He is not a resident of France, just vacationing in his
Riviera property (owned through the SCI).
• There will be a UK probate but London magistrate /
judge has to apply French marital rule (community) to
the couple’s assets.
• UK judge may not recognise the SCI as a company...
Sub-
Trust
Bank A
© Geoffroy Dedieu 2013 172 Setting up a Single Family Office Sharing a few lessons and experiences
BASIC FINANCIAL PLATFORM:
WHAT STRUCTURES DOES THE FAMILY NEED?
Family Family
Office
Private
Investment
Company
Private
Fund
Family
Member
Bank A
Family
Office
Insurance
Trust
Central
Custodian
Custody & Banking Platform
Brokers
Custodian 2
Bank B
Custodian 1
Investment
Fund
With or without a grouped (fund)
portfolio
Portfolio Management
Platform
Fund
Manager (if not the FO)
Portfolio
Private
Foundation
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations a) Conflict of laws & jurisdictions
b) Comparative Law
c) International Taxation
d) International Structuring
11a
© Geoffroy Dedieu 2013 174 Setting up a Single Family Office Sharing a few lessons and experiences
Connection Points & Characterisation What Creates Conflicts of Laws &
Jurisdiction?
SOME NOTIONS OF PRIVATE INTERNATIONAL LAW
UHNW families are often international by nature, with family members, assets and business
interests in various countries. Potential disputes will regularly involve several countries. Private
International Law is the area of the Law used to determine which country’s laws apply and which
court have jurisdiction.
• Two questions apply to all international disputes or
situations: • Conflict of Laws: Which courts have jurisdiction in case of
dispute?
• Conflict of Jurisdictions: Which country’s laws apply?
• Conflicts can be related to various areas of the Law. • Law of individual persons (residence, capacity, filiation);
• Property law;
• Contract law;
• Matrimonial law (marriage and divorce);
• Successions, wills, donations.
• Connection points or connecting factor (point de
rattachement): they are elements of the situation which can be
used to connect it to a jurisdiction and a country’s laws.
• Examples include: • Nationality;
• Residence;
• Location of property.
• Characterisation (USA) or Classification (UK) or
Qualification (France): the judge needs to assign each
connection point to the most appropriate legal concept or
category.
• Most jurisdiction classify issues according to their own rules:
Macmillan Inc. v Bishopsgate Investment Trust plc [1996] 1
ALL E R 585, Auld LJ., ". . .the proper approach is to look
beyond the formulation of the claim and to identify according to
the lex fori the true issue or issues thrown up by the claim and
the defence".
• Examples include: • Wills: can it be written in simple handwriting, without a notary public?
• If this is classified as a matter of capacity => apply law of the nationality.
• If this is classified as a matter of documentary form => apply law of the
place of writing.
© Geoffroy Dedieu 2013 175 Setting up a Single Family Office Sharing a few lessons and experiences
EFFECTS OF PRIVATE INTERNATIONAL LAW
Beyond general rules related to applicable laws and competent jurisdictions, specific rules have
been developed by countries as well as through international convention to apply to people,
assets and contractual relationships.
Assets People (Family Members)
• The law applicable to citizenship
is usually based on the national
law (refer to passport).
• The law applicable to capacity (or
incapacitation) and family
(protection of minors, marriage) is
usually the law of the residence
or domicile. • Note the distinction between Common
Law and Civil Law countries when it
comes to define “domicile” as opposed
to “residence”.
• Note that there vis a significant body of
E.U. directives and regulation applying
to personal status, minors, marriages.
• Lex Rei Site.
• Most countries apply to assets the law
of their location.
• Boats and aircrafts are deemed to be
located in their country of registration.
• Copyrights are protected in each
country where protection is sought.
• Patents are protected separately in
each country under the World
Intellectual Property Organization
(WIPO).
Relationships (Contract and Tort)
• Contracts.
• Most systems allow the parties to a
contract to chose the law applicable to
the agreement.
• If parties have not made a choice, the
most common principle is to apply the
law of the country of residence of the
debtor of the main contractual obligation.
• Damages or Tort.
• Most countries apply the law of the
event that cause a damage and leave
the possibility to apply the law of the
country of residence of the victim(s).
• There are specific international
conventions applying to traffic
accidents, product liability, food
products.
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations a) Conflict of laws & jurisdictions
b) Comparative Law
c) International Taxation
d) International Structuring
11b
© Geoffroy Dedieu 2013 177 Setting up a Single Family Office Sharing a few lessons and experiences
Common Law Civil Law
SOME NOTIONS OF COMPARATIVE LAW
• Based on enacted Codes, first code was Napoleon’s Code
Civil, France 1804. Followed by others in Europe (German
BGB, 1896).
• Art. 5 Code Civil : “It is forbidden for judges to pronounce
general rules …” Judges follow the written Law and, when
necessary, can interpret it.
• Qualifications are often made following a hierarchy of
alternative criteria (tax residence).
• Differences in philosophy : • Contracts are based on the true intentions of the parties.
• Matrimonial regime is a community by principle.
• Forced heirship rules apply
• No trust but notion of split property : usus, fructus, abusus
(Art 544 cc). Therefore usufruct can be separated from legal
ownership.
• Countries : • France, Germany, Holland (except Curacao);
• French & Portuguese-speaking Africa;
• Latin America (except some Caribbean islands);
• Thailand, Indonesia, Vietnam, Taiwan, China, Japan,
Philippines.
• Originated in England : case law and Equity (rules
defined by the Chancellor’s Chancery Courts) were
merged by the Judicature act in 1873 (USA : 1848)
• Judge-made-Law : court decisions are binding on courts
of lower levels (and same court)
• Qualifications are made taking into account all relevant
factual elements.
• Differences in philosophy : • Contracts are interpreted literally.
• Matrimonial regime is separate by principle.
• Forced heirship is rare
• Fiduciary concept : a person or institution in a position of
a trustee is bound to act in good faith for another’s
benefit.
• Countries : • UK, USA
• English-speaking Africa;
• India, Australia, Singapore, Hong Kong
Note that there are 2 main legal systems in the contemporary legal world (the whole World does
not follow the same legal philosophy …). With variances in each country.
© Geoffroy Dedieu 2013 178 Setting up a Single Family Office Sharing a few lessons and experiences
Observations Private International Law … compared
COMPARING PRIVATE INTERNATIONAL LAWS ?
• Solutions adopted in different countries regarding conflicts
of laws or jurisdiction will differ.
• There is not a single Private International Law, there are
many. Almost one different PIL per country.
• Hence the need to compare Private International Law rules.
