REALISING YOUR VISION FOR SUCCESSION

We have both the technical expertise and the commercial experience to hold an exceptionally wide variety of assets, including private companies, business ventures, property, art collections, aircraft and marine vessels, as well as diversified investment portfolios.

Trusts are frequently an integral part of intergenerational succession planning and as trustees we support families in passing on their legacy.

We have highly qualified trust officers, lawyers and accountants making up our two principal fiduciary teams in Jersey and Switzerland. They are proficient in the establishment and administration of structures incorporating entities from a wide range of international financial centres. These include Jersey, Switzerland, British Virgin Islands, Guernsey,

Cayman Islands, Mauritius, Luxembourg, Cyprus, Isle of Man, Singapore and New Zealand. In addition, our South African and United States offices establish and administer South African and United States trusts, and act as independent trustees.

We specialise in helping individuals and families structure their finances to realise their vision of how their wealth should be managed and passed smoothly down to future generations. In some instances the next generation will be ready to step into the shoes of their predecessors and carry on business as usual. In others the transition necessitates a substantial change in the asset mix, which needs to be carefully planned and managed, with due regard for family as well as commercial considerations.

 

A CLOSER WORKING RELATIONSHIP

​Whilst the needs of our clients, their families and the structures we establish on their behalf vary widely, our trustees always maintain close contact with settlors and, where appropriate, beneficiaries. We encourage regular meetings within the context of family governance regimes.

​We will provide corporate trustees or, where appropriate, senior board level executives able to act as trustees and provide high-level commercial, legal or other technical expertise. Stonehage Fleming trustees commonly sit on the boards of family companies representing family interests.

 

INDEPENDENT TRUSTEESHIP

​Stonehage Fleming combines the advantages of a privately-owned and managed business with the benefits of substantial scale. This enables us to offer an exceptionally broad range of expertise and global capability. Although we have thirteen offices around the world, achieving global reach

​through an extensive network of associates, we are still independently owned, with the majority of shares in the hands of long-serving management. This means we can take a long-term view and ensure you benefit from assured continuity in your relationships with our senior team.

 

EXTRAORDINARY DISCRETION

​Meticulous attention to detail coupled with extraordinary discretion is at the heart of trusteeship. We strive to protect the interests of all beneficiaries, including their rights to privacy,

​and to ensure optimum tax efficiency and full crossborder compliance in an increasingly complex regulatory environment.

 

 

Inter-Vivos Trusts: Nebulous Creatures of Immense Pedigree with a Glorious Past & Promising Future

With all the negative publicity surrounding offshore trusts, it would be easy to think that the days of the trust are over, that the risks and costs now outweigh the benefits and that wealthy families will be looking for alternative ways of holding their assets.

At this stage, however, the evidence is the contrary. The trust is a unique structure for holding assets developed in England around 1200 AD and adopted in practically all jurisdictions which have a legal system based on the principles of English Law. Nowadays the trust is increasingly recognised internationally even in Civil Law Jurisdictions (including, for example, Switzerland and most recently Hungary) and is extensively used in both China and Japan, despite their very different legal systems.

The trust has survived many previous attacks, mainly because it has numerous legitimate uses and is a superb vehicle for family succession planning. It is obviously true that increased regulation has added to costs, that the demand for transparency has diminished financial privacy and that increasingly determined tax authorities are curbing the ability of offshore structures to avoid tax. However, there remain many legitimate and compelling reasons for settling assets into a trust, which have perhaps been temporarily obscured by the highly negative and illinformed press, associating all offshore trusts with money laundering and tax evasion.

The reality is that a small number of participants have helped to give the whole sector a bad press, by taking on clients whom most would regard as unacceptable.

Trusts under Attack

Regulators

The number of international regulatory changes in the past two years is unprecedented, with new AML regulations, EU Directives, transparency initiatives, exchange of information and the ability of foreign tax authorities to learn the identity of beneficiaries. These include the US Foreign Account Tax Compliance Act (FACTA) and the OECD’s Common Reporting Standard (CRS), both of which are threatening the privacy we have taken for granted for so long. The cost implications of these new initiatives are substantial, with all the obligations for enhanced due diligence, disclosure and reporting.

Tax Authorities

With government budgets under pressure all round the world, the rich are an obvious target:

  • Increased transparency and exchange of information, combined with greater vigilance by the authorities will make it more difficult to use secrecy for illegal tax evasion.
  • Opportunities for legal tax avoidance are being reduced by legislation designed to levy taxation on the basis of substance over form.

Media

The often deliberately misleading media campaigns will continue, increasing pressure on politicians to take action against so called ‘tax havens’ and raising concerns that data theft will cause breaches of confidentiality.

The combination of loss of privacy, increased costs, reduced tax benefits and now the potential reputational risks of being associated with offshore structures obviously prompts the question:

“What is the future for offshore trusts?”

The short answer, is that once the current furore has subsided, it will be recognised that Trusts are needed today just as much as they have been in the past.

The Lessons Of History: Trusts Are Resilient

Whilst implementation of FATCA and CRS is a challenge, there were similar concerns over the introduction by the US of the Qualified Intermediary Regime (QI) in 2001, but it was business as usual, following implementation. Similarly, despite current concerns, the reality is that trust laws continue to be recognised or promulgated on both sides of the Atlantic as well as in Russia, Eastern Europe, Asia and the Middle East, in response to growing international demand.

