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A SPECIFIC STRUCTURE FOR EVERY FAMILY

​The service is individually designed around the requirements and preferences of your family. Whilst no two families are alike, the family’s history, size and location, the nature of the principal assets and the aptitudes of senior family members will all be key factors in defining your requirements.

All families have one thing in common: the need to plan the practicalities of passing the baton from one generation to the next and laying the foundations for an enduring legacy. This, perhaps above all, is the common theme which helps define our approach.

 

STRATEGIC ADVICE AND KEY ADVISER

​Your key adviser is there to act on behalf of the whole family, as required, and to proactively help the family plan for significant decisions which may have a long-term impact.

The key adviser will share the benefits of his or her extensive practical experience of working with other families.​

SPECIALIST ADVICE

We routinely work closely with your family’s other trusted advisers. Where necessary, we procure and coordinate specialist advice on behalf of clients, either from our internal experts or from our wide network of professional contacts around the globe.​

We identify the need, together with the family, and we select and brief the adviser; we apply the advice given to the totality of the situation and we make clear recommendations to the client.

SUCCESSION AND GOVERNANCE

​We manage the family governance framework to ensure both routine and strategic decisions are consistent with agreed objectives and that they adhere to the agreed decision-making processes.

​We support families in the development of their plans for succession. We frequently chair and facilitate family meetings.

REPORTING AND TRANSACTION SUPPORT

​Our Family Office provides a full range of high quality administration services. These ensure everything is correctly processed and documented and that all the necessary information is available in the form you want it - to help make sound decisions on a day-to-day basis.

We run bank accounts, operate companies and trust structures, and manage properties, art collections, aircraft, boats and philanthropic foundations.

We support clients in all transactions, including buying or selling businesses, investments, properties, art or leisure assets.

 

Specialist Family Office Services

Defining the Need for a Family Office

Many wealthy individuals, particularly successful entrepreneurs, reach a stage when they might benefit from the services of a family office. Their affairs become so complex and their transactions so numerous that they need an individual or team to keep on top of it all, to handle day to day matters as they arise, conduct necessary research, and brief them on the background when decisions are required.

They may wonder how the service of a family office differs from that of a typical wealth manager? The clue is probably in the name, in that the family office is at least as much focused on the family itself, as it is on the wealth.

FAMILY FOCUSED APPROACH

The ‘family focused’ approach recognises that the long-term preservation of wealth, across generations, is far more dependent on the family itself than on professional advisers and that engaging family members in the purpose and process of stewardship is a crucial ingredient of the service.

Equally, just as the family impacts on the wealth, so the wealth has a deep impact on the family and family members. There is little point in creating and handing on wealth if it does not help those who inherit to have fulfilling as well as prosperous lives.

So part of the reason for a family office is to integrate a plan for the management and administration of wealth with a plan for the family succession, which usually includes collective agreement on the purpose of the wealth and key objectives. It also includes family governance, essentially the framework for decision making, leadership and family communication. This is designed to unite the family in common purpose (as regards assets they collectively own), to help reconcile differences of view and minimise the potential for dispute.

In every family there will be some members who are actively interested in and motivated by the opportunity to manage and create wealth and others for whom wealth is simply a means of funding their lifestyle, thus being more inclined to rely on professional advisers. These differing perspectives need to be reconciled, which can have a major bearing on decisions concerning family assets.

The family office role thus demands deep knowledge and understanding of the family, as well as the assets they own and expertise across all aspects of their affairs, sufficient to contribute to high level decisions. For larger ‘multi-family’ offices, they will also contribute great practical experience drawn from other families going through similar circumstances.

But this is only part of the reason for having a family office.

KEEPING ON TOP OF COMPLEX ARRANGEMENTS

Apart from the significance of the word ‘family’, the other word is ‘office’.

The need for a private office can simply reflect the number and complexity of tasks to be undertaken and decisions to be made, bearing in mind that many of these decisions cannot be taken in isolation, and require the input of someone with detailed understanding of the broader picture.

Many entrepreneurs have numerous investments and ventures, perhaps held through different holding entities, with complex tax issues and sometimes quite sensitive family considerations. There comes a point when it is almost impossible to carry all the necessary background in your head and the need arises for more disciplined and well-structured processes and record keeping, supported by an individual who understands all the issues.