• For example : The doctrine of “renvoi” considers the issue
in internal PIL and gives it a … local solution. • In certain cases, a court referring to a foreign law may find that this
law handles the connecting factor / connection point differently to that
of the judge’s own forum.
• The difference in treatment in the same international issues
can lead to two (non-exclusive) outcomes: • Inconsistent decisions in two or several countries; or
• Forum shopping: the parties compare potential solutions before they
chose which country’s courts they will apply to. In that case parties do
compare various national treatments of the conflict. That is a
comparative approach to Private International Law(s).
The way different countries treat the same international situation will differ, resulting in different
solutions. Judges and countries have tried to reduce these difference.
• The definition of the same connecting factor (for laws or
jurisdictions) can be different from one country to another.
• Example: “residence”.
• This can cause different countries to adopt different
solutions despite having the same conflict of law rules. It
can also cause a “renvoi”.
• Note that some countries even have internal conflict
systems (federal states).
• The Hague Conference on Private International Law and
the International Institute for the Unification of Private Law
(UNIDROIT, French: Institut international pour l'unification
du droit privé) both oversee the drafting and adoption of
international conventions designed to develop a uniform
system of Private International Law.
• Short list of Hague & Unidroit conventions: • Family: Marriage, divorce, minors, child abduction.
• Contracts & assets: international sale of goods, contracts,
testaments, matrimonial property, product liability, recognition of
trusts, stolen cultural objects, aircraft.
• Legal procedures: enforcement of foreign judgments, evidence,
access to justice.
© Geoffroy Dedieu 2013 179 Setting up a Single Family Office Sharing a few lessons and experiences
COMPARING TAX LAWS ?
• Each country has its own Tax laws and regulation.
• There are international tax agreements between countries … but they tend to be bilateral: between 2 counties only. • Although model (template) OECD tax conventions have allow for a certain harmonisation in Double-tax Agreements (DTA’s)
• “Internal Tax” studies and literature usually describes 1 countries approach to extraneous elements affecting that 1
countries tax revenues.
• So the description and study of “Internal Tax” in Germany is different from the same “Internal Tax” review in Singapore.
• It is a question of vantage point.
• Therefore Comparative Law has a role to play for international UHNW families and their family offices.
The way different countries treat the same international situation will result in different tax
treatments, which in turn will create opportunities and risks for international tax structuring.
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations a) Conflict of laws & jurisdictions
b) Comparative Law
c) International Taxation
d) International Structuring
11c
© Geoffroy Dedieu 2013 181 Setting up a Single Family Office Sharing a few lessons and experiences
THE EVASION VS. AVOIDANCE DEBATE
• We all have a right to arrange our affairs so as to pay what we owe to the taxman, but not more.
Evasion vs. Optimisation / Avoidance (UK: see 1860 Turner LJ, Fisher v Brierly)
1. Tax Evasion
• The illegal act of not paying due taxes.
• It is usually a crime but the little cat-and-mouse game some jurisdiction are playing around the definition of the crime makes
the international debate more complicated. Family offices should beware of jurisdictions that do not recognise tax evasion in
other countries as a crime.
2. Tax Optimisation and correspondingly Tax Avoidance
• Tax avoidance is legal but generally frowned upon by tax services and subjected to specific anti-avoidance regulation.
• Mostly, my optimisation is your avoidance: Optimisation is viewed from the taxpayer’s perspective, while avoidance is
viewing the same system from the vantage point of the taxman.
• What allows tax authorities to characterise any scheme as “avoidance” rather than acceptable optimisation is the intention
to use loopholes against the intention of the law: intention to play with words in an artificial, non-substantiated manner is the
limit that FO’s need to be aware of.
“Taxes are the price of civilisation”.
Oliver Wendell Homes, Jr.
© Geoffroy Dedieu 2013 182 Setting up a Single Family Office Sharing a few lessons and experiences
WHAT ARE THE REASONS AND WAYS THAT UHNW FAMILIES OPTIMISE
THEIR TAXES?
There are 2 main factors allowing international tax optimisation
1. Differential in tax rates
• G7 countries tend to have high government and social expenditures and therefore higher tax collection needs, resulting in
generally higher tax rates.
• A UHNW family can decide to locate part of its assets, businesses, family members or any part of the FO structure
(administration, fund management, trust company, fund custody etc..) in lower-tax jurisdictions. In certain G7 countries the
media positioning of such “relocation” can be tricky.
2. Different tax treatment and classification: Tax mismatches
• All tax systems, as legal systems, resort to necessary classification of situations, instruments and entities. • Different jurisdictions will follow different legal systems and therefore classification methods and outcomes will vary.
• In most jurisdictions tax classifications substantial, appropriate but flexible.
• A classification must apply equally to all members of the same class.
• See discussion on tax mismatches based on classification issues.
• Use of mismatches for the purpose of avoidance / optimisation is what generally triggers Anti-avoidance rules.
• Therefore, as a rule of thumb, families and FO’s should not use mismatches in the absence of strong material
justifications (USA: Gregory v. Helvering: business purpose and economic substance)
UHNW Families and their Family Offices most often try to optimise their international tax
exposure. That is a right … but it should be done within reasonable limits, within the bounds of
the Law and taking into consideration potential reputational consequences.
© Geoffroy Dedieu 2013 183 Setting up a Single Family Office Sharing a few lessons and experiences
Effects of Mismatches Main Types of Mismatch
INCREASED INTERNATIONAL AWARENESS OF AGGRESSIVE STRUCTURING
Tax Mismatches (1)
• Using entities specific to a legal system • Some entities do not exist as such or are not recognised in the
same way in different legal systems;
• Some entities have legal personality in a jurisdictions but are not
recognised as legal persons for tax purposes in other
jurisdictions.
• Example: playing on the legal nature of trusts.
• Playing on the definition of residence • Entities that are resident in 2 different jurisdictions;
• Entities that play on the definition of “local” income.
• Using instruments that are characterised
differently in different countries • Example: debt in a country but equity in another.
• Using agreements or vehicles that leverage a
variation in the nature of ownership ( • Beneficial ownership vs. legal title;
• Usus, fructus & abusus;
• Example: playing on the definition of an asset vs. a collateralised
loan.
1. Deduction of expenses and non-inclusion of income.
2. Double deduction of same economic value in two jurisdictions.
3. Generation of extra foreign-tax credit (where in fact little or no
foreign tax was paid).
Responses
• International response to mismatches have consisted mostly of
national responses but OECD jurisdiction are increasingly
sharing intelligence on hybrid arrangements.