For the vast majority of individuals and families using Trusts, their tax planning is perfectly legitimate and not based on secrecy or tax evasion. That demand has not waned attests to the durability, versatility and inherent ability of trusts to preserve, manage and develop wealth as “part of the social and economic fabric of society.“1 Foundations, limited partnerships and corporations simply cannot compare with the benefits and flexibility trusts provide.

Legitimate Trusts For Legitimate Purposes

The many legitimate uses for trusts include: succession and estate planning (thereby alleviating the need for probate); tax planning during life and upon decease; continuity of family businesses; provision for heirs unable to take care of their financial affairs (spendthrifts, minors and the like); for testamentary freedom and protection against forced heirship claims; vehicles for charitable giving; and last, but by no means least, asset protection.

With increasing accumulation of wealth across the Globe and unprecedented numbers of businesses established over the last thirty years, families obviously require holding structures which promote effective succession and protect the assets they have built, especially in countries which are politically unstable.

And what better vehicle than a Trust, which can protect wealth for future generations, while simultaneously allowing families to retain enjoyment during their lives?

The essential element of a Trust, that distinguishes it entirely from other legal vehicles, is the gratuitous transfer of property from the settlor to the trustee, which results in the assets no longer belonging to the settlor. Following the transfer, the assets legally belong to the trustee and creditors will only gain access to these assets if it can be shown that the Trust was made with the intention of defeating legitimate creditor claims or is otherwise technically invalid. This will not be easy if the Trust has been established with appropriate legal advice and properly administered by an independent trustee.

The selection of a “real trustee,” who is independent and fully competent, is crucially important. A trustee who fails to act independently and takes instructions from the settlor and/or a beneficiary, can subject a trust to possible attack by creditors. They may argue that he was not a legitimate trustee of an Inter Vivos Trust but rather a mere nominee custodian holding the assets on bare trust for the settlor. The reality is that responsibility of the trustee is to all the trust beneficiaries and not to the settlor.

In many cases settlors wish to retain a degree of influence and certain jurisdictions have made specific legal provisions to enable this. The Hague Trust Convention2 makes it clear that “the reservation by the settlor of certain rights and powers…are not necessarily inconsistent with the existence of a trust.” However, the less powers the settlor reserves, the stronger the trust. Under certain circumstances it may also be advisable to delegate some powers on to protector committees, family councils and investment committees. The latter may provide family members a forum for discussion, without the risks created by settlor retention of powers.

Even where the validity of a Trust is not questioned, the residence of the Trust for tax purposes might be challenged3. Offshore Trust laws allowing settlor reserved powers will not help protect a Trust if it is pulled onshore because key decisions are made by individual’s resident onshore. The precise definitions vary significantly according to the jurisdictions involved but the conduct of the trustee and the extent of proper trust administration (or lack thereof) by the trustee, will be the evidence principally relied upon by the tax authorities in such cases.

Ease and Continuity of Succession Without Probate

Many wealthy families prefer to hold assets in trust structures to preserve continuity of purpose, to involve trusted family advisers in key decisions, to help avoid family disputes and to prevent the assets being threatened by poor decisions on the part of individual family members.

Frequently settlors come from jurisdictions that limit testamentary freedom (so called ‘forced heirship’). Thus if the wish of the settlor is to ensure that the fortune he/she generated is managed after death pursuant to their wishes, a trust is an obvious solution. Many financial centres have passed legislation that specifically provides for the trust to be governed by the laws of that jurisdiction, irrespective of the law of the settlor’s domicile.

Another benefit of an Inter Vivos Trust is that it is wholly private and avoids the complexity, costs and time that probate takes for international families with assets located in many jurisdictions. There is no requirement for court orders to enable the trustee to continue to act after the death of the settlor or subsequent beneficiaries. The management of the trust assets continues smoothly and these assets can ultimately be distributed, without any public process, quietly and privately.

Holding A Family Business

Families with family businesses need to address the issue of succession, coupled with responsible ownership. Shares directly held by individual family members can give rise to significant problems on death, divorce, bankruptcy, changing financial circumstances or differences of view. Trusts, on the other hand, can offer continuity of ownership from one generation to the next. It is not unusual for differences of opinion to arise between members of the family directly involved in the management of the business and those who are merely shareholders. Such differences can develop into unpleasant and destructive disputes, which often result in enormous legal costs, potentially serious damage to the business and, worst of all, long lasting feuds between family members.

Settling family business shares onto a Trust can assist tremendously. Whilst conflicts cannot be entirely avoided, setting out clear rules to govern the family business in a structured fashion, under the stewardship of appointed trustees, can help mitigate family disputes. It will also increase the chances of the family staying together and keeping control of the business. A trust can provide a mechanism for consolidation and reservation of voting powers, which will limit conflicts arising.4

This presupposes a genuine Trust with a trustee who has a close relationship with all beneficiaries, who can negotiate a course which will be accepted by all parties, in line with the requirements of the trust deed. Without these relationships across generations, a trustee is little more than an administrator.

Where possible, the trustee will try to ensure his or her efforts are supported by a family constitution which addresses and defines the family values and the purpose of the wealth.

Providing for Spendthrifts

Most HNW families will face the probable dissipation of their wealth over three generations unless protective measures, such as a trust, are put in place. This process is called wealth entropy. Trusts can be used to protect the family from their inheritance and the inheritance from the family.

Similarly, many wealthy families do not want their children to inherit family wealth in a lump sum at a relatively young age. They want to ensure their children will receive the assets only if and when it is determined they have the maturity to properly handle such wealth. Placing the assets into trust, with specific tailored provisions, will allow the settlor’s objectives to be achieved, whilst protecting the children from themselves and from others.