He or she must be able to identify problems, offer opinions and bring a degree of expertise and experience. In some cases, such an individual can become indispensable, allowing the entrepreneur to focus on his or her core activity, without having to worry continually about the details of their financial and family arrangements. Crucially, such an individual also gives peace of mind to those who are concerned by the prospect of an unexpected event leaving their spouse or children with a complex financial situation, of which they have very limited understanding.

THE VALUE LIES IN THE COMBINATION

Overlaying this, some aspects of the arrangements may demand significant professional input and the family office procures such input either from within its own professional staff or from an external firm.

It is this combination of managing family arrangements, providing expert administrative support, and bringing high levels of technical expertise and experience, that make the family office highly valuable and very different from a typical wealth manager.

The precise needs of an individual or family vary enormously, depending on circumstances. For example how large or complicated is the family? What is the mix of assets and how are they held, in which countries? What are the capabilities and objectives of family members and how is this likely to change in the future? To what extent are they primarily looking for administrative support and technical advice or do they also want someone who really contributes to major decisions and long-term strategy / succession?

Only after addressing all these issues is a family able to begin considering what sort of family office they require. The most important decision is whether to have their own dedicated family office (single family office) or to find a so called ‘multi family office’ which operates as a commercial business, serving a number of different families. In some cases a combination of the two may be appropriate.

FUNCTIONS OF A FAMILY OFFICE

The functions of a family office are, by definition, many and varied, to meet the needs and preferences of the particular family:

SOPHISTICATED ADMINISTRATION

A family office always provides extensive administration and reporting, which may require a sophisticated operating platform, depending on the nature of the family assets and structures.

This can cover numerous trusts and companies, bank accounts, investments, commercial ventures, properties, art collections and leisure assets. In many cases, the structures, the assets and the family are spread across a number of different countries, which adds to the complexity and the need for tax and legal advice to be followed meticulously in every movement of assets.

FAMILY GOVERNANCE

The family office will usually have responsibility for operating family governance, ensuring a proper framework for making decisions, arranging and facilitating family meetings, and organising family communications, which will include trustees, directors, and professional advisers, as well as family members. This is far more than an administrative task, as it involves proposing and agreeing the agenda, providing relevant information and analysis, obtaining and interpreting professional advice, prior to the meetings, often helping to resolve differences of view.

ASSET MANAGEMENT

Nearly all family offices are directly responsible for the management of liquid assets, such as cash and investments, although the day to day running of portfolios is often outsourced to professional managers. The investments may include private equity holdings, both directly held and through funds, so it is common for family offices to have an in house private equity or corporate finance team.

THE FAMILY BUSINESS

For those who have a family business, the family office will also play a role in helping to manage the relationship between the family and the business and, in particular, ensuring the interests of all family shareholders and beneficiaries are properly considered, when major decisions are taken.

PROPERTY, ART AND LEISURE ASSETS

Residential and commercial property have always played a central role for most families and the management of art collections has become an increasingly important function as the value of the art has grown. Many families also own boats, aircraft and other leisure assets.

PHILANTHROPY AND IMPACT INVESTING

Recognition of the need to focus more formally on their contribution to society has increased emphasis on philanthropy and impact investing, both of which also play an important role in passing down values from one generation to the next and helping to shape the family culture.

MANAGING TRANSACTIONS

Some families are very active in terms of regular transactions involving commercial ventures, property, art and leisure assets, and their family offices must be equipped to manage these transactions, including appraisals, diligence, structuring and funding.

TAX AND FINANCIAL PLANNING

Overlaying all the above, will be tax planning and coordination of advice, which is an ongoing process, as tax will probably have a bearing on nearly every substantial transaction.

TOTAL RISK MANAGEMENT

A sophisticated family office will operate a framework for risk management across the spectrum of the family’s affairs, including risks arising within the family as well as risks attached to particular assets. In the current environment, there is increasing focus on reputational risk and cyber security.