• Anti-avoidance rules: in most OECD jurisdictions, the common
test is that of “substance”.
• UHNW families and their FO’s should use the same test as a
sanity check on any structuring they devise with advisors. Is
there a real need for family assets, businesses, employees or
family members to be located in that other country?.
• Use of comparative taxation: in some countries tests were
established to check the corresponding treatment of a situation
in the other relevant jurisdictions.
International tax planning often takes advantage of the difference of national tax treatment of
instruments, entities or transfers, this practice creates no real economic value and generally
induces negative image / reputational consequences.
Source: OECD, Hybrid Mismatch Arrangements, March 2012
© Geoffroy Dedieu 2013 184 Setting up a Single Family Office Sharing a few lessons and experiences
INCREASED INTERNATIONAL AWARENESS OF AGGRESSIVE STRUCTURING
Tax Mismatches (2)
Example: The Repo Mismatch, a hybrid transfer of a security instrument.
Source: OECD, Hybrid Mismatch Arrangements, March 2012
SPV
6. BU2 collects foreign tax
credit in Country 2 for
taxes paid by SPV in
Country 1.
5. SPV pays $7 dividend to
BU2.
1. BU1 obtains $100
financing from BU2 at 4%
interest.
2. BU1 creates SPV with
$100 preferred equity (at
7% dividend). BU1 enters
into repo of SPV shares
with BU2.
Business
Unit 1
SPV
Shares
SPV
Shares
7. In Country 1 the
arrangement is seen as a
loan from BU2 to BU1. BU1
is exempt from taxes for
dividend paid by SPV. BU1
can also deduct interests
charged by BU2.
Business
Unit 2
$100 Principal
3. BU1 enters into repo of
SPV shares with BU2.
4. SPV earns income and
pays corporate tax to
Country 1.
Sourc
e: F
inancia
l Tim
es, N
ovem
ber 2
013
© Geoffroy Dedieu 2013 186 Setting up a Single Family Office Sharing a few lessons and experiences
THE ERA OF GLOBAL TAX COMPLIANCE HAS ARRIVED … (1)
Time to wake up.
• Why do people still use
these jurisdictions for
international structuring? • These structures are flexible
and easy to set up and
administer (efficiency).
• Progressive Trust & Company
legislation.
• Optimised tax exposure;
• Privacy / Confidentiality;
• Succession, statutory regime &
protection of the weak. No
forced heirship rules;
• Protection against unfair
claims;
• Charity purposes;
• Protection of all children in
case of divorces & secondary
families.
• What clients want to see in
an international jurisdiction: • Good professional and legal
infrastructure;
• Independent judiciary;
• Sound, progressive regulation;
• Competitive services and value
proposition.
International tax evasion will be rooted out but offshore centers will still have a role to play.
© Geoffroy Dedieu 2013 187 Setting up a Single Family Office Sharing a few lessons and experiences
THE ERA OF GLOBAL TAX COMPLIANCE HAS ARRIVED … (2)
TAX COMPLIANCE DECLARATION
To: ABC Trust Ltd, street, ZIP, country
From: Name of UBO: Mr Wise Name of Trust: ABC Settlement
I, Mr Wise of street, town, country CONFIRM AND DECLARE as follows:
• I am aware of Country A’s commitment to safeguarding its financial system from being used to harbour
or launder tax evasion monies or proceeds from serious tax offences. Serious tax crimes include
omissions, falsifications or fraudulent conduct perpetrated with wilful intent to evade tax or to assist
others in evading tax;
• I have sought appropriate legal and tax advice and/or am aware of and have fully considered my tax and
other regulatory reporting obligations in all applicable countries with regards to the Trust and its
underlying entities and I undertake to comply with these obligations;
• All assets which I have settled and/or will be settling into the Trust and its underlying entities (whether
directly or indirectly) are sourced from legitimate sources on which all applicable taxes have been paid
and / or declarations made to the relevant tax authorities;
• Upon your request, I will promptly provide any information relating to my tax affairs as may be
reasonably required for the purpose of verifying the tax status of the assets settled into the Trust and its
underlying entities;
• Upon your request, I will promptly provide, as far as I am able to, any information relating to the Trust
(including any trust relevant party of the Trust) as may be reasonably required for the purpose of
verifying that the Trust and its underlying entities are not used in connection with any serious tax
offence;
• To the best of my knowledge, the Trust and its underlying entities are not used in connection with any
serious tax offence, my tax affairs are fully compliant with all applicable laws, and I have not been
convicted of any serious tax offence in any country; and
I will notify you immediately if there is any change to the circumstances declared above.
DECLARED by Mr Wise at (place) __________________________ on (date)_________
Signed ____________________
TAX COMPLIANCE DECLARATION
To: ABC Trust Ltd, street, ZIP, country
From: Name of UBO: Mr Wise Name of Trust: ABC Settlement
I, Mr Wise of street, town, country CONFIRM AND DECLARE as follows:
• I am aware of Country A’s commitment to safeguarding its financial system from being used to harbour
or launder tax evasion monies or proceeds from serious tax offences. Serious tax crimes include
omissions, falsifications or fraudulent conduct perpetrated with wilful intent to evade tax or to assist
others in evading tax;
• I have sought appropriate legal and tax advice and/or am aware of and have fully considered my tax and
other regulatory reporting obligations in all applicable countries with regards to the Trust and its
underlying entities and I undertake to comply with these obligations;
• All assets which I have settled and/or will be settling into the Trust and its underlying entities (whether
directly or indirectly) are sourced from legitimate sources on which all applicable taxes have been paid
and / or declarations made to the relevant tax authorities;
• Upon your request, I will promptly provide any information relating to my tax affairs as may be
reasonably required for the purpose of verifying the tax status of the assets settled into the Trust and its
underlying entities;
• Upon your request, I will promptly provide, as far as I am able to, any information relating to the Trust
(including any trust relevant party of the Trust) as may be reasonably required for the purpose of
verifying that the Trust and its underlying entities are not used in connection with any serious tax
offence;
• To the best of my knowledge, the Trust and its underlying entities are not used in connection with any
serious tax offence, my tax affairs are fully compliant with all applicable laws, and I have not been
convicted of any serious tax offence in any country; and
I will notify you immediately if there is any change to the circumstances declared above.
DECLARED by Mr Wise at (place) __________________________ on (date)_________
Signed ____________________
• This is an example of the
sort of declaration that ALL
beneficial owners will need
to sign in most jurisdictions
in the proximate future.
• Thinking that one could use
offshore tax structures to
evade taxes in one’s
country(ies) of tax
residency is ludicrous ...
that era is over.