Asset Protection

Trusts properly implemented with a bespoke, irrevocable, discretionary trust deed, can offer protection against third party creditors but also against liability arising from direct ownership of assets and the claims of divorcing spouses, or disgruntled heirs. However, a Trust can only provide asset protection (AP) if it is established in an appropriate jurisdiction and the settlor relinquishes beneficial ownership, dominion and control to an experienced and competent trustee. This must be done at a time when there are no existing or foreseeable claims against him/her, as alternatively the trust may be viewed by the courts as an attempt to defraud creditors. UK courts, in particular, are extremely alert to any possibility that the trust might have been created to defeat the settlor’s own creditors, even if the settlor was clearly solvent at the time.

However, a trust created by a solvent settlor for the benefit of beneficiaries such as children should prevent their creditors from collecting against the assets in contrast to a direct gift of the same assets.

Additionally, it is important to remember that whilst AP Trusts are subject to the basic principles and laws applicable to Trusts generally, they require specific planning by experienced professionals. Thus whilst such Trusts may always be subject to challenge, a well-planned Trust with a “real trustee” is the best tool available to protect a family’s wealth from unjustified or unexpected claims.

A Trust is not always a silver bullet in divorce cases instituted in the UK courts, but they do provide another layer of protection. The enforcement of an English court order granted in matrimonial proceedings in the Trust’s offshore jurisdiction will be a major hurdle, which the spouse will have significant difficulty overcoming. Furthermore, not all the cases are bad, as the particularly poignant choice of words used by the court in the A v.A divorce case5 (which upheld the husband’s two trusts noting that the trustees had conscientiously performed their fiduciary duties), reflects:

“...even in the Family Division, a spouse who seeks to extend her claim for ancillary relief to assets which appear to be in the hands of someone other than her husband must identify, and by reference to established principle, some proper basis for doing so.”

Tax and Regulatory Neutrality

In a global world it is increasingly common for assets to be owned by a variety of investors from different jurisdictions, whether or not they are of the same family. Each of those jurisdictions will have different tax and regulatory systems, such that it is difficult not to disadvantage some investors or beneficiaries by comparison to others. Holding the assets through an offshore structure is often designed to achieve tax and regulatory neutrality between all investors - i.e. a fair playing field. In general the beneficiaries will be fully taxed in their own jurisdictions but will not be subject to unnecessary complications arising from an unsuitable ownership structure.

Charitable Trusts

Most wealthy families make significant contributions to charitable causes, frequently through charitable trusts. This takes the ownership of the assets outside the family, whilst allowing the family some continuing influence over the way the assets are managed and the causes which they support.

So What is the Future of the Trust

Despite the bad publicity, the trust is a highly useful device which plays a very important and legitimate role in our society. Moreover, it is highly debatable whether criminals and tax evaders make use of offshore centres and trusts any more than they do mainstream bank accounts in major international cities like London and New York.

Gone are the days when commoditised trusts were sold by unskilled salesmen and the demand was for trustees who would acquiesce to every whim of the settlor/beneficiaries. And good riddance to them too because these were the very trusts that created the prejudices of journalists condemning the trust industry today.

HNW families that have trusts for legitimate goals need trusts that will stand up to scrutiny when stress tested, which calls for reputable, knowledgeable trustees who are accountable. Such families understand the price that needs to be paid, in terms of passing control over their assets to the professional trustee, so they will seek out trustees who have real business acumen, knowledge of trust law, independence and the skill to manage family trust relationships. Similarly, in the new world of transparency, companies offering trust services must worry about their reputation and can no longer afford to offer trustee services to families who still want to “have their cake and eat it”, appointing trustees who act according to their wishes and who perceive the settlor and his or her family as “clients”, rather than potential beneficiaries in accordance with the terms of the trust.

Given the myriad of potential issues HNW families face, they have never needed trusts more than they do today. But they require trusts that will stand up to attacks from creditors and tax authorities and this will only be the case if the trustees exercise their discretion and are not afraid to say, on appropriate occasion, “No.” Similarly, those families who understand the old Jersey Law adage ‘donner et retenir ne vaut’ (it is impossible both to give away yet retain) will be less equivocal about passing the necessary degree of control to their trustees, a fundamental requirement for a valid trust. And, undoubtedly, their trusts, like good ports in a storm, will be the ones most likely to pass the stress test.


1 Hon. Justice David Hayton, Reflections on the Hague Convention After Thirty years
2 Article 2 of the Hague Convention on the law Applicable to Trusts and on their Recognition, most of the provisions of which have been incorporated into English law, (by the (English) Recognition of Trusts Act 1987).
3 Garron Family Trust V Her Majesty the Queen [2009] TCC 450
4 See: Trust Ownership of the Family Owned Business: Towards a wider Perspective, Christian Stewart, Family Legacy, Asia
5 Av. A. 2007 EWHC 99(Fam)

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The Changing Role of the Family Office

Family offices are struggling to cope with the growing demands for advice and expertise arising from increased regulation, a more litigious society and the risks of an unstable global economy. Andrew Nolan argues the need for tighter definition of its role and responsibilities to enable the family office to adapt to the current environment.

There is no blueprint for a family office, as each should be designed to serve the particular needs of the family concerned. There have, however, been some clear trends over the last two decades which need to be considered by any family establishing a new family office or reviewing the role of an existing one. Indeed the extent of the changes now taking place in the external environment is challenging the fundamental concept of a modern family office and its economic viability. Never before has it been more important to define the objectives and to design a working model which can realistically meet those objectives in a cost efficient manner.