FAMILY EVENTS AND DISPUTES

They will deal with the implications of all routine family events, such as births, marriages and deaths and may play a key role in the event of family disputes, divorces and other problems. This deep and often sensitive involvement in personal issues means they develop and very close understanding of the family itself, which is extremely helpful in their guardianship of the family wealth.

STRATEGIC REVIEWS AND SUCCESSION PLANNING

Finally, the family office will normally be involved in all strategic reviews and major decisions and may play a leadership or facilitation role. This will nearly always include developing and implementing plans to pass the legacy to the next and subsequent generations, which is arguably the most important component of long-term wealth management.

ADVANTAGES OF SINGLE FAMILY OFFICE

The main advantage of the dedicated, single family office is direct control over the staff, who are entirely focused on the affairs of one family, free from the inevitable conflicts of serving other families or pursuing the corporate objectives of a commercial business (including targets etc). It should therefore be hoped that any advice received is unbiased and that the office will be flexible enough to respond to the changing needs of the family at any given time.

Privacy is also a considerable advantage, with sensitive information confined to the minimum possible number of people, all of whom are directly known to and employed by the family itself. Given concerns about data security this is an important factor for some families.

Finally, the single family office is usually not subject to regulation, which is an increasingly cumbersome and expensive burden for commercial providers.

These advantages can be of great importance to a family, but need to be weighed against the fact that depending on size of assets, they may not have the economies of scale of a commercial operation. In addition, there are a number of other attractions of going down the ‘multi family office’ route, or indeed of finding a compromise between the two.

ADVANTAGES OF MULTI FAMILY OFFICE

In theory, the main advantage of the multi family office (MFO) is that it has the economies of scale, and hence can offer a more sophisticated operating platform, much greater diversity of expertise and invaluable practical experience of other families, addressing similar issues.

The complexities of managing wealth in all its forms have increased dramatically over the last decade and require increasing input from specialist advisers. Having extensive expertise ‘in house’ can thus be much more effective in ensuring the correct advice is always sought and applied. In some cases they can apply the same advice across a number of families, also reducing costs.

For potential clients, the practical experience of other families is among the most attractive features of a multi family office, in that they are usually keen to learn how other families have dealt with similar situations and what lessons have been learnt.

The operating platform is of particular importance for those with diverse assets and holding structures, as it enhances efficiency and enables flexible reporting tailored to particular circumstances.

Finally, a further advantage claimed by MFO’s is that they provide a more attractive career for staff seeking the opportunities of a more commercial environment. They are hence better placed to attract and retain staff of the quality required and less dependent on a single individual.

THE INTERNATIONAL FAMILY OFFICE

Whilst the above advantages can be claimed in theory, the practice is that most MFO’s are quite small boutiques with perhaps only 30 – 50 staff in one or two locations, and a relatively small number of client families. Such ‘boutiques’ are limited in the expertise they can carry and in their international representation. They hence tend to focus on certain types of families with limited needs, some of them, for example, primarily focusing on the management of liquid assets, rather than the broader wealth of the families they serve.

For international families with a wide variety of assets, held through multiple structures, the future must be for larger, more international MFO’s, which can genuinely meet their needs. This means being able to add value across the totality of their affairs, but nearly always working in partnership with other professional advisers.

THE COMPROMISE SOLUTION

In general, the wealthier the family, the more likely they will want their own dedicated family office, especially to deal with more personal family issues. However, it is now common for such families also to use a multi family office, for aspects of their affairs which will benefit from greater economies of scale, access to a broader range of expertise, capabilities in a number of geographies and a more sophisticated operating platform.

CONCLUSIONS

Deciding on the need for a family office service is typically driven by the realisation that day to day management of the family’s affairs is becoming a task which exceeds the capacity of a single individual family leader, without restricting their involvement in other matters (such as running the family business). This often coincides with the wish to begin involving the next generation, which also increases the need for more formal decision making processes and family communication.

The very wealthiest families will nearly always want their own, dedicated family office, but quite frequently combine it with using selected services of a MFO or International Family Office to access its broader range of expertise and operating platform.

For all families, the decision about which type of family office must start with a thorough and frank appraisal of the family’s principal needs. They should think very hard before putting in place an expensive bespoke operation, if they can find a multi or international family office which already has the infrastructure, expertise and experience to meet their needs more effectively.