• There are however all sorts
of other good reasons to
use international structuring
in a compliant way.
© Geoffroy Dedieu 2013 188 Setting up a Single Family Office Sharing a few lessons and experiences
Agencies Involved Instruments Available for International
Cooperation
INTERNATIONAL COOPERATION AGAINST TAX CRIMES (1)
• Tax-related instruments • Bilateral treaties (OECD Model Tax Convention).
• Tax information exchange agreements.
• Conventions: Conv. on Mutual Administrative Assistance in Tax
Matters, Conv. on Customs Offences.
• EU Council Directive on Taxation 2011.
• Anti-money laundering (AML) and anti-terrorism financing
(CFL) instruments • UN Palermo convention against organised crime.
• UN Vienna convention on narcotics.
• UN Strasbourg convention on proceeds of crime (AML)
• EU 3rd AML directive 2005
• Anti-corruption instruments • UN convention against corruption
• OECD convention on combatting bribery of foreign public officials
• Local financial regulation and supervision • Basel Committee principles for effective banking supervision.
• International Organisation of Securities Commissions, IOSCO.
• Mutual legal assistance • Since tax evasion is now criminalised in most jurisdictions, many
treaties and conventions relevant to international crimes apply.
• Tax administration • Recent trends gave included the creation of task forces specialised
in offshore structures.
• Customs administration • They naturally tuned to international aspects of offshore structures.
• Customs agencies have vast powers of investigation and
intervention.
• Financial Intelligence Units • They were set up in the 1990’s to deal with money-laundering and
(later) terrorism financing.
• Police and Prosecution • Both are often specialised: tax crime, organised crime, terrorism …
• Financial Regulators / Supervisors • There role is not typically to focus on tax matters, more to promote
financial stability and security in the jurisdiction.
• But they do supervise AML/CFT regulation.
• Specialised Agencies
As demonstrated by the OECD’s analysis of international cooperation against tax crimes, Anti-
Money Laundering systems are core to the emergence of global tax compliance. It is the
implementation of AML and KYC rules that has recently catalysed new international tax evasion
tools.
Source: OECD, International Cooperation against tax crimes and other financial crimes. 2012
© Geoffroy Dedieu 2013 189 Setting up a Single Family Office Sharing a few lessons and experiences
Developments in the British Overseas Territories Consequences of Offshore Leaks
INTERNATIONAL COOPERATION AGAINST TAX CRIMES (2)
In May 2013, the UK HMRC announced that:
• It is working with the Australian and US authorities to examine
data regarding companies and trusts in a number of territories
including Singapore, the BVI, the Cayman Islands and the Cook
Islands.
• It has already identified over 100 people who benefit from these
structures and that over 200 UK accountants, lawyers and other
professional advisors who advised on setting up these structures
will also be scrutinised.
• A total of 17 EU nations intend to pilot a common standard for
automatic multi-lateral exchange of account information and invite
the rest of the EU to join them.
In September 2013, the French Government announced it was
black-listing the BVI, Jersey and Bermuda.
• April 2013, the Cayman Islands announcing their
intentions to exchange account information bi-laterally
with the UK and the US.
• May 2013, Anguilla, Bermuda, Montserrat, the BVI and
the Turks & Caicos Islands announced their intention to
share account information with the UK, France, Germany,
Italy and Spain.
• Under the Memoranda of Understanding ("MOU") signed
between each of the Crown Dependency ("CD") Territories
and the UK: • The UK will provide disclosure facilities to UK taxpayers with
outstanding UK tax liabilities;
• The Government of each CD will require Financial Intermediaries
("FIs") to make clients who are known to be "relevant persons"
aware of the disclosure facilities prior to 31 December 2013; and
• Remind their clients of the disclosure facility in the period between 1
April and 30 September 2016.
• In addition, there will be exchange of account information between
each CD and the UK with effect from 2016.
International cooperation is picking up on the ground …
Source: DLA Piper (2013, Lifting the Lead on Tax Evasion, Simon Airey)
Chapters
1. Key Messages
2. Key Challenges
3. Defining the Family
4. What do Family Offices do?
5. Organisation and Tasks
6. The In-sourcing vs. Outsourcing debate
7. Governance & Policies
8. Information Technology
9. Investment Management & Reporting
10.Managing Non-Financial Assets
11.Structuring International Wealth for Future Generations a) Conflict of laws & jurisdictions
b) Comparative Law
c) International Taxation
d) International Structuring
11d
© Geoffroy Dedieu 2013 191 Setting up a Single Family Office Sharing a few lessons and experiences
LEGAL ISSUES WITH OFFSHORE STRUCTURES
• In Common Law countries, offshore trusts are recognised for
material legal effects (transfer of assets, no forced heirship) but not
necessarily for tax purposes.
• Civil Law countries would most often not recognise trusts at all.
• 1985 Hague Convention on the Law Applicable to Trusts and their
Recognition
• Closest connection test applies : where are the assets,
beneficiaries and settlor ?
• The Hague convention specifically excludes taxation from the
scope of the recognition => Civil Law countries will not recognise
trusts for tax purposes.
• Ratified by Australia, Canada, Cyprus, France, Holland, Hong
Kong, Italy, Luxembourg, Malta, UK, USA.
• The Brussels Convention between EU countries imposes the
automatic recognition of judicial trusts, example : testamentary
executor acting as trustee for under aged children.
Recognition of offshore trusts
• Offshore companies are usually recognised for material legal
effects (transfer of assets) but not for tax purposes.
• Despite legislative efforts of offshore jurisdictions.
Recognition of offshore companies
Company
Child 1
Child 2
Wife 1
Wife 2
Mr. Wise Mr. Wise was married and divorced in Australia, re- married in France and lives in the UK. Wife 1 lives in Australia Wife 2 in UK Child 1 in UK (1st wife) Child 2 in France (2nd wife) Bahamas Trust setup for the kids and Wife 2 when they all were residents of Hong Kong BVI company now owned by the trust has a bank account in Singapore, which holds cash, deposits and US. Europe and Asia securities. Mr. Wise owns a French SCI (transparent real-estate company)
Sub-
Trust
Bank A
© Geoffroy Dedieu 2013 192 Setting up a Single Family Office Sharing a few lessons and experiences
BASIC TRUST STRUCTURE
ABC
Trust
Pote
ntia
l Cash D
istrib
utio
ns
(regula
r or fro
m tim
e to
time)
Other Properties
(Real Estate)
Trust Deed and
Letter of Wishes
include specific
conditions for
distributions
Sub-
Trust
Purpose Trust or Charity
OR
(more often)
Mr & Mrs Wise
Settlors
Mr True
(as trustee)
ABC Trustee
Company
Bank A
Beneficiaries as
Named
from time to time
Mr & Mrs Wise
Beneficiaries
Children
Others
123 Company Ltd
Portfolio Business Holding
Company
ABC Trustee
Company
Deed s
igned b
y settlo
r(s)
& tru
ste
e(s
)
Tra
nsfe
r of A
ssets
& P
ropert
ies
© Geoffroy Dedieu 2013 193 Setting up a Single Family Office Sharing a few lessons and experiences
ESSENTIALS OF A TRUST
• Trusts are an Equity concept, a creation of UK Chancery
Courts (since the 15th Century), whereby knights going
to war (the settlor) could entrust their property to a
person (trustee) and that person would be bound to fulfill
certain fiduciary duties (fiduciary from the Latin “fides”,
meaning faith).