THE TRADITIONAL FAMILY OFFICE

Whilst a family office should in theory be ‘purpose built’, most have evolved over decades, new functions being added on in response to events. Many started as offshoots of a family business or an estate office.

The role was primarily administrative, keeping accounts, processing transactions and administering trusts and other vehicles. The family would take advice directly from professional advisors such as lawyers, accountants, stockbrokers and land agents and the family office would be responsible for implementing that advice.


EVOLUTION FROM ADMINISTRATOR TO ADVISER / GATEKEEPER

Over the last twenty years, the role has gradually evolved from administration and implementation to adviser and ‘gatekeeper’ between the family and their professional advisers.


There are four main reasons for this significant change of role:

  1. The need for professional advice is more frequent and more specialised, reflecting an increasingly complex and litigious environment. Many families require a ‘gatekeeper’ to identify issues, to select appropriate specialists, to understand and interpret the advice they give, and to integrate that advice into the broader picture.
  2. Wealth management, in particular, is vastly more complex than twenty years ago with a plethora of new products, strategies and structures, which require extensive analysis and ongoing monitoring, to ensure the right solutions and the right advisers. The days of relying on a single stockbroker or investment manager are now a distant memory.
  3. The increased risks of a fast changing and unstable economic environment have brought a need for highly sophisticated risk management across the full spectrum of family finances.
  4. Families themselves have become more complex, primarily because they are increasingly international, but also because many have multiple business interests.

THE PROBLEM WITH THE CURRENT MODEL

The problem is that the need for advice is growing so rapidly that it is challenging for a typical family office even to meet the requirements of being an effective gatekeeper.

The combined impact of ever more complex tax compliance, increasing regulation and a highly litigious environment is testing the capabilities of even the largest and best resourced family offices. Many indeed are so busy responding to the latest tax or regulatory changes that they scarcely have time to consider the bigger picture, especially family strategy, governance and succession planning.

The problem is often exacerbated by loose definition of the role of family offices, causing muddled thinking and duplication of effort between the family office and external advisers. Some family offices, for instance, have already overreached themselves in trying to duplicate the role of an external asset manager, without the critical mass or resource to deliver a fully competent service. Not only is this inefficient, but by immersing themselves in excessive detail in one aspect of the family’s affairs, they can be distracted from their core responsibility of implementing the family’s wider wealth strategy.

Defining what is expected of a family office can be more difficult than it sounds, as it involves articulating very precisely the relationship between the family, the family office and external advisers, both in reaching decisions and in the implementation. It will involve analysis of:

  1. The family itself
  2. Key areas of collective activity
  3. Extent to which the family wishes to delegate the management of its wealth to a family office, rather than through direct relationships with professional advisers and private banks

1. THE FAMILY HISTORY AND CIRCUMSTANCES

Whilst each one is different, the services required will strongly reflect the circumstances, size and history of the family itself:

  • History, number of generations and number of family members
  • Ability, orientation and authority of family leadership
  • Geographic and jurisdictional complexity
  • Assets collectively owned / collective activities
  • Complexity of structures through which assets held
  • Family strategy, objectives and values
  • Family Governance

Clearly it is a very different proposition to run the family office for a 1st generation entrepreneur with two young children than for a 5th generation family with 200 members scattered around the world, led by senior family members who are not particularly interested in business and are thus less involved in day to day decisions.

Equally, the role of the family office is strongly affected by the complexity or otherwise of the structures through which the assets are held and the governance framework which aligns family decision making with long-term strategy and objectives. The family office is often the guardian of family governance processes and in larger families, with many different trusts and companies, it requires considerable skill and experience to ensure key decisions reflect the interests of the family as whole.

2. MAIN AREAS OF COLLECTIVE ACTIVITY

The priorities of the family office will also reflect the main collective activities of the family which will generally include some or all of the following:

  • Investment management, banking and treasury
  • Relationship with family business
  • Private equity and direct business interests
  • Property
  • Philanthropy
  • Administration (Basic / Expert) and Reporting

In each area, the precise role of the family office needs to be defined, for example:

Investment management

How is responsibility for asset allocation and manager selection apportioned between external investment managers, the family office and the key decision makers within the family? Is the role of the family office to be a manager of managers and supplier of investment services or to stand in the shoes of the family in purchasing such services from the external market?

The difference may be subtle, but if not precisely defined, there is every chance the family office will become a shadow investment manager, with all the resource and cost which that implies.

Relationship with Family Business

To what extent is the family office involved in overseeing the relationship between the family business and family shareholders (often through trusts and other vehicles), ensuring that the interests of all shareholders are properly represented, especially when major decisions are made which impact on the risk profile of their investment?

In many cases the family leadership is directly involved in the business, so knowledge and skill may be required in ensuring their decisions are subjected to proper scrutiny on behalf of other family members. The family office may also be closely involved in succession planning for the business, often through a formal framework defined in the family constitution.

Private Equity and other business interests

Is the family office a mini private equity house accountable for performance or does it simply implement the ideas and decisions of senior family members to invest in private businesses on an opportunistic basis? If the latter how are the interests of other family members protected?

Again, the difference is quite fundamental, one requiring a team of highly experienced private equity professionals, and the latter requiring someone with sufficient corporate finance experience to research and implement, but not ultimately responsible for decisions. Either way, suitable governance will be required to protect the interests of the wider family.