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The Role and Standing of Experts in the Modern World

A by-product of the BREXIT campaign was the beginning of a debate about the role and standing of experts in the modern world. Michael Gove was widely criticised for saying, in an unscripted response to a question, that people ‘have had enough of experts’, but in doing so, he has perhaps initiated a discussion which is long overdue.

The debate so far has amounted to little more than an exchange of insults between opposing factions. ‘Brexiteers’ have delighted in pronouncing (perhaps prematurely) that most economists and political pundits have been proved wrong, not only over Brexit, but by the election of Donald Trump and the economic reaction. The response of the ‘remoaners’ is to say that in a ‘Populist’ society, major decisions will be taken by people with little knowledge or understanding of the relevant facts and arguments.

The exchange of insults is inevitable, as both sides vent their anger, following an acrimonious campaign. However, there is now a real need for a more thoughtful debate on the role of experts, the value they deliver, their limitations and how effectively we use them. This debate is particularly relevant to family offices and wealth managers, such as Stonehage Fleming, who make extensive use of experts to serve their clients, but also has far wider implications across our society.

Given the relentless trend towards specialisation, more and more experts impact on nearly every aspect of our lives from banking and finance to healthcare, building and planning, and even leisure activities, not to mention giant projects such as commissioning aircraft carriers or nuclear power stations, financing hospitals or expanding Heathrow Airport.

Lady Thatcher once famously said, “Advisers advise and ministers decide”, but it raises the question of whether the advice received has been fully understood and adequately challenged by the decision maker, weighted in proportion to its importance and properly integrated into the decision making process, alongside many other factors.

This can apply all the way down the scale from government ministers making huge capital expenditure decisions and electors casting their votes on the great issues of the day, to ordinary citizens seeking advice on a medical treatment or pensions.

Many of these decisions have become so complex that we are sometimes inclined to rely too much on experts and too little on our own instincts, judgment and analysis. Indeed it is not uncommon for individuals to find themselves in the hands of the wrong specialist, who cannot see the wider picture, with potentially disastrous consequences.

The arguments in favour of specialisation are often very obvious, but it is worth examining some of the negatives, so that we can better equip ourselves to deal with the problems which arise in an expert led environment. This debate is all the more necessary because of the erosion of trust in society, with too many instances of specialists using their knowledge to deceive rather than enlighten their clients, as appears to have happened in the banking industry, for example.

Some would even argue that our increasing dependence on specialists, and the systems they devise, has infantilised the population and according to Yuval Harari in his fascinating book ‘Sapiens’, humans were at their most competent in the hunter gatherer age when they did everything for themselves! It may be helpful to think about this problem from the perspective of the decision makers, who have to ensure they FULLY understand not only the advice they receive, but the scope and limitations of the adviser’s expertise, his or her ability to see the problem in its proper context, from the client perspective, and the possibility that he or she may be subject to bias, for whatever reason.

UNDERSTANDING THE SCOPE AND LIMITATIONS OF THEIR EXPERTISE

No economist, nor anyone else can be considered an expert on the economic consequences of BREXIT, because it is an unprecedented ‘one off’ occurrence, of enormous complexity, where the outcomes are obviously unpredictable. Economists can supply important and useful data and historical precedents which may influence us, but this does not make their opinions on the overall outcome more valid than those of other people with some understanding of business and trade.

The problem was that some economists used their reputation as experts in a particular field to give unwarranted credibility to their opinions on the wider issues. At the same time the public wanted yet more information, as though it would somehow make clearer a decision which was actually based not so much on facts and figures, but a massive leap of faith, heavily reliant on instinct and intuition.

Whenever using experts, the client needs to understand to what extent the expert is bringing facts and analysis and to what extent opinion. It is only too easy to believe that the person with all the facts at their disposal also offers good judgement, but this is not necessarily the case, especially where their area of expertise is just one factor in a larger picture.

CHALLENGING THE ADVICE PROVIDED

The client must be able to question and challenge the advice received to satisfy themselves that it is accurate, relevant, and based on a proper understanding of the overall problem. In many instances the ability to challenge requires some understanding of the expert’s field, especially as many experts are not great communicators. This may necessitate one or more intermediaries as a bridge between the expert and the ultimate decision maker, but the more links in the chain, the greater likelihood of a misunderstanding which may lead to the wrong decision.