• A trust is merely an obligation (not a legal entity) which
can be enforced in law against a person (the trustee) in
respect of certain property (trust property or the trust
fund) by persons beneficially interested in that property
(the beneficiaries). It is not an independent legal entity in
the same way as a corporation.
• In most cases, it brings a solution to a problem requiring
the separation of assets from personal ownership. This
can be handled in several different ways, but the most
flexible and advantageous is a Trust.
• (hence the US expression : Asset Protection Trust, APT)
• Identifiable trust property • Transfer of legal ownership and control
• Identifiable and mandatory terms of the trust • in our practice there is always a deed.
• Legal capacity of settlor/transferor
• Clear intention
• Identifiable object • identifiable beneficiaries
• Named or by class
• or purpose, which can only be a charity.
• Relief of poverty, religious advancement, education, community as
a whole.
• Powers must be exercised in beneficiaries’ best interests,
not the trustee’s
• Investments should be cautious and placed with
appropriate institutions
• Trustee must avoid breach of trust by making investments
from which it profits personally - investment with group
companies permissible but caution needed
• Beneficiaries can sue a trustee for breach of trust • Failure to act prudently
• Incurring losses
• Family dispute/difference between beneficiaries
• Bank trustees are best target - deep pockets
Where did trusts come from and what are they? The 3 basic elements of a trust
Fiduciary obligations of the Trustee
© Geoffroy Dedieu 2013 194 Setting up a Single Family Office Sharing a few lessons and experiences
NATURE & TYPES OF TRUST RELATIONSHIP
• Assets do not “belong” to the “client” • Either as settlor or beneficiary
• Trustee must administer assets: • In best interests of beneficiaries
• According to the terms of the trust
• Trustee cannot be compelled to take a course of action
unless in exceptional circumstances
• Trustee must act as a “prudent man” • Professional trustee is held to a higher duty as a “reasonably
prudent businessman”
• Must take reasonable care and avoid excessive risk when
investing trust property
• Trustee is liable to make good for losses incurred as a result of
bad investment
• Tax liabilities and creditor claims may be faced by the trustee
• Duty to get in and assume control over the trust property • Must demonstrate ownership of the trust assets
• Duty to protect trust property and administer it according
to terms of the trust
• Trustee cannot be mere custodian of assets • Need for detailed information - particularly with respect to private
• companies/real property
• Standards required : • Standards of behaviour for trustees are required by the law -
prudent man/man of business rule.
• Decisions and actions must be defensible and reasonable but
need not necessarily be the same as those a court would reach
• Trustees should avoid hazardous investments
• Trustee should not rely on blanket authorisation but should
consider all circumstances at the time an investment is to be made
• Revocable / Irrevocable trusts
• For a given term or Life • Generally there can be no perpetuity but some offshore legislators
made exceptions.
• Discretionary trusts • Trustee has discretion as to timing and amount of distributions
• Beneficiaries’ interests are not fixed
• Beneficiaries may be added or removed
• More suitable for tax planning purposes
• Can respond to changing needs & circumstances
• Settlor guides trustee by “letter of wishes”
• Voluntary, Constructive, by Law • We are only concerned with trust voluntarily established by deed
– voluntary and in writing.
• Fixed trusts (vs Discretionary) • Beneficiaries have a fixed identifiable right to trust property -
“interest in possession”
• Beneficiary with right to income - “life tenant”
• On life tenant’s death “remainderman” will receive benefits /
assets
• There may be different provisions for capital and income
distributions
Common pitfalls Other duties of the Trustee
Various Types of Trusts
© Geoffroy Dedieu 2013 195 Setting up a Single Family Office Sharing a few lessons and experiences
SOME RELEVANT TRUST CASES
• The 3 certainties
Knight v Knight : certainty of the intention of the person
who creates the trust, certainty of the subject matter
(beneficiaries), certainty of the objects.
McPhail v Doulton : For a discretionary trust, it is
sufficient to have beneficiaries designated by classes,
provided these classes are defined through express
tests.
• Rule against shams
Rahman v Chase Bank (1991) : Court in Jersey
invalidated a trust setup by Rahman with Chase as
trustees. Rahman was a Lebanon resident (Civil Law
country). At his death, various claimants (including
widow and mother) respectively asserted that his
domicile was Lebanon, New York and Israel. In fact
Rahman retained control of the investment policy,
perceived some moneys (interests and rent) that
should have been paid to the trust and directed
payments from the trust.
Snook v West Riding Investments Ltd. : a sham is where
there is an “intention that the acts or documents are
not to create the legal rights and obligations which
they give the appearance of creating”.
• Prudent man of business rule
Bartlett v Barclays Bank Trust Co.
• Beneficiaries cannot revoke trustee
Re Brockbank : Beneficiaries cannot change the
trustee even if they are unanimous. Unless they
apply to the competent courts and they have a
reasonable ground.
• Rule of no tracing
Re Diplock : beneficiaries cannot trace an interest
(money) into the hands of a bona-fide recipient of a
distribution.
• Doctrine of Acceleration
Saunders v. Vautier : Nephew was sole beneficiary and
should have received assets at the age of 25. Court
agreed to terminate the trust at his request at the
age of 21 (the legal majority).
• Liability of Investment Advisor for negligence
Voisin v Matheson Securities (Jersey decision) :
Matheson had recommended bonds which later
went in default. Advisor failed to take into account
the conservative investment profile of the client
(trustee). Failed to inform trustee that S&P had
placed the issuer on credit watch. Held responsible
for the loss.
© Geoffroy Dedieu 2013 196 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY TRUSTS & PRIVATE TRUST COMPANY (PTC)
What it Does How does it work ?