Property

Is the property for residential, leisure or investment purposes or a combination of all three? Does the family office find and negotiate the purchases on the family’s behalf, or does it simply implement the instructions of the family and provide ongoing administration services? Is it also responsible for considering the tax and succession implications and the alternative structures through which the properties should be held?

Philanthropy

Is there a philanthropic legacy and what are its objectives, both externally and within the family? What role do the family members play in this and what support is required from the family office?

Arrangements for philanthropic giving vary considerably from one family to another, but philanthropy is increasingly combined with succession planning in leaving a legacy of social capital as well as monetary wealth, in which family members play a key role.

Administration and services

The administration requirements of a family office can require considerable technical expertise (trusts, tax, legal, banking etc) and a deep working knowledge of the family is also essential, including the history, personalities, preferences and objectives, so that the family office is able to process routine transactions without continuous reference to the family leaders.

Just how complex are the family’s requirements and what is the frequency of transactions requiring decisions and judgments in the implementation? Are they, for instance, frequently buying properties, works of art or leisure assets? How complex are the banking and treasury arrangements?

Legal, structuring and tax issues

All of the above are overlaid with legal, structuring and taxation issues, some of which may be relatively routine and within the competence of the family office team, whilst others may require specialist external advice. For complex situations even quite routine transactions may have significant ramifications which need to be considered.

Risk management

Finally, risk management for a wealthy family now requires a highly disciplined methodology similar to that for a business. It starts with a full risk audit, analysing and prioritising all the risks faced by the family, across all the assets including direct business interests, as well as the investment portfolios and the risks in the family itself.

3. THE NATURE AND DEPTH OF FAMILY OFFICE INVOLVEMENT

To address the role of the family office from a slightly different perspective, it is worth asking in principle what level of advice and service the family requires:

A. Implementation and administration only - family make key decisions with direct input from advisers
B. Family Office selects and coordinates external advisers
C. Family Office plays lead, trusted adviser role
D. Family Office sets agenda for family and plays leading role in facilitating decisions


At the extreme, the role of the family office combines that of a service provider, trusted adviser and management consultant, working with a range of professional advisers to identify the right course and build a family consensus, as well as being responsible for implementation and administration.

In practice the level of input may vary as between the different areas of responsibility. For instance a business family may want the family office to have limited involvement with the family business, but a much deeper level of involvement with the investment portfolio.

The nature and depth of involvement may also change over time, particularly as the family leadership passes from one generation to the next. The family office may have a role to play in preparing for that transition and for succession planning more generally.

Some family offices are led by one or more family members, although this obviously depends on having someone willing and able to fulfil that role, who is competent, acceptable to other family members and willing to submit to proper governance processes.

KEY CONCLUSIONS

First, it must be accepted as a fact of life that the world is changing and that wealthy families will probably pay more tax than in the past and incur greater costs in managing their affairs, if they wish to avoid unnecessary risks. Unpalatable though this may be, they have to be realistic and can only set out to manage their wealth as efficiently and effectively as possible.

Second, in order to contain these costs, the objectives and role of the family office must be much more precisely defined than in the past, clearly specifying the division of responsibilities between the family, the family office and external professionals such as investment managers and lawyers. Improved definition reduces unnecessary duplication and time wasting caused by indecision or muddled thinking.

Third, for every significant activity (including high level strategy), the optimal balance must be found between the expertise and servicing capability to be maintained within the family office and the extent of outsourcing to external specialists. This balance will depend on the volumes and complexity of the anticipated work and the impact on quality as well as cost.

Fourth, considerable thought needs to be given to the need for a trusted adviser to the family and whether this advisor resides in the family office. Having such an individual regularly involved at the heart of the family’s decision making may not only improve the quality of key decisions made, but also save considerable costs by swiftly rejecting ideas which are unlikely to be viable, before too much has been invested in their appraisal.

Finally, the model for any family office must be realistic in terms of the ability to recruit, retain and motivate suitable staff, bearing in mind that whilst there are benefits of having advisers directly employed, these must be balanced against the benefits of using external advisers who have regular and ongoing experience of working with other clients in their field of expertise.

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The Key Role of Advisers in Succession Planning

​The role of properly structured succession planning in reducing the risks to family wealth is beyond dispute. Yet this most important of all risk management tools is too often overlooked, both by the families themselves and their advisers.

​It is a well known fact that most family fortunes fail to survive more than three generations. Less well known is that the prime cause of wealth destruction is a breakdown of communication within the family, which often results from failure to plan adequately for passing on the wealth from one generation to the next.

​In the current economic environment there is a great deal of focus on the management of risk and, in particular, the potential vulnerability of the family business or the investment portfolio to a further banking crisis and a collapse in market confidence. Increasingly sophisticated risk management tools are promoted by wealth managers and private banks for this purpose.

In the longer term, the biggest risk of all is a failure within the family itself which, at its mildest, results in a loss of direction and leadership and, at its worst, can result in a full scale family war as different family members fight each other for the assets, the legacy or the family leadership. By the third or fourth generation the chances are very high that those who inherit were brought up in luxury with little concept of the work ethic on which the family fortune was founded.​

​Succession planning is therefore the most important tool of long-term risk management. It does not guarantee the preservation of wealth through the generations, but it can and does improve the chances that the wealth will survive, in an environment which enables family members to flourish as individuals, as part of the family unit and as members of society.

