FOA White Paper - Single Family Office _ The Ultimate Wealth and Legacy Protector

Single Family Office:The Ultimate Wealth and Legacy Protector

WHITEPAPER

Author: Angelo J. Robles and Contributor: Arie Y. Levy-Cohen

Given growing global financial risks, families of exceptional wealth with their own dedicated, properly structured single family office stand the best chance of

preserving and expanding their wealth over generations.

The vast majority of the more than 56,500 families around the world with net worth of $100 million and up and more than 16,500 with upwards of $250 million1 have yet to create a single family office (SFO). Many families understand that SFOs provide the ultimate in privacy, control and customization. Their resistance to creating one often stems from a mistaken belief that SFOs are exorbitantly expensive to operate than outsourced investing and other services.

In fact, the costs of starting and running a family office—especially one that primarily retains its own dedicated direct investment staff—can be much lower than outsourcing to investment professionals/managers. The risks and opportunity costs of not having a single family office, which could be devastating to a family’s future wealth, dictate reconsideration of creating an SFO.

This White Paper ascertains risks that today’s tumultuous global financial markets pose for families of exceptional wealth and identifies the many ways a properly structured SFO can best manage, if not mitigate, those risks.

ABSTRACT

© 2015 Family Office Association and Angelo J. Robles

1 WealthX’s “World Ultra Wealth Report 2014” https://www.private-banking-magazin.de/uploads/fm/1416410395.Wealth-X__UBS_World_Ultra_Wealth_Re-port_2014_Final.pdf (Ac-cessed May 21, 2015.)

Family Office Association A R

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https://www.private-banking-magazin.de/uploads/fm/1416410395.Wealth-X__UBS_World_Ultra_Wealth_Report

https://www.private-banking-magazin.de/uploads/fm/1416410395.Wealth-X__UBS_World_Ultra_Wealth_Report

Families of exceptional wealth, especially if at the level of creating an SFO, are in the “stay rich business.” Maintaining what they have and ee ing ace it in ation nea nil no and taxes requires building a moat around the ca ital to otect it fi st and fo emost edge risk, and protect purchasing power.

However, many wealthy families and their advisors drastically underestimate risks that could devastate their assets, especially as they transition from matriarch/patriarch to the wave of generations to come. Six of the most perilous risks are:

Forgetting They Are in the “Stay Rich” Business

Over time, investments in fragmented, uncoordinated, vehicles and structures laden with fees and without regard to taxes will have a wealth siphoning effect. When a family of e ce tional ealt t sts ot e s o tside s to invest in what they as wealth owners t ly don t nde stand con icts and lac of alignment of interests often result.

Lack of Transparency

The point of an SFO is to completely and totally a e cont ol of t e family finances and other affairs. When the family doesn’t know what it owns, it cannot have true control. In times of turmoil, lack of transparency results in irrational decisions.

Cyber Threats

Former U.S. Secretary of State Condoleeza Rice, currently a political science professor at Stanford University and senior fellow at the Hoover Institution, told attendees of

y idge Alte nati es A 2015 t at t e biggest global threat today is cyber security2.

Recent breeches of hundreds of thousands of customer account and personal information by a top manager at Morgan Stanley, plus hacks into SONY and other major corporations’ customer databases, indicate the seriousness of this threat.

Sovereign Exposure

Financial markets are subject to cycles, which history has shown will continue to occur indefinitely. n a o st case scena io it may be a matter of if, not when, investors can reclaim what they own. Every asset class is at risk to the extent of where in the cycle it may be. Exposure as well as “asset location” affects the family strategy around generational transition, taxes, asset protection, political t moil systemic financial fail es and e en natural disasters. The institutions where cash is on deposit, the nations that issue the currency and the debt against which its issued, marketable securities, as well as real assets such as jewelry, art, coins and precious metals could become subject to cyclical variations and sudden, unexpected shocks.

RISKS TO RICHES


2 SALT is the largest hedge-fund / alternatives conference in the world.


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Lack of Tax Planning

ac of com etent and oacti e ta planning devastates investment gains and generational transition. A direct investing family office allo s nea com lete cont ol over the investment tax picture and potential for superior generational transition planning. Wealth owners should make it clear to their family office t at oacti e ta lanning ranks in importance as high as investment management.

Asset Ownership

The strategic choice of which family entities and legal structures will own assets is woefully overlooked. It’s important to consider what is best owned onshore, offshore, through a trust,

st ct e co o ation o limited liability com any etc. n ot e o ds it s not eno g to no at one o ns as disc ssed ea lie no ing how one should own various assets will impact asset protection, taxes and privacy.

A related reality, which is also poorly understood by the vast majority of even exceptionally wealthy families, is rehypothecation ic allo s b o e age fi ms to hold public securities such as equities—that they purchase on investors’ behalf through

i e o ses in st eet name a a an omnib s acco nt . n ot e o ds t e di ect o ne of that security is not the investor, who only has a ledger entry legal agreement with the b o e age fi m t at. e act al o ne of t e sec ity is t e b o e age fi m ic olds it for the investor in “street name.”

The United States’ constitutionally protected property rights do not shield owners of public securities from margin risk due to rehypothecation. There are many legal repercussions, but the ownership issue alone s fficiently stifies lacing assets inside fi ms t at ens e yo assets a e titled and owned by you: not the street name. The impact custody can impose on property rights makes it imperative to diversify the underlying custodians of securities by institution, by jurisdiction and by currency. For instance, wire houses are permitted to use shares owned by a client as collateral, even for the banks’ own proprietary trading. This could, at times, es lt in a con ict and in some cases to t e

b ea ing of seg egation les t is is at brought down MF Global and many of its clients . n esto s can in some cases e est that rehypothecation be disallowed in their account. Better still, use a delivery-versus-ayment acco nt and send t e ysical

securities to a custodian of choice.

RISKS TO RICHES



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These six high wealth hazards can be monitored and mitigated to a large extent by a dedicated internal team with experience in global finance cybe sec ity and ta planning, to keep careful watch on geo-olitical and financial t eats t at can

jeopardize the family’s assets. That team is called a single family office.

Those who already have an SFO in place a e among t e mino ity of a ified ealt y families that has acted to protect their assets for current and rising generations. However, just having an SFO does not guarantee it will be successful at safeguarding the families’ interests. The majority of SFOs are vulnerable to one o mo e st ct al inefficiencies t at can undermine even their best planning efforts:

Culture, then Structure

ete c e e o tedly said lt e eats strategy for breakfast.” No matter how brilliant an organizational structure, it is often quickly and irreversibly undermined by wholesale failures of the cultural capacity, engagement or alignment of the vast majority of those who are supposedly being led.

Matt Wesley, founder of the wealth management fi m e esley o ecently asserted in his blog post, “culture eats structure for breakfast.”3 He explains, “Trusts fail and litigation ensues. Family behavior ndoes financial lans. a st ategies sit

on the shelf because of lack of political will. Family feuds destroy otherwise healthy businesses. And the structural work of family governance specialists is a hollow shell that does not begin to address the family dynamics that, as it were, stand back, smirk, and then eviscerate all of this good work.”

The SFO not only must have the right people who thoroughly understand the family’s culture and have the right information to make intelligent decisions. e best family offices are built around the owning family’s vision and values about generational wealth and legacy. They also make sure that required structures e ect t e family s c lt e in o de fo t e FO

to serve and thrive across generations.

One of t e fi st c lt al conce ns fo t e FO to understand is, what is the wealth for? The wealth creator and his or her family need to define and comm nicate t ei al es ision and the legacy they want to leave. Good governance at the family level will guide them to draft a family mission and a family constitution, and develop a board or council that will address issues such as generational planning for all ages. Many families lack structural policies and procedures and fail to follow best practices that can mitigate risk and leverage what’s available to them.

When the SFO is not built around the family’s culture, the talent will have no direction, generational leadership or consistent message.

SFO SOLUTIONS


3 “Culture Does Indeed Eat Structure for Breakfast,” Family Wealth blog post Dec. 1, 2014 (http://www.thewesleygroup.com/blog/?p=609). Accessed 20 May 2015.


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http://www.thewesleygroup.com/blog/?p=609

Direct versus Allocation Investment Models

On the investment side, there are two types family offices allocators that take endowment model and allocate investments to outside managers, and direct investors.

The vast majority of SFOs are allocators: who scour the landscape for best in breed managers from long only, to hedge funds, private equity funds and venture funds. Wealth owners often greatly underestimate the cost of being an allocato fees and net of ta es et ns . n today s blic ma ets t e e is

less need for wealthy investors to settle for the underperformance of many active managers

a tic la ly alte nati e manage s om As by on and aniel adle efe to as “fee machines.” These fee machines enable—in fact, invite—investors to challenge the model of outsourced investment managers, e lain on and adle e ec ti e di ecto of the Global Projects Center at Stanford

ni e sity and di ecto of esea c fo financial technology at Stanford University’s School of nginee ing es ecti ely in t ei ecent Institutional Investor article4 e ig ly ecommend eading t e com lete iece .

With the direct investment model, the SFO sources and invests directly in public and private securities, as well as other investments s c as eal estate and of co se cas inst ments . e family t at di ectly in ests completely, will unequivocally know what it o ns t ans a ency and ac ie e g eate privacy, security, fee clarity, and far greater ta cont ol. i ect in esting enables t e family to understand and control its liquidity

and its ability to make internal direct hedging decisions based on these holdings. These a e significant ad antages. i ect in esting in private companies is admittedly more complex than other assets to execute in terms of internal talent, resources and capital, but their benefits can e ceed t ei c allenges.

Even the best-of-breed outsourced managers ill inc easingly find it to g to stify t ei

cost, as “technology has reached a tipping oint in finance insist on and adle . ey

note sma t financial inte media ies a e sed technology in the past few decades to obtain higher ‘rents’ and reinforce their competitive advantage within uncompetitive markets. … Indeed, to access the most powerful technologies, institutional investors and others family offices a e ad to o it t e most

expensive gatekeepers.”

That model is morphing, to the disadvantage of all t eet fi ms and t e ad antage of in esto s. O e t e ast 0 yea s say on and Nadler, “advances in technology have se ed to em o e financial inte media ies. Going forward, technology may threaten their existence. It means the private club of edge f nds ic yo a ily aid 2 and 20 to oin on t be as e cl si e as it used to be. It means the mythical ‘black box’ that some asset managers use to drive outperformance—and reinforce their own market power—will be democratized. It means we will see a gradual emancipation of allocators from high cost intermediaries and a dramatic move on the part of institutional in esto s to a d m c mo e e ible and affordable technology companies.”

SFO SOLUTIONS


4 “The Rise of the Tech Model May Soon Make You Obsolete,” Institutional Investor, March 25, 2015http://www.institutionalinvestor.com/Article/3439375/Asset-Management/The-Rise-of-the-Tech-Model-May-Soon-Make-You-Obsolete.html?ArticleId=3439375&LS=EMS1150282&single=true#.VV4jLmDtJjE(Accessed May 21, 2015.)


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http://www.institutionalinvestor.com/Article/3439375/Asset-Management/The-Rise-of-the-Tech-Model-May

http://www.institutionalinvestor.com/Article/3439375/Asset-Management/The-Rise-of-the-Tech-Model-May

Monk and Nadler also note that the con e gence of tec nology A and fintec entrepreneurs that are disrupting old models, now enable SFOs as never before to “match” in esto s it e y s ecific deals. o cing deals is of course only part of the equation.

iligence on i ate com anies and t e complexity, time and capital needed to go from interest to investment is far more complex than buying public securities. Many deals an SFO spends time and diligence capital on, however, may not close, of course. Even when invested, private company transactions require constant servicing.

Monk and Nadler also note that the con e gence of tec nology A and fintec entrepreneurs that are disrupting old models, now enable SFOs as never before to “match” in esto s it e y s ecific deals. o cing deals is of course only part of the equation.

iligence on i ate com anies and t e complexity, time and capital needed to go from interest to investment is far more complex than buying public securities. Many deals an SFO spends time and diligence capital on, however, may not close, of course. Even when invested, private company transactions require constant servicing.

Another trend that will mitigate the complexity and cost of direct investment is the explosion of interest among SFOs to band together to do “club deals.” Participating SFOs in club deals share the tasks and costs of scouring the world for opportunities, as well as diligence and service. The collective approach of multiple SFOs sharing the vetting, co-investing and servicing of private investments can be very valuable. Underlying families behind the SFO, especially those newer to wealth afte e iting a s ecific ind st y can b ing connections and e e tise in s ecific e ticals by combining the knowledge and resources of a variety of families into a collaborative effort.

Investing in private companies through private equity funds is another way to gain e os e to t e inefficiencies and encefo t opportunities in the private markets. PE funds also may have opportunities to invest with more diversity in its portfolio of companies than a family doing one-off transactions.

es ite t e effects of t e common 2 20 com ensation model see belo and t e other limitations through funds, wise SFOs explore and understand all their options.

SFO SOLUTIONS



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Aligning Family and SFO Interests

Families often fail to align their interests with incentives for their SFO executives. Executives simply follow their orders and mandates that the family gives them. It’s up to t e family to set t e c lt e in t e family office put governance and structures in place and provide an environment with resources and technology for the talent to do their job.

Especially at the CIO level, compensation and bonuses are often tied to gross returns. Instead, motivating top talent to be dedicated to your family legacy and gene ational finances e i es o iding incentives to minimize taxes and maximize the true net return. While not the norm, smart compensation must also incentivize the CEO/CIO to achieve hedging, jurisdictional diversity, and proper asset location and allocation. This is not something to do on the “cheap.” Base ay bon s and benefits fo to tie talent m st

be competitive. This is best accomplished in coordination with a compensation expert dedicated to and experienced in SFOs.

Hedging: Against Political Turmoil, Systemic Financial Crises and Natural Disasters

A well rounded plan for a family of great resources must include a plan to hedge and manage generational risks. Global banks, wire houses and custodians all play relevant and important roles for the wealthiest families. It is worthwhile to keep relationships with m lti le to tie financial instit tions as yo net worth permits. The wealthiest families should explore country and institutional di e sification. e . . anada ayman Bahamas, Uruguay, Switzerland, Singapore,

bai ong ong o ay and A st alia may all make fair choices depending on the needs and exposure of each family.

Foundational holdings among many of the world’s largest and most savvy generational families include income producing private b sinesses o o t nistic in land ag ic lt e

ate and ene gy eal estate and eal assets. Certain real assets, such as gold, art, jewelry and land, may be limited as pure investments, yet offe e cellent ma et edges if di ectly o ned . c edges can otect assets and purchasing power. Therefore, an exceptionally af ent family s o ld not be diss aded f om direct investment in these assets even though they may place a drag on income and perhaps short term asset appreciation.

as and ma etable sec ities blic e ities and fi ed income a e also foundational holdings for families of exceptional wealth. Surely U.S. capital ma ets ill benefit g eatly f om t e ig t away from sovereign debt, which in turn

ill ca se e en mo e ca ital to o into t e o and asda lacing mo e pressure still on the Fed to raise rates. As U.S. rates rise, America’s cost to borrow will, of course, increase. However, cash is still king and the U.S. dollar is still the ultimate c ency to o n as blic secto confidence ebbs in other regions. The euro and the yen will face tremendous challenges as will all currencies directly or indirectly pegged to the dollar, which is rising hard. This will snap all pegs, resulting in dramatic currency value s ings a in to en t e iss F anc F decoupled from the euro. More of this is sure to come to a jurisdiction near you.

SFO SOLUTIONS



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Given the many serious risks to riches and the ability of SFO professionals to devise and implement solid solutions, exceptionally wealthy families, with so much to lose, would be wise to consider creating their own family office.

Contrary to their resistance, based on a misperception about the cost of developing and running an SFO, many fail to understand that investment advisory/consultant and third a ty manage fees in ce tain long only f nds

and all near alternative funds, performance fees a e often fa ig e t an t e cost of building and running a direct investing

SFO. In fact, an outsourced investment advisory, coupled with an endowment model of choosing active managers and heavy exposure to alternative managers, can be very expensive net of fees and taxes.

et s do t e mat . n estment cons lting com anies ty ically c a ge 0 basis oints b s e yea . Fo a family it 500 million to

in est t at comes to 2 million a yea lea ing million to in est. c cons ltancies a e

likely to recommend investing your money in hedge funds, private equity funds and venture ca ital f nds t at fold in anot e significant laye of costs no n as 2 20

Costs: SFOs vs. Allocation

2 e esents f nd management e enses at t e end of 12 mont s based on net assets in ested million l s a y ot etical 10 et n .

million ic comes to 5 . million. e efo e t e 2 management e enses come to 10. 5 million.

20 e esents e fo mance s ccess fees is based on assets net of t e 0 basis oint cons lting fee million l s 10 g o t . million

min s 2 management e enses 10. million

. million . million 5 . million

5 . million 10. million 5 . million

5 . million 20 10. million

+

-

x

=

=

=

10. million 10. million 21. millionx =

Fo t e 500 million net o t family t e 2 20 fees o ld come to anot e combined 21. million ass ming 10 g oss in estment et ns

assets net of 0 basisoint cons ltancy fee

10 g o t

2 management e enses

e fo mance fee



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Table 1 esents fees fo families it 100 million 250 million 500 million and 1 billion in gross assets, rounded to the nearest decimal point.

* Net assets = investable assets minus 40 bp consultancy fee, plus growth after one year** Assumes a hypothetical 10% return on year end assets, less 2% management expenses (debited end of year. Many funds debit quarterly)

Table 1: Annual Consultancy and Investment FeesINVESTABLE ASSETS




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n com a ison a g eat FO it to talent may cost bet een . 5 million and .05 million a year.

Table 2: Annual Salary/Bonus Ranges for SFO Executives




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Psychologically, it may feel harder to pay SFO executives and employees than to pay fees for investment consultants, advisors and funds. That’s because with the SFO the family pays salaries and bonuses directly from the family’s accounts, in most cases, so it feels more personal, while consultancy fees are often debited from a custodial account set up by the family and fund fees and performance are debited directly by the fund.

Another factor that has inhibited many families of exceptional wealth from organizing an SFO is the fear from their current advisor network, which may feel threatened by the buffer between them and the family of an SFO. Investment advisors of all stripes are painfully a a e of o fintec and A a e dis ted the brokerage industry by disintermediation. Individual investors and SFOs no longer need middlemen as frequently as in the past to research opportunities and make investments directly.




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There has never been a better time for the wealthiest families to create an SFO—or for families it an e isting FO to e ect and possibly reorganize.

No bank or outsourced provider can innovate, collabo ate o o is as ell as a ne e a family office t at is st eamlined and efficient deeply rooted in the family’s culture, serving an empowered family that works to inspire its talent. There has never been a better time for the wealthiest families to create an SFO, o fo e isting families it an FO to e ect and possibly reorganize based on emerging trends.

The stakes are high, as many families could lose their wealth as they transition to future gene ations. e Family Office Association FOA is e e to el ne and e isting

members keep abreast of developments in t e o ld of family offices and de elo t e

ig t c lt e fit leade s i talent st ct es and technology to navigate such risks most effectively.

IN PARTING



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Angelo J. Robles

Angelo J. Robles is Fo nde and O of t e een ic onnectic t based Family Office Association FOA a global membe s i o gani ation t at deli e s i ate ed cational and networking opportunities, proprietary research, and access to salient thought leadership to m lti le gene ations of ealt y families and t e ofessionals o n t ei single family offices.

A membe of t e inceton o ncil on Family Offices . Robles as a long eco d of leade s i ositions at to financial se ice com anies incl ding . efo e la nc ing FOA e fo nded

and ran several successful entrepreneurial ventures: He served as President of the New England chapter of the Hedge Fund Association, and pioneered online retirement planning for Fo t ne 1000 e ec ti es it t o nte net sta t s 01 Rollo e .com and RARollo e s.com.

n FOA . Robles as c eated a eso ce ni e in t e family office o ld a font of een insights into strategic investing delivered personally by some of the world’s top investors coupled

it se ings of t o g t leade s i ty ically confined to gat e ings li e o ld conomic Fo