Owns Assets in
Country B
Owns Assets in
Country A
• This type of structure can be useful for larger families
and large SFO’s to administer their own trusts.
• The PTC holds complex assets and businesses.
• They derive economies of scale but nonetheless allow
individual family members to benefit from their
separate trust.
• They allow for better overall management and
cohesion of the family affairs.
Requirements
• Company acts as trustee solely for family trust (no
individual trustee)
• Company can be owned and controlled by family trust
but with administrative support by professional trustee
• There may be tax/sham implications if not careful
• Legal advice mandatory
Private Trust
Company
Own shares in
the company
Funds Allocated to
Charity
Trust 1 Trust 2 Charity
Trust
Directors include
Family Members
(or directly family
members)
Family
Trust
Shares
in the
PTC
Board of Directors
© Geoffroy Dedieu 2013 197 Setting up a Single Family Office Sharing a few lessons and experiences
FAMILY INCENTIVE TRUSTS
What it Does How does it work ?
• Avoids “remittance addiction”
• Sets key standards of behavior for beneficiaries :
• demonstrate financial independence
• engage in productive activities
• Minimum requirements for distribution : grades,
diploma, income level ...
• Incentive for specific goals or targets : grades,
creation of a business, enter a specific course of study
...
All Beneficiaries
Child 1
Child 2
Other Family
Member
Trust Deed &
Letter of Wishes
include specific
conditions for
distributions
General Conditions
Conditions A, B, C
Conditions D, E, F
No Condition
Mr & Mrs Wise
Settlors
Incentive
Trust
© Geoffroy Dedieu 2013 198 Setting up a Single Family Office Sharing a few lessons and experiences
THE USE OF PROTECTORS
• Appointed by settlor to oversee trustee and ensure
that administration is satisfactory.
• May be more than one or a “committee”.
• Powers specified in trust deed should not be excessive
to avoid quasi-trustee/tax trap.
• Can comfort both settlor and trustee.
• May be a professional person or corporation.
• Settlor should not be sole protector.
Powers of a Protector How does it work ?
• Positive
• Ability to appoint, remove or replace trustee
• Approve or reject trustee’s request to amend
trustee’s fees.
• Power to cancel a “flee clause” (clause which
provides for the automatic relocation of the trust’s
administration and governing law in a different
jurisdiction).
• Negative, i.e. protector’s consent required
• To revoke or appoint trustee
• To add or exclude beneficiaries
• To make distributions of capital or income
• To change governing law of trust
• To make significant changes at the Strategic Asset
Allocation level.
© Geoffroy Dedieu 2013 199 Setting up a Single Family Office Sharing a few lessons and experiences
LETTERS OF WISHES
• A letter from settlor to guide trustees on investment of
trust fund and its application to beneficiaries.
• Should be dated after the trust deed.
• Can be changed at any time.
• Must not fetter trustee’s discretion and are not legally
binding.
• Should be carefully drafted and should not contravene
terms of trust or its governing law.
• Moral obligations exist but slavish adherence should be
avoided (sham).
Example for a Discretionary Trust What the Letters do
• This letter is intended only to provide you with our general wishes and guidelines on your powers to administer the trust assets in the future.
• The Trust is established for the benefit of our family members, presently comprising the following persons (the Beneficiaries) : Name, Date of Birth, Passport No.
• Your should regard the signatories of this Letter of Wishes as your primary beneficiaries during their lifetime.
• It is our wish that you feel free to discuss with either one of us on any policy matters regarding the Trust ... In the event of our death, you should regard our son / daughter listed as beneficiary number ___ above as your primary liaison
• In such circumstances, please have regard to the following guidelines:
• The trust assets should be enjoyed by the Beneficiaries in the
following proportions : Beneficiary number __, %
• You may wish to take into consideration their respective views,
particular needs and if possible their individual tax situations.
• If all of the Beneficiaries should be dead before us, entitlement of
the trust fund should be shared equally by ----
• This letter is intended only to provide you with our general wishes and guidelines on your powers to administer the trust assets in the future.
• The Trust is established for the benefit of our family members, presently comprising the following persons (the Beneficiaries) : Name, Date of Birth, Passport No.
• Your should regard the signatories of this Letter of Wishes as your primary beneficiaries during their lifetime.
• It is our wish that you feel free to discuss with either one of us on any policy matters regarding the Trust ... In the event of our death, you should regard our son / daughter listed as beneficiary number ___ above as your primary liaison
• In such circumstances, please have regard to the following guidelines:
• The trust assets should be enjoyed by the Beneficiaries in the
following proportions : Beneficiary number __, %
• You may wish to take into consideration their respective views,
particular needs and if possible their individual tax situations.
• If all of the Beneficiaries should be dead before us, entitlement of
the trust fund should be shared equally by ----
© Geoffroy Dedieu 2013 200 Setting up a Single Family Office Sharing a few lessons and experiences
Different Types Different Characteristics
NATURE AND TYPES OF COMPANIES (1)
• A company is usually a legal person, it has a name &
address, it owns assets in its name (not the shareholders
or the directors).
• It is created by agreement between founders (initial
shareholders) and usually it is registered in a country of
incorporation. • In Common Law countries : Memorandum and Articles (or bylaws) +
Case Law
• In Civil Law countries : “Statutes” + written Laws
• France : Art. 1832 cc and Company Law of 1966.
• It can be dissolved by the shareholders or the court. It can
also expire at the end of its legal or contractual duration.
• In Civil Law countries, enacted laws dictate the rules
applicable to companies, whereas Common Law courts
have developed a body of rules before laws where
enacted.
• Limited or unlimited liability. • Corporations / companies
• Partnerships (Common Law), Companies of Persons (Civil Law)
• Liability limited by shares or by guarantee (Lloyds).
• Private or public company.
• In Civil Law jurisdictions there are usually no Company
Seal and Secretary. It is not “abnormal” not to have a
seal.
• Companies incorporated in offshore centers most
often fall under a specific local statute for “International
Business Companies” (IBC).
© Geoffroy Dedieu 2013 201 Setting up a Single Family Office Sharing a few lessons and experiences
NATURE AND TYPES OF COMPANIES (2)
Common Mistakes How does it work ?
Bank / Financial
Assets
Assets Owned by the
Company
• Assets belong to the company, not the shareholders.
• Shareholders must formally appoint and revoke
Directors (“ad nutum” or with a good reason).
• Directors represent the company, not the
shareholders.
• Directors are accountable to shareholders: fiduciary
duties (Common Law and statutes).