Why is it, therefore, that whilst so much time and resource is commonly allocated to other, less important risk management tools, far too little attention is given to the most important tool of all – succession planning?​

THE CONSEQUENCES OF FAILURE TO PLAN

The consequences of failure to plan are well known, and far too numerous to list. Perhaps the most obvious are disputes between siblings on the death of the founder or disputes between those who are involved in the family business and those who want it sold. There is also jockeying for position within the business and disagreement about its strategic direction, some perhaps preferring to stick to the core activity, whilst others advocate a more risky expansion and diversification strategy, involving substantial leverage. ​

There may be family members who want to use family wealth to invest in new ventures, following in the entrepreneurial footsteps of the founder, whilst others have no interest in business and prefer the wealth to be independently managed by professional managers. All this can have an impact not only on the business and the family wealth, but on the family itself, as the key protagonists try to lobby other family members for support. Sadly, in most instances, those who advocate the greatest risks have the loudest and most persuasive voices.​

​In addition to business strategy, there is the simple issue of management competence and the danger that the next generation does not have the talent to run a large business, either as managers or as owners.

All of these risks and many more, are greatly magnified by the lack of a clear framework for making decisions and a clear set of objectives which have been originated by the founder and renewed by successive generations.​

The potential for damaging divisions and perhaps catastrophic wealth destruction is so obvious that it is hard to understand why an exceptionally able and talented human being, who has spent a lifetime putting together a large fortune, would ignore many of the basic principles of handing it down to the next generation. Yet many otherwise brilliant men and women do just that.​

REASONS FOR FAILURE TO PLAN

​Some say that the biggest obstacle to succession planning is the typical entrepreneur’s belief in his or her own immortality, or to put it the other way round, a reluctance to face up to his own death or incapacity.

In truth, the answer is more complex, in that there are many hard decisions to be made, some of them straight business decisions, others highly overlaid with emotional considerations. Some may create a division between father and son, between brother and sister, or even between husband and wife and even when it is all done, the outcome can never be guaranteed.​

​Many entrepreneurs have observed that it is harder to pass on your wealth than to make it in the first place, but perhaps this is precisely the argument for some sort of formalised process. Such a process takes at least some of the emotion out of decisions, which otherwise have the potential to cause resentment and division. Pre-determined criteria will help provide an objective measure, to avoid the perception that one family member has been favoured over another.

KEY ELEMENTS OF SUCCESSION PLANNING AND FAMILY GOVERNANCE

The drawing up of a succession plan is clearly, in the first instance, the prerogative of the founder of the wealth, or subsequent family leadership. However, it is argued by most experts that it should generally be done with some degree of consultation among those principally affected. Those involved need to have a say and the opportunity to work together with other family members in defining a common set of values, objectives and governance framework. This can be a substantial task.​

There are three main elements of succession planning:​

Defining the purpose of the wealth

Much can be achieved by trying to answer the simple question ‘what is it all for?’ Is the wealth simply to provide for the living standards of subsequent generations? If so, how do you ensure it contributes to enhanced quality of life, when there is so much evidence that inheritance without responsibility can be damaging?​

For some families, much of the wealth is tied up in particular assets such as a family business, a landed estate or an art collection, which the founder wishes to be maintained intact. If so, this must be made clear, to avoid future disputes. It should also be specified whether and in what circumstances the wealth should be used to encourage entrepreneurial or other creative activities of family members or to be used for philanthropic purposes. Whatever the specific purposes, the founder will surely wish to leave a legacy which encourages a positive work ethic in subsequent generations to reduce the prospect of wealth being squandered and lives ruined in the process.​

Dividing the wealth

​The next question is how the wealth is to be divided between different family members. Fairness and equality are easy words to use, but it is not so easy to define what they mean in practice. It could be argued that the wealth should be divided equally between members of the next generation. Alternatively, that a greater share is allocated to those with responsibility for carrying forward the family business or other assets. The responsibilities of family leaders have to be specified and mechanisms put in place to protect the interests of others. Some families have a ‘pot’ of money to finance family members with exceptional talents or business ideas, or those with special needs or suffering hardship. Without a guiding philosophy every decision has the potential to cause a rift.

Making decisions

​The processes by which decisions are made is critical to the future wellbeing of the family.

For many wealthy families, their assets are held through a variety of ‘vehicles’, being primarily companies and trusts, each with their own objectives, their own boards of directors or trustees and their own governing instruments. However, most families have seen the benefit of some kind of family constitution, which defines the overall objectives and decision making processes for the family as a whole.​

Communications will usually include family meetings (the whole family and consultative only) and the family council (representative body with some decision making powers). Where there is a family business making up a substantial part of the assets, the relationship between the family and the business will be critical, as will the rules which govern the highly sensitive area of family members working in the business.​

ROLE OF THE ADVISER OR TRUSTEE

The above is just a selection of the many issues which need to be considered by a wealthy individual or family, to which should be added all the usual tax and legal issues affecting a family with complex assets, especially those distributed across a number of legal jurisdictions.​

As mentioned earlier, many wealth creators postpone consideration of all these matters, often until it is too late. Equally their advisers are at fault for failing to put the issue firmly on the table in a manner which provokes a positive response. After all there are so many arguments in favour of a properly structured succession planning exercise, that it should surely be routine for all advisers?​

Conclusions

It has been demonstrated beyond reasonable doubt that in the vast majority of cases an effective succession planning exercise brings considerable benefits to a wealthy family. The question is when to start such an exercise and the biggest challenge is to agree the format and get the process started.​

​The scope of the exercise and the extent of involvement of family members will depend on the wishes of the wealth creator, or the current family leadership. Although it is generally regarded as advisable to involve the next generation in a consultative exercise, there may on occasions be reasons for not doing so. Equally, the founder may wish to lay down some principles from the outset, as a framework for discussion.