The CEO of a group supplying safety equipment to power stations in the 1970’s refused to supply his equipment if he could not find someone in the management who understood the totality of how the power station operated. It is difficult to be confident that there is any modern power station which would meet that test, and we clearly now have a banking system where the operational details are only superficially understood by those in authority, who are increasingly reliant on experts to report to the board on the activities of other experts.

Equally, at an individual level, the ability of the client to understand and challenge the opinions of specialist medical consultants or financial advisers is often very limited, so they may also need intermediaries to question and challenge the experts on their behalf. For the wealthiest clients, these intermediaries are available, at a price, and they will filter, distil and synthesise the opinions of numerous experts across a range of different areas, before integrating all the advice and relating it to the problem in hand. It is a complex and skilled process and, even for the wealthy, advisers with the all-round experience to cover this role are few and far between. For the less wealthy, they sometimes have little option but to trust the advice they receive, whether they understand it or not.

In financial services there has been a great deal of emphasis on transparency to reduce dishonest practices, but the reality is that it is just as easy to hide the truth in too much information as too little, if the client does not have the ability to challenge and interrogate.

ALIGNING THE PERSPECTIVE OF THE ADVISER TO THE CLIENT

Experts can be so absorbed by their own subject that they tend to view the world and the problem in hand through the prism of their own specialism, rather than through the eyes of the client. It is not unusual for advice to be given based on a subtle, but crucial misunderstanding of the problem or on an exaggerated view of the significance of that advice to the wider picture.

The expert must understand his role and the context in which his advice is sought. The client must ensure the expert is properly briefed, genuinely understands the whole picture and has the ability to adapt his advice to a variety of different circumstances. This is particularly the case if the circumstances do not fit the profile of the expert’s normal clients and he has to step outside his usual approach.

Understanding the perspective of the clients can sometimes be as challenging and as valuable as the expertise itself.

EXPERT BIAS

Expertise can itself create bias, in that the expert will tend to look for solutions in the areas he best knows. An example of this was when the opinion of an expert medical witness in a court case about the death of a baby was discounted by the judge, because the doctor concerned had particular theories around the subject of Munchausen’s Syndrome. This caused him to be biased towards a particular cause of death.

Some experts tend to offer relatively standardised solutions and most have a well-established and sometimes deeply entrenched approach. Best practice among experts can become overtaken by changes in the outside world or unusual features of the particular case under consideration. In many areas conventional wisdom can be shaped by ‘group think’, and subject to quite rapid change, when new thinking challenges old practices – even the regulators sometimes find themselves imposing regulations based on outdated thinking. New regulations nearly always bring more work for experts!

From a different perspective, can you rely on an expert in shares, property or gold to predict future price movements, if their career or finances stand to benefit from rising markets? What you need from these experts is information and analysis, but the judgements should probably be made by someone with a broader perspective, more removed from the market concerned.

LANGUAGE AND COMPLEXITY

In some fields, as experts become increasingly specialised, they tend to speak more and more to each other rather than to their ultimate clients. It is entirely possible for them to become excessively absorbed in their own world, often developing their own language and jargon which becomes incomprehensible even to well informed outsiders. Understanding the expert can become more valuable than the expertise itself!

Some experts also have a tendency to overcomplicate their own subject, arguing that further complications are essential to best practice, perhaps in the interests of risk management.

We must remember that complexity, of itself, can be a substantial risk, and when it is combined with specialist jargon it can severely obstruct the decision maker’s ability to reach the right conclusions.

This surely was one of the prime causes of the banking crisis, where the banking system began to resemble the ‘Tower of Babel’ with everyone speaking a different language and with too superficial understanding of what each other did. It is very clear that the boards of the major banks had inadequate understanding of the risks being run in specialist departments.

CAUTION AND DATA DEPENDENCY

On the other hand many experts tend to be very cautious and conservative, deriving their self-esteem from specialist knowledge and the certainty which that brings them. They can be resistant to change and new ideas, which can place them in conflict with the more innovative approach of entrepreneurs and businessmen who are often their clients.