• The Beneficial Owners (BO’s) : they are the ultimate
beneficiaries of rights and privileges legally granted to
shareholders.
• Share certificates can be nominal or to the bearer. In
the first case, the company’s registers are proof of
ownership, in the second, the certificates bear
evidence of ownership.
• Rights and privileges given to shareholders must be
identical for a same class of shares : rule against
discrimination.
Shareholders
Individuals : Natural Persons
Corporates : Legal Persons)
Shareholders
own shares in
the company
Business Activities of
the Company
Shareholders
appoint &
revoke the
Directors
Company issues
Share Certificates
Founders (first
shareholders)
sign the M&A
Company
The Board Manages
the company and
Represents it to third
parties
Board of Directors
Shares
in the
Company
M&A
+ Articles or
“Statutes”
Bank A
© Geoffroy Dedieu 2013 202 Setting up a Single Family Office Sharing a few lessons and experiences
WHICH COMPANY DO YOU HAVE?
No Legal Personality
(therefore no limited
liability)
German “Stille
Geselschaft”
French “Société de
Fait” Art. 1873 cc
French “Société en
Participation”
Art. 1871 cc
With Legal Personality
No Limited Liability With Limited Liability
UK / US Partnerships German “Komandit
Gesellschaft” France
“Société Civile” no
commercial activity,
hold real estate or
financial portfolio
“Société en Nom
Collectif”
commercial activity
allowed
Public Limited
(can raise capital from
the public)
Private Limited
(only raise capital from
shareholders)
Onshore :
UK, US, Australia,
Singapore, Hong Kong
Offshore : BVI,
Cayman, Guernsey,
Labuan, Mauritius
Most “offshore” jurisdictions
now require that all certificates
be converted or immobilised
(since 2001).
Find out what the
Memorandum or
“Statutes” say
Legally Owned by
Nominees
or Trustee
Legally Owned
by the
Beneficiaries
Registered
Shares
Bearer
Share
© Geoffroy Dedieu 2013 203 Setting up a Single Family Office Sharing a few lessons and experiences
DO YOU UNDERSTAND THE BASIC LEGAL CONCEPTS ?
Can you describe these and explain what they are for?
Properties
or Businesses
XYZ Ltd Asset
Company
or Holding Company
ABC Trustee
Company
123
Beneficiary
Company
Share
Certificate
Trust
Deed Letter of
Wishes
Individuals
(Client, BO,
Professional)
Trusts & their
documentation
Companies
(different roles)
Assets
M&A + Articles
or “Statutes”
Mr. Wise
Settlor
Beneficiaries as Named
from time to time
Mr. Right ass
Protector
Mr. True as
Trustee
Board of Directors
Family
Trust
Bank A
Portfolio
Sub-
Trust
End
© Geoffroy Dedieu 2013 205 Setting up a Single Family Office Sharing a few lessons and experiences
• Assumptions are a basis for discussion, not a scientific representation of a reality that probably cannot be assessed with
discussions … most figures are in line with 10 years or 20 years performance.
• Equities performance assumed at 8%: this is an aggressive assumption. Over 15 years (1998-2013) equities returned
closer to 0%. And over 20 years 3%.
Appendix (Chap 9) Summary of Portfolio Risk Mapping Assumptions
Past
Performance
2% Target /
Preservation 5% Target 10% Target 15% Target
Cash 3.0% 65.0% 30.0% 1.0% 2.0%
AAA 4.5% 20.0% 3.0% 0.0% 1.0%
AA-A-BBB 6.5% 10.0% 15.0% 3.0% 7.0%
HYB 12.0% 0.0% 15.0% 80.0% 40.0%
Equities 8.0% 2.0% 16.0% 12.0% 40.0%
Real Estate 11.0% 0.0% 6.0% 12.0% 25.0%
Commodities 7.0% 2.0% 5.0% 7.0% 10.0%
Alternative 5.0% 1.0% 10.0% 15.0% 35.0%
% of SFO''s targetting this Level 37.1% 42.6% 5.6% 14.8%
Leverage 4.0% 0.0% 0.0% -30.0% -60.0%
Target 4% 6.6% 12.1% 15%
No solution for
>15%
© Geoffroy Dedieu 2013 206 Setting up a Single Family Office Sharing a few lessons and experiences
APPENDIX - A BIT OF VOCABULARY
• Advisory Wealth Management model that is characterised by a focus on the
provision of holistic advice and financial planning, as well as discretionary or advisory
portfolio management to individuals and families; typical of both offshore Private
Banking and many European onshore markets (e.g. Germany, France, Italy,
Switzerland).
• Agent Relevance: nominee directors, account signatories, trust houses. An
individual or organization appointed by a principal to act on his or her behalf with the
power to bind the principal. This places the risk of financial exposure upon the principal,
along with placing the right to bind that principal in some other party’s hands. The power
of the agent varies in jurisdictions, and the status should be verified. Certain
jurisdictions prohibit the assignment of the agent’s powers by the agent to another.
• AML Anti-Money Laundering.
• AML/ CFT Anti-Money Laundering & Combating the Financing of Terrorism.
• AGM Annual Meeting or Annual General Meeting. An assembly of
shareholders of a company/corporation in which resolutions are considered and the
financial health of the company is considered. Not all jurisdictions require annual
meetings.
• Beneficial Interest
or Ownership Not a direct interest, but rather through a nominee holding legal title
on behalf of the beneficial owner’s equitable interest. Provides privacy, confidentiality,
and convenience, and avoids use of one’s own name for transactions.
• Beneficiary The person(s), company, trust, or estate named by the grantor,
settlor, or creator to receive the benefits of a trust in due course upon conditions the
grantor establishes by way of a trust deed. The beneficiary could be a charity,
foundation, and/or person(s), characterized by “classes” in terms of their order of
entitlement or hierarchy.
• BO Beneficial Owner. (see UBO)
• Broker/Dealer Wealth Management model in which players primarily trade securities
for customers and for their own accounts. This style is characterised by a strong focus
on transactions and frequent client contacts; typical of a significant part of the US
private client business.
• CAD the Singapore Police’s Commercial Affairs Department.
• CAGR Compound annual growth rate.
• CDB Swiss Bankers Code of Conduct.
• CDD Customer Due Diligence.
• CFT Combating the Financing of Terrorism.
• Compliance Compliance with the laws, rules and standards which govern
banking or other financial activities.
• DCF Discounted cash flow valuation.
• EBIT Earnings before interest and taxes.
• EBITDA Earnings before interest, taxes, depreciation and amortisation.
• EPS Earnings per share.