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Total Wealth Management for Business Owners and Entrepreneurs

SUCCESSFULLY NAVIGATING A CONFLICT OF PHILOSOPHIES

The term ‘wealth management’ implies more than just the management of an investment portfolio, and most wealth managers claim to add value across the whole spectrum of their clients’ affairs. comprehensive understanding of an individual’s total wealth may be plausible for clients whose affairs are relatively straightforward, and who have the bulk of their assets in cash and marketable investments. however, this becomes more complex and challenging when a substantial proportion of an individual or family’s wealth is tied up in a family business and perhaps a number of other directly held investments.

It is not uncommon for a founding entrepreneur to have amassed a significant portfolio of specialist investments aside from their core business. these active, self-directed investors, who have been heavily reliant on their own knowledge and expertise, may invest for many years largely without the need for a conventional investment manager.

Typically, this type of entrepreneur only begins to consider professional investment advisers when they start thinking about succession, especially where their children or other successors simply do not have their specialist knowledge, influence and contacts, or do not share their interest in business.

Often, an entrepreneur will only then seek an investment adviser who can help manage the transition to the next generation:

  • To provide expert support to the family in managing the legacy investments
  • Probably to exit at least some of these investments and re-invest in a more balanced portfolio

Finding such a manager or adviser is, however, no easy matter:

  • Most investment managers are trained to manage wealth within a process and framework that does not match the mind-set of the successful entrepreneur
  • In particular, entrepreneurs have an approach to risk management that sometimes differs quite fundamentally from that of a professional investment manager
  • The impact of this is that the portfolio is likely to be confined to one or two sectors, far from the well spread portfolio advocated by investment professionals
  • Many entrepreneurs do not readily place their trust in investment professionals
  • These doubts have been compounded by the events of the last decade, which have substantially reduced trust in the financial services industry

DIFFERENT PERCEPTIONS OF RISK

The professional investment manager reduces risk through diversification across the whole spectrum of asset classes, whereas the entrepreneur tends to invest only in sectors which he understands and with people whom he knows, often resulting in a very concentrated portfolio. Risk is highly subjective and neither view is either right or wrong: they are just fundamentally different, and these differences have to be reconciled to begin developing a coherent investment strategy.

A multi-asset investment manager will typically espouse the benefits of diversification, built from the tenets of Modern Portfolio Theory and the work of a generation of Nobel prize-winning academics. In practice this means investing in a range of investments across asset classes, such that the overall portfolio sits at the required point of the risk/reward trade off.

The entrepreneur’s view is often far more personal than the investment manager’s because, rather than taking a holistic view, starting with analysis of the global marketplace, the entrepreneur sees risk and opportunity through the prism of his own practical experience. He or she has built a business relying on their own hard work and judgment, and has considerable belief in his or her ability to judge a business proposition.

In the early stages of the business venture, the priority is survival rather than the management of an asset. After a period, the successful business begins to provide a comfortable living, and eventually acquires significant capital value.

At the stage where there is significant value in the business, the theorist would argue the case for diversification, but the entrepreneur sees a growing business with increasing market share and decreasing risk of failure. As surplus cash is generated, some entrepreneurs may indeed seek to diversify by investing in a professionally managed portfolio. Others however, perhaps fuelled by the self-belief that is central to their own success, are more inclined to back their own judgment than hand money over to professional investment managers. An entrepreneur will often back individuals whose abilities he respects, as a result of first-hand knowledge, especially from past business relationships.

With the exception of property, which is a special case, most entrepreneurs do not invest outside their range of perceived expertise and are not often inclined to trust the ability of people with whom they have no direct experience.

The validity of this approach to risk management can be debated, and it can be argued that successful entrepreneurs may sometimes underestimate the risks in applying their undoubted business skills to investments in other ventures which they do not control. Their self-belief can be reinforced by mixing with other similarly successful businessmen, who have all generated much better returns over many years, than professional investment managers.

Often it is only when the core business matures, and/or when the entrepreneur begins to contemplate retirement and succession, that a more devolved form of investment management becomes an attractive option. For the reasons touched upon above, such individuals are likely to need convincing that a wealth manager possesses competencies which can genuinely add value. The wealth manager has no hope of gaining their trust unless he or she addresses and reconciles the fundamental differences of perspective in the management of risk.

Managing the Transition

As an entrepreneur approaches retirement, the need for succession planning becomes more immediate. Where there are family members ready and able to take over, there may be no need for a fundamental change of approach. However, in many circumstances the next generation do not have the desire or expertise of the founder, thus necessitating either significant changes in strategy, or bringing on board external expertise. Ideally there will be a transition period during which the founder will gradually hand over control, but this process is far from easy.

After forty or more years of taking all the decisions in successfully building up a valuable core business and a variety of other assets, the difficulties involved in a transfer of authority must be obvious:

  • The sheer habit of independent decision making is ingrained
  • A long track record of success has convinced the individual that their judgment is usually best
  • There is inevitably a strong emotional commitment to the core business and possibly other investments
  • There may be a need to ‘own up to’ some past failures
  • If a fundamental change of investment philosophy is required, there will be a serious conflict with the founder’s entrenched instincts, which can rarely be resolved overnight
  • There are usually family complications which add to the difficulty of decision making

The first and most obvious decision is whether the core business should continue under family ownership and management. This is a massive decision, which requires extensive planning, preferably over many years. It is the subject of a separate paper by Stonehage Fleming (Selling the Family Business).

