Family offices are familiar to the Swiss wealth market and have witnessed considerable pressures and change. This article examines some of the latest trends.

The following article on the family office industry is by Anna Steward of the international law firm Charles Russell. The editors of this publication greatly value these insights but as ever do not necessarily share all the opinions contained in the piece, and we invite readers to send in their views.

The term “family office” can mean any number of different structures or arrangements.  These may be either institutional or independent and represent single or multiple families.  In Switzerland there has been a recent trend for families to look at options for a structure over which they have a substantial level of control through which to manage their investments as well as day to day matters which may affect the family.

Multi-family offices are becoming more and more popular with high net worth families looking to bring about a smooth cross-generational transfer and keep an eye on costs by achieving economies of scale.  In particular where the retention of a family business is not viable in the context of particular family circumstances (if, for example, the next generation carve out independent careers), giving rise to a dramatic increase in liquidity, the use of a family office structure to manage the family’s wealth in the long term can offer the right balance of independent management with an ultimate retention of oversight and control particularly from an investment perspective.  If the family is the ultimate employer the incentive as well as the style of investment may be a little more focused than in the case of an independent investment manager/advisor.

All change in Switzerland?

Despite fears that Swiss banking secrecy is being slowly eroded, Switzerland remains a popular centre for the management of wealth for high net worth and ultra high net worth individuals and families.  The banking industry, while under increasing pressure from foreign tax authorities, has a tradition of high standards and quality of service and still attracts highly qualified and talented individuals to its ranks.  The larger Swiss banks themselves offer varying forms of family office platforms which, alongside the investment management and advisory services offered, include long term wealth planning, philanthropic incentives and “training” for the next generation. 

Why a family office?

In addition, families are increasingly looking to solutions provided either by a single family office structure (generally for larger families) and multi-family offices which provide anything from pure investment services to a full family office service.  Multi family offices in particular have had to adapt to the expanding needs of high net worth families and in particular to the requirements of several generations. As well as investment services and trustee services, family offices are increasingly providing family “concierge” service.  These can range from the payment of monthly bills for families, arranging travel and personal security, employing staff on a worldwide basis, looking after travel arrangements, children’s schooling and managing international property portfolios and often yachts and aircraft.  

Families might consider a single family office to enable co-ordination of policy and investment strategy, particularly after a high value liquidity event such as the sale of the family business.  Long term the goals of a single family office are generally investments in line with the family’s policy and strategy and, more importantly, wealth preservation.  Multi family offices have tended to focus more on business opportunities.  This article looks at issues which are affecting both single and multi-family offices.

Wealth preservation rather than fiscal planning

With the advent of global initiatives on tax transparency including Group of Twenty and FATF [Financial Action Task Force] initiatives against planning through the use of tax havens, FATCA [Foreign Account Taxation Compliance Act] and the ever growing network of tax information exchange agreements and double taxation treaties, it is no longer possible to avoid tax on a global scale.  Whilst tax mitigation remains important, families are focused more than ever on long term, tax compliant wealth preservation and cross generational planning. 

Previously, family offices were viewed much more as independent investment platforms for clients who wanted to keep control of the general strategy and have funds invested across a number of different financial service providers but through a centralised mechanism whereby they could structure daily oversight.  Rather than having individually to analyse the performance of each bank/financial institution, a team of investment experts employed by a family office can co-ordinate oversight.  

The general perception is that, rather than focusing on return on investments, clients are more aware of external factors which will impact their wealth in the long term.  From a Swiss perspective they are aware of attacks on secrecy and in particular monitoring various developments.  These include such as the UK-Swiss Confederation Tax Cooperation agreement, the proposed (but recently rejected) so called relaxation of Swiss banking secrecy rules to allow certain disclosures to the Internal Revenue Service in relation to US tax planning advice given within Switzerland to US connected persons looming on the horizon, the possibility (or perhaps probability) of the introduction of all crimes money laundering legislation. 

Family office service providers in Geneva have noticed that clients are looking in particular for transparency in relation to fees, tax compliant solutions, and most importantly, high levels of confidentiality and security.  Even if banking secrecy itself may be eroded, protection of information is vital in terms of personal security.