• EUSD European Savings Tax Directive. a directive on the taxation of
interest income from savings within the European Union that came into effect on 1 July
2005.
• EV Enterprise value.
• FATF Financial Action Task Force.
• FATCA The USA’s Foreign Account Tax Compliance Act .
• FCF Free cash flow.
• FMV Fair Market Value. This is an IFRS standard.
• GIPS Global Investment Performance Standards. For investment portfolio
performance reporting.
• HNWI High Net Worth Individuals (individuals with investable assets of
USD1 Mio+).
• Holding Company A holding company derives its net flow through assets and worth
from the stock equity that it holds in its subsidiary companies, including from licensing
agreements, royalties, and dividends from equity holdings.
• IBC International business company. A corporation, in reality an exempt
company, formed (incorporated) under a typical company act of a low-tax jurisdiction
but not authorized to do business within that country of incorporation; intended to be
used for global operations. Owned by member(s) or shareholder(s). Has the usual
corporate attributes.
• IFRS International Financial Reporting Standards.
• Interpol International Criminal Police Organization. The network of
multinational law enforcement authorities established to exchange information
regarding money laundering and other criminal activities. Has more than 125 member
nations.
• IRR Internal Rate of Return. The rate that sets the NPV of an investment
or project to 0.
• KYC Know Your Client.
© Geoffroy Dedieu 2013 207 Setting up a Single Family Office Sharing a few lessons and experiences
APPENDIX - A BIT OF VOCABULARY
• Letter of Wishes The settlor or the beneficiary of a trust may give to the trustees a
letter of his wishes or the trustees may prepare a memorandum of the wishes of the
settlor or the beneficiary with regard to the exercise of any functions conferred on the
trustees by the terms of the trust. Where there is a letter of wishes or memorandum of
wishes, the trustees may have regard to that letter or memorandum in exercising any
functions conferred upon them by the terms of the trust; but shall not be accountable in
any way for their failure or refusal to have regard to that letter or memorandum. In
addition, no fiduciary duty or obligation shall be imposed on the trustee in such
circumstances.
• LIBOR London Interbank Offered Rate.
• Mareva injunction A court injunction preventing a company or trustee from transferring
assets pending the outcome of a lawsuit.
• MAS Monetary Authority of Singapore.
• MV Market value. (see FMV)
• NPV Net Present Value. The present value of future cashflows. (see DCF)
• OECD Organization for Economic Cooperation and Development.
• Paradis fiscal French phrase for a tax haven.
• P/B Price-to-book value.
• P/E Price-to-earnings ratio
• PEP Politically Exposed Person
• Private Banking PB - Used interchangeably with the term “Wealth Management” in this
report; denominates the servicing of High Net Worth Individuals and is not synonymous
with the servicing of “Private Clients”, a term that is commonly used in the US to mean
the servicing of clients with more than US$150-200 K in investable assets.
• Protector A trust instrument may appoint as protector, any person of full age
and of sound mind, including the settlor, or anybody corporate, any firm, partnership or
group of persons, whether incorporate or unincorporated. The protector of a trust may
also be a settlor, a trustee or a beneficiary of the trust.
• RICO US Racketeer Influence and Corrupt Organizations Act. A
professional service provider or trust promoter who assists in money- laundering
schemes or scams may be drawn into US criminal prosecution under RICO.
• ROE Return on equity.
• Rule against
perpetuities A legal limit on the lifetime of a trust or the remote vesting of assets in
the beneficiaries of a trust. May be void ab-initio (from the beginning), a fixed term, or
determined on a wait-and-see basis. Under basic common law, there was a prohibition
against trust assets being held more than twenty-one years after the death of the last
trust beneficiary who was living at the time the trust was created. This has been
abrogated or modified in most offshore jurisdictions.
• SAR Suspicious activity reports (USA).
• Shares Evidence of an equity position in a company. Depending upon the
laws of the issuer’s country, shares may registered, bearer, voting and nonvoting,
unnumbered, common, preferred, or redeem-able. Different classes of stock may be
issued as well as no-par value shares. Limitations of the shares are in the
memorandum or in the articles of association of the company/corporation.
• Statutory That which is fixed by statutes or codes (as opposed to the
common-law body of cases, generating what is referred to as “case law”).
• STR Suspicious Transaction Report (Singapore). Comparable to SAR,
Suspicious activity reports in the USA.
• UBO Ultimate Beneficial Owner. Refer to BO.
• UCITS European (EU) Undertakings for Collective Investment in
Transferable Securities. In other words, investment funds.
• UHNWIs Ultra High Net Worth Individuals (individuals with investable assets
of USD30 Mio+).
• US Person Persons with a US personal tax exposure such as:
• American citizens and dual passport holders;
• Individuals with a place of permanent residence in the United States;
• Holders of permanent residence permit for the United States. A permanent
residence permit means, for example, a green card, an extended stay in the United
States this year and during the two past years, or a substantial physical presence
test.
• VaR Value at Risk, a statistical measure of portfolio risk.
Geoffroy is Chief Executive Officer of the TY Danjuma Family Office, based in Esher, UK. He
is an experienced Family Office manager, with a focus on the Single-Family model. Geoffroy
lived and worked in Asia from 1993 to 2009 and is now commuting between London, Africa
and Singapore. Before he was hired by one of his client-families, Geoffroy was the founder of
Family Services at Bank Julius Baer and previously founder and Head of the European Desk
in Asia for a large European Bank as well as Deputy Head of the bank for South East Asia.
He has worked as a banker with European Family Offices who bank in Singapore and for
whom he managed at one point assets in excess of USD 2.5 billion. He focuses on finding
creative solutions to complex family situations in areas as diverse as portfolio structuring,
family estate planning, trusts, next-generation coaching and Family Office management.
Geoffroy is an experienced speaker and writer. He teaches a Family Office course at the
University of Orleans (France) - Master of Wealth Management programme. Geoffroy holds
masters degrees in Law (National University of Singapore and DEA Paris) and Business
Administration (MBA INSEAD). He is the Laureate at the 1992 Freshfields Competition for
Young International Lawyers. He is a Certified Financial Planner (CFP, France) and a
Member of the Chartered Institute for Securities and Investments (UK).
This book was born out of the need to provide a reference guide for
families wishing to set up their own wealth-management structure,
drawing from experience in Singapore, Switzerland and London.
Sharing a few lessons and experiences from a family officer with a view
to provide a different perspective on issues of hiring, organisation,
structuring and costs.
2011-2013 © Geoffroy Dedieu
SETTING UP A
SINGLE FAMILY
OFFICE