As stated above, many successful entrepreneurs approaching retirement have invested in a variety of businesses, operating in similar sectors to the core business. In addition, there may be other substantial holdings including property, leisure assets and increasingly, valuable art collections. Unless the next generation is ready and willing to step into the founder’s shoes in each of these areas, the eventual loss of his knowledge, expertise, contacts and business skills may make some of these investments vulnerable.

It is highly unlikely that any founding entrepreneur will dispose of all such assets overnight and reinvest in the sort of balanced portfolio favoured by the investment industry. It will typically be a process in which the entrepreneur begins to adapt gradually to a new approach, and will need to be convinced every step of the way of the merits of the new philosophy. He or she will also need to be convinced of the ability of prospective advisers to add value in eventually stepping into his or her shoes, and providing the support and understanding they want for their family after they have gone.

The requirement therefore is to develop a transition plan which probably includes:

  1. Exit strategy for investments which depend too heavily on the founder’s knowledge and influence
  2. Phased reduction in exposure to concentrated sectors
  3. Some level of constraint on further investment in specialist, entrepreneur-led opportunities
  4. Full risk management strategy across the entire asset base, which will include mitigation of sector specific risks and illiquidity during the transition
  5. Clear protocols for handing over decision making and consulting other family members (family governance)
  6. Definition of role of advisers / wealth managers in implementing the transition and in supporting the family, both during the process and thereafter

The plan must of course have a clear timetable with milestones, which will act as an important discipline and will only be modified with good reason, in the light of changing circumstances. It therefore goes without saying that the prospective wealth manager must have experience and capabilities which extend across the whole of the asset base, as it stands at the start of the process.

The ‘legacy’ positions present two particular challenges to new advisers.

The first is to ‘get under the bonnet’ of each company, understand its business model, and assess the strengths and weaknesses. The second is to negotiate an exit strategy, which can be an emotive process because of the long relationship between the client and the investment. It is key to the adviser’s role to understand these nuances, and provide an exit program that makes sense from both a personal and portfolio perspective.

Even the most astute entrepreneurs can be unfamiliar with the complexities of negotiating the exit of a position that may not have obvious market comparables. Consideration should be given to the length of time required to dispose of the position, whether it is tradable in the market, the degree of influence or voting rights in decision making, whether there are any lock-up periods and the relative importance of the investment to the entrepreneur personally (friends, partners or family who are involved in the business may be affected).

While legacy assets can be considered a hindrance from an adviser’s perspective, the client may be reluctant to dispose of them for very valid personal reasons.

RESPECTING THE CLIENT PERSPECTIVE, WHILE DISCHARGING ADVISORY AND FIDUCIARY RESPONSIBILITIES

Just as it is vital for the potential adviser to understand the client, it is equally important for the client to understand the constraints within which the adviser operates:

  1. The circumstances and portfolio of assets described above are far removed from anything that a typical wealth manager would normally recommend
  2. The adviser has a clear obligation to express his or her opinion, recommend a course of action, and ensure that the client fully understands and accepts the risks involved in taking a different course
  3. The adviser may have responsibilities to other parties including family members, trustees or beneficiaries

This type of client needs an adviser who can provide conventional asset management of the highest quality, but also has the capability, experience, insight and flexibility to deal constructively with the existing portfolio of specialist investments. The adviser needs to be challenging, but able to compromise and to take account of client views, without undermining his objectivity and frankness. Such an adviser will recognise the need for a transition period, where he is effectively operating as co-pilot, alongside the client.

He will also be building his relationship with the next generation and needs to be ready to support, advise and possibly challenge them, should they have both the will and the aptitude to continue the tradition of direct investment, at least for an element of their wealth.

The adviser must be accountable for all outcomes and ensure that his responsibilities are clearly defined, so that he puts up a robust and well informed challenge when required. Some advisers will find this type of relationship very difficult to handle, and will immediately recommend formal ‘text book’ family governance with decision making by committees. However this dilutes the control of the founder entrepreneur, and it is often wiser to recognise that most founding entrepreneurs find it very difficult to let go of the reins, so it sometimes has to be a gradual process.

The solution will lie in finding a balance, but decision making responsibilities need to be very carefully documented and transparent to all relevant parties, including trustees and beneficiaries.

CONCLUSIONS

The financial services industry builds scalability and cost efficiency by selling commoditised products, which are designed for ‘typical clients’. Wealth managers tend to be rather more flexible, but in most cases their business model relies on a relatively standardised approach which meets the needs of their chosen target market. The flip side is that such a model often cannot economically address the requirements of exceptional clients, whose affairs are particularly complex and who have built their wealth by backing their own judgment and making their own decisions.

Wealth management for entrepreneurs and business owners demands a model that is based on listening to each client and delivering genuinely bespoke services, especially in managing the transition to the next generation. It requires significant skill, broadly based knowledge and well defined responsibilities.

The adviser must have the breadth of experience to add value across the entire asset base and to challenge the entrepreneur, even within his or her own areas of expertise. Many entrepreneurs are strong personalities, and questioning their judgement can require courage.

It is not a job for the faint hearted!

On the 15th January 2015 Stonehage Group Holdings Limited completed a merger with Fleming Family & Partners Limited (‘FF&P’), a London-based Multi-Family Office. The combined company is called Stonehage Fleming Family & Partners Limited (‘Stonehage Fleming’) and is the leading independently-owned multi-family office in Europe, Middle East and Africa. Its advisory division provides corporate finance and direct investment advisory services as part of a holistic approach to advising wealthy families.

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