Traditionally, clients have looked to Geneva and the Swiss market as a safe haven both in terms of political stability, tax neutrality and protection of information. Clients who are resident in jurisdictions where personal security is an issue, such as parts of Latin America, need to be reassured that their information is secure.  Recent leak scandals have been one of the factors which have encourage clients to look at the solutions offered by single family offices or smaller multi family offices so that they retain greater control.

From an investment perspective, the perception is that, since the 2008/9 global financial crisis, high net worth clients are happier to invest in what they know. Where the family business has been sold, funds are often used for substantial private equity investments in industries with which families are already familiar.  Alongside the change in investment trends,  a far greater emphasis is being placed on risk management with more and more being spent each year by family offices on due diligence.   One family office in Geneva estimated that up to 60% of its annual outgoings is being spent on commissioning due diligence reports for new investments. Family offices in Switzerland are seeing an increasing emphasis on the importance of real estate with some setting up specialised real estate teams. Artwork and other tangible assets are also increasingly popular as families shy away from certain traditional investments. 

Interest in commodities investments has also led to a broadening of a geographical scope in terms of investment strategies. Feedback from people involved locally in formulating investment strategies for multi-family office clients shows that when looking at private equity or seed capital type investments, clients are looking for solid management, good financials, a good “story”, niche/original ideas, a market which is not over-flooded and relatively low barriers to entry.

A new style of philanthropy?

Philanthropic ventures remain important for high net worth individuals and families; particularly given that they are more and more the subject of intense public scrutiny. A new type of philanthropic investment referred to by some as “philanthropic capitalism” is becoming increasingly popular.  This can be anything from investing in scholarship programmes which in turn may raise the profile of a family business venture amongst talented undergraduates or investing in community projects which can enable more efficient (yet responsible) use of local resources.  The new approach to philanthropy is more akin to a fusion of philanthropy and entrepreneurialism.  The family office platform is an ideal mechanism for this type of strategy.  Clients are also aware of the tax advantages, particularly in the US and the UK, of philanthropic ventures.

Increasingly the next generation is being encouraged to become directly involved in philanthropic ventures with some family wealth holding structures being managed in a way so that substantial capital distributions are withheld from members of the next generation who are not actively investing in not-for profit ventures.

Long term considerations

As well as effective investment solutions, clients are looking to family office arrangements to help with a smooth generational transfer.  This will include workshops and programmes (which are also offered by bank run family office platforms) offering education for the next generation covering wealth management, personal security and risk and other issues. 

From an investment as well as a structuring process, clients are looking to family offices to provide much longer term strategies.  The importance of preservation of wealth for future generations and the long term good of the family cannot be over emphasised.  This emphasis on long term protection rather than short term returns means that families are still keen to structure their holdings using trusts (or in some circumstances foundations or a combination of the two) with family offices often either providing the trustee services or working alongside independent trustees to provide investment advice and other services.

Alongside the trust, the family will work with the family office and perhaps external advisors to ensure an effective long term governance strategy - in particular, who will control and own the assets once the first generation is no longer directly involved, and how.  An effective communication strategy laid out in flexible terms can serve in the long term to preserve family harmony as well as enable efficient administration.  In some circumstances it may even be appropriate for family members themselves to be employed by the family office as investment advisors or in another key role.

Conclusions

In the current climate,  wealthy families still invest extensively with private banks and independent asset managers in Switzerland but increasingly seek ways in which to tailor and monitor their investment focus and, frequently, this can be achieved through the creation of a single family office (for larger families) or integration into a multi-family office.  Investment trends have seen families looking to industries and markets in which they have existing specialist knowledge as well as opportunities for smaller investments in non-traditional asset classes.  Real estate is still seen by many as a safe bet. 

For many wealthy families, the long term protection of the family’s wealth far outweighs the importance of short term returns. Global financial instability since 2008 has resulted in wealthy families being far more risk aware and the level of control afforded by a family office has contributed to their growing popularity.