Advising family offices: What do they need to succeed?

For many ultra-high-net-worth families operating internationally, choosing how best to organise their affairs can be complex.

As well as managing internal challenges like family dynamics, governance and succession, they must also adapt to external challenges, such as political and economic instability and an ever-changing global reporting landscape.

A family office is an efficient way for families to navigate these complexities. It can help consolidate the family vision, enable effective governance for both the family and (where applicable) its business, and provide a vehicle for the stewardship of family wealth for generations. Family offices have become a popular option for ultra-high-net-worth families in recent years, with 70 percent founded since 2000.¹

However, operating a successful family office is not without challenges, particularly as families become more globalised and cross-border reporting obligations increase.

To provide practical guidance on how family offices can approach these challenges, we assembled an international panel of private wealth specialists to discuss the key ingredients to success.

Define the family office governance structure

The panel was uniform in acknowledging that “one of the biggest risks to any family office is the family itself.” To minimise this risk, they agreed it’s imperative a robust, rules-based family governance framework with clear communication channels is implemented.

A rules-based approach is not role specific, can be flexible and helps to promote participation across all members of the family business. This approach typically includes everything from wills, trust documents and shareholder agreements, to corporate documents and family rules of engagement, which should be consistent with the family’s estate planning wishes. This method helps everyone know where they stand and what is expected of them, which can be critical when it comes to the involvement of younger generations.

However, the panel stressed this tactic is often neglected at the outset. This can result in the misalignment of the family’s governance structure and estate plans. Acting early to ensure alignment of these factors can help save a costly exercise later on and foster collaboration between family members who have a clear set of objectives to work towards.

Whilst family offices are not typically created with an end date in mind, families should have a clear exit strategy. The panel discussed how a family business may elect to incorporate an “escape vote” into their governance framework at three- to five-year intervals. This enables family members to have their say on whether they wish to maintain the structure, while also restricting conflict by involving everyone in these key decisions. Discussing a potential future exit can also reduce the complexity of a family structure by shining a light on the significant resource and cost expenditure involved.

Considering cross-border complexities

Complexity is typically introduced to a structure when families start to operate across borders. This has been driven more recently by two shifts: a change in mindset of younger generations, who prefer to be mobile international citizens; and increasing global regulation such as the U.S. Foreign Account Tax Compliance Act (FATCA), Common Reporting Standard, and ultimate beneficial ownership legislation.

The panel drew on examples of when family members move to – or invest in – another jurisdiction without fully involving the family office and its advisors. This can subject the family office to regulatory and tax reporting obligations that are not fully understood, potentially putting any underlying business at risk and resulting in costly remediation fees. It’s therefore advisable to include sufficient flexibility within the governance framework to accommodate family members operating internationally.

The panel stressed that professional trustees and wealth managers can add considerable value to these governance and structuring discussions. They can provide cross-border structuring and compliance expertise and facilitate what can be tough intergenerational conversations, all the while acting independently so emotional biases are removed from decision making. They can also serve as legacy wealth stewards familiar with the history of the family’s wishes and prepare the next generation for managing wealth responsibly. This oversight can help promote a consistent approach to governance that can transcend generations.

The role of these advisors continues to evolve. There is an increasing reliance on advisors to counsel the next generation on complex decisions around compliance, sustainability, philanthropy and tax, which, as the panel agreed, may drive a rise in family offices outsourcing to specialist service providers.

Getting succession right

Succession is critical to the longevity of a family office and any underlying business, but despite its importance, only 54 percent of North American family offices have a succession plan in place.²

On one hand, some family principals are proactive when it comes to succession and have short- and long-term contingency plans that can span, in some instances, up to seven generations. On the other hand, some founders wish to leave succession discussions to their executors and/or heirs and will continue to work without relinquishing control or planning beyond their own lifetime.

Even if family principals are willing to have conversations about succession, the next generation often has different interests and views. Managing these differences can be a challenge, and family offices need to think carefully about who will be involved in any family businesses and what experience the future leaders are expected to have. After all, the family business isn’t always for everyone. Children who want to follow their own path may want to take their equity out of the family structure. These individuals should be compensated fairly and thought should be given as to whether the family principal’s will aligns with this scenario.

For those remaining within the family business, where they are located internationally can have a significant bearing on both succession planning and how the family business is structured.

In the initial stages of planning, it’s often easy to understand the family’s wishes as there is a clearer idea about where they want to spend their lives. However, as the panel agreed, it’s not always possible to rely on these wishes as part of long-term planning because individual circumstances change, and family members may relocate. As a result, flexibility should be baked into structuring and succession plans to avoid the costly exercise of adapting these later.

Offshore trusts and other estate planning structures can help families accommodate these changes and manage the complexities posed by international succession planning. The panel concurred that these structures are particularly useful for managing the legacy of the family wealth for beneficiaries who are globally mobile and have differing needs. But what do global families think about putting their wealth offshore?

The panel explored whether families skeptical of the concept of offshore planning are coming from a place of knowledge, and if the private wealth industry is doing enough to educate younger generations on its benefits. Offshore financial centres such as Jersey, with stringent regulations, flexible international planning tools, accessible courts and robust regulatory frameworks, are heavily scrutinised by global reporting standards and offer a logical choice for international family offices seeking to streamline their structuring arrangements.

The future of the family office

It’s clear that ultra-high-net-worth families continue to grow in complexity. However, while each family office is unique and has its own definition of success, a robust governance framework and clear succession plan underpin their functional success.

These facets – together with a network of professional advisors that evolve alongside their needs – help wealthy families achieve continuity and adaptability within a shifting global landscape. Critically, they can also foster responsible stewardship, meaning the family’s wealth and legacy is safeguarded for generations to come.

¹ _{RBC and Campden Wealth’s North America Family Office Report 2022}

² _Ibid.

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