Much of their knowledge is based on processes and factual data (often historic), which may cause them to place too much emphasis on factors which are tangible and quantifiable as opposed to those which are not.

It is of course understandable that experts will want to highlight the risks, so they cannot be held responsible for omissions, but they must also understand the need for advice to be ‘user friendly’.

Anyone who has been in business will relate, for example, to the refreshing experience of dealing with a lawyer who understands the commercial context and sets out the risks in a manner which recognises their materiality to the decisions in hand.

It could be argued that it is up to the client to judge the unquantifiable and to decide what risks they are willing to take, but it can require courage to overturn a very negative expert opinion, which highlights long lists of all the things that could theoretically go wrong.

MANAGING A MULTIPLICITY OF EXPERTS

Some projects, by their nature, require so many experts that massive project management skills and processes are required to integrate their advice into a coherent framework. With every additional expert comes additional risk that a failure of communication may cause a wrong decision. There are so many examples of major government projects going wrong, from PFI Financing of hospitals to Naval Destroyers breaking down at sea, that there must be questions about the ability of those responsible to manage such projects. It may be that too much resource is allocated to paying for the experts and not enough to those responsible for managing their input and ensuring a successful outcome.

At a more modest level, the number of experts now involved in a planning applications can be so great that the cost and difficulty of converting outline to detailed permission and meeting construction conditions may be a real factor in our failure to build enough new homes. Too many experts can create bureaucratic processes which obstruct economic activity and progress.

USE OF TECHNOLOGY AND ARTIFICIAL INTELLIGENCE

Rapidly improving and more sophisticated technology, in particular advances in artificial intelligence, will have an increasing impact on the role of experts and how they are used. This will drive experts to operate more in the space where they add value through judgement and experience, with diminishing reward for delivering information, analysis or process. For some experts this will be an uncomfortable transition and will enable well informed clients and lead advisers to do without their input.

CONCLUSIONS

The object of this paper is not to decry the massive contribution of experts to our society, but to highlight the opportunities to use their contribution more effectively.

  1. There is an urgent need to restore the balance between experts and skilled generalists.
  2. We must incentivise those who show potential for more broadly based careers, developing the ability to lead a project team, with sufficient knowledge to challenge and integrate expert contributions. Specialist expertise is now so highly rewarded that it is difficult to develop career progressions which enable people to acquire the broad range of experience required.
  3. More recognition should be given for judgment and skills as opposed to pure specialist knowledge, which can sometimes be relatively easily acquired.
  4. Much more training is needed for experts in understanding the wider context and identifying with the client perspective (this is much harder than it sounds).
  5. More training in communication skills is required to ensure experts are able to communicate advice in a well organised and thoughtful way which will be readily understood by the user.
  6. A concerted effort is required to reduce unnecessary complexity which cannot be justified by added value to the end user – the regulators sometimes have a vital role to play in this.
  7. A concerted effort is required to reduce the number of expert inputs required in any particular area, in order to simplify processes and cut bureaucracy. This will increasingly be supported and enabled by more sophisticated technology.
  8. Better processes are needed for the management of major projects.

As a Family Office, handling the affairs of wealthy families with complex circumstances, Stonehage Fleming ensure the input of experts is normally channelled through an experienced Key Adviser, with vast practical experience of similar clients. This adviser stands in the shoes of the client family, has to represent and communicate the interests of all family members and reconcile any differences of view. He or she must therefore ensure the key issues are understood by everyone, in order to build a consensus around the decision to be made. His skills and experience will equip him to identify where expert input is required, to select and brief the best people for the job, to manage their input and integrate the contributions of a number of experts into the overall analysis. He or she will equally recognise when further advice is NOT required and will selectively use enhanced technology to replace expert input.

Training and developing these Key Advisers is an ongoing challenge, because the financial services industry has for many years encouraged and incentivised its best people to specialise and hence produced very few individuals with the more broadly based experience and skills to meet the demands of that Key Adviser role.

The same applies to many other areas of our society.

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Independent Wealth Management and the Role of the Trustee

It is therefore a prerequisite that the trustee must be independent in all respects and act only in accordance with the needs of beneficiaries, with regard to the objectives defined in the trust deed.

‘Independence’, of course is a word commonly used in financial services to help define the relationship between adviser and client, with various regulatory regimes designed to ensure the adviser does not prefer his own interests. For a trustee, there is an extra and vital dimension to independence, which means being independent between all trust beneficiaries, not allowing himself or herself to be excessively influenced by one or more family members, at the expense of others.

RESPONSIBILITY OF TRUSTEES

The duty of a trustee is to act as a ‘prudent man of business’ in managing assets on behalf of beneficiaries. This applies, of course, not merely to investment portfolios, but to all assets held in trust, such as family businesses, directly held investments and ventures, property, art, leisure assets and many others.

He must exercise his responsibilities in accordance with the terms of the relevant trust deed, having regard to the interests of all the beneficiaries. Indeed he may often have to balance the conflicting interests of different beneficiaries and to reconcile sharply differing views. It goes without saying that trusteeship can demand an exceptionally broad range of knowledge, experience and skills, in order to make the right decisions, whilst maintaining family harmony.

The prudent man of business will seek advice where required, but will take the ultimate decision as required by the trust deed. The question hence arises as to how much expertise a trustee needs in respect of the assets under their control, how they use that expertise and how they get paid for it.

Nearly all trustees, for example, have some understanding of investments, which they use to select and brief external advisers and to interpret and act upon their recommendations. Indeed it is very clear that even where investment management is fully outsourced, key investment decisions, especially asset allocation, are strongly influenced by the views of the trustees and rightly so. It is entirely possible that the influence of the trustees will have far more impact on the investment performance and risks than decisions taken by the professional investment managers.

More controversially, the trustee responsible for a family business may have to reconcile the continuing ownership of that business with the duty to consider the case for diversifying the risk of a single line holding. It implies a need for continual monitoring of the business and having the knowledge, skill and courage to call for a major review which may well be highly unpopular with family leaders.

The same applies to other assets, such as direct investments, property and art. The trustee can always call in specialist advice, but needs the basic understanding and experience to know when such advice is needed. He needs to find and brief the right specialists, and to use the advice correctly in coming to a decision, often in discussion and perhaps negotiation with the client family members.

Just how knowledgeable does a trustee need to be to discharge these responsibilities, as a ‘prudent man of business’ and how does he or she apply that knowledge? Where he has expertise, should he allow his own views to be overridden by external advisers, or should he merely take account of such advice in reaching a decision?

Recognising the need for investment expertise, some larger trust companies have established specialist units to help with asset allocation decisions and to help select and monitor the best third party investment managers. Some have gone even further in hiring specialists to support clients in direct investment and corporate transactions, in property and art management. Many trustees also have significant in-house legal expertise.

The question is where to draw the line and at what point is it essential for trustee independence that the advice required is outsourced to a third party, even if suitable expertise exists in-house?

KEY FACTORS IN DECIDING WHETHER TO OUTSOURCE

The assumption must be that, in deciding whether external advice is required, for whatever purpose, the interests of the trust beneficiaries will be paramount. The following check list may be helpful:

  1. Do the trustees genuinely have independent expertise ‘in-house’ to contribute to the decision and can it be demonstrated that it compares with external specialists?
  2. Does understanding of the wider perspective put them in a better position than other external advisers?
  3. Are issues of convenience, cost efficiency or privacy sufficiently important to be a factor?
  4. Is a deep and trusting relationship with the trust settlor and beneficiaries a legitimate factor, if they have more confidence in their trustees than an external adviser or asset manager?
  5. Are there other respects in which the views of the settlor and beneficiaries should be considered and if so why – for example if the family has expertise in a particular field?
  6. What is the materiality of the decision in terms of risk and range of possible outcomes?

In theory, for example, the case for outsourcing management of an investment portfolio of short-term government bonds, or even of blue chip equities (especially if they track the indices quite closely) is much less powerful than the case for outsourcing the management of a portfolio of hedge funds or private equity, where so much more depends on the judgment and skill of the manager. Equally, it is much easier to justify keeping asset allocation and manager selection in-house, than using specific in-house investment funds or products.

SELECTING AN EXTERNAL ADVISER

Firstly, it is necessary to define the scope of the advice required. Are the trustees looking for specific advice on a particular matter requiring very specialist knowledge, or is it a more general, long-term relationship? If the latter, is it wealth management covering the whole spectrum of the trust assets or is it simply the management of a portfolio of quoted investments and funds?

The trustees will also wish to ensure the adviser is motivated and competent to act in the client’s best interests, and to understand the broader picture, rather than having their judgments distorted by other factors, including their own remuneration, ambition or entrenched professional practices.

  1. What is the reputation and standing of the advisers, how well do the trustees know them and have they come with good recommendations from other clients in similar situations?
  2. Do they ‘connect’ with the underlying clients, in terms of understanding their issues and addressing their concerns, rather than delivering a standard ‘sales pitch’ or solution?
  3. Do they demonstrate competence in all the relevant areas of expertise, without bias towards their own areas of specialism?
  4. Is their business model aligned to serving the long-term interests of the clients, rather than the short-term remuneration of the individuals providing the advice?

THE CASE FOR A HOLISTIC APPROACH

Many clients and trust beneficiaries seek a holistic approach to the management of their wealth, which means ensuring that the clients’ financial affairs are managed through a single individual or team, with a deep understanding of each client family, their wealth and other circumstances. This individual or team must have the knowledge and experience to cover all aspects of their affairs, with access to information and views from relevant specialists where required.

The word co-ordinator is often used, but this word grossly underestimates the role played by a holistic wealth manager, particularly one who handles complex clients with multiple interests across a variety of jurisdictions, often holding disparate assets through a number of different structures.

The job of the ‘holistic’ wealth manager is not so much to introduce clients to the experts, but to lead and manage the team and drive the decision making process. His or her role includes the following:

  • Standing in the shoes of the clients, by developing a deep understanding of their family circumstances, their attitudes and concerns, as well as their financial and business affairs.
  • To help the clients develop and outline a strategy, purpose and objectives for their wealth, ensuring it serves a useful purpose for successor generations.
  • To identify key issues and key decisions which need to be taken and areas where specialist advice may be required.
  • To identify the best and most appropriate specialists, brief them, and work with them to reach conclusions which fit the overall context.
  • To integrate the advice into a wider decision making framework, which may include advice from a variety of other specialists, some of which may be conflicting.
  • To manage day to day execution and reporting, in accordance with the agreed strategy and objectives.

It will be apparent that the more complex the clients’ affairs, the greater the demands on the experience and judgment of the wealth manager, who needs sufficient understanding of all relevant areas. He or she will also need significant experience of similar clients, so that he can draw on all those practical experiences, covering family issues as well as technical input. This experience comes not just from the number of clients they have served, but from the breadth and depth of their involvement.

Those who advocate the holistic approach would argue that the wealth manager needs supporting specialists in-house, with whom he or she has day to day contact, working together as a ‘team’. This more seamless approach is a better experience for the client, reducing the need to engage with multiplicity of different advisers.

The best solution for the client is not the theoretical independence of a totally outsourced model, but finding the right balance between in-house and external advice. This will include consideration of the viability of the provider’s business model.

A further advantage of the holistic approach is that the provider has both the expert knowledge and experience to identify the right external specialists, when required, and sufficient business to allocate that they are in regular contact with most of the specialists they may wish to draw upon.

All these considerations are highly relevant to the trustee, both in selecting external advisers and in considering the extent of expertise he or she needs within their own team.

CONCLUSION

Because of their special status, trustees have a particular responsibility to preserve their independence and to manage any conflicts of interest. This will include finding the right balance between in-house and outsourced advice and services, to serve the best interests of their beneficiaries.

It is unquestionably right to outsource where external providers can clearly better meet the needs of the trust, but there are many circumstances where an in-house solution is preferable. It is the job of trustees to make judgments and take big decisions, and they should be expected to have the expertise, experience and capability to fulfil their responsibilities without excessive reliance on third party advisers.

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Our approach is rooted in a deep and practical understanding of the family, its wealth and wider circumstances. We help families develop and implement their plans to pass on an enduring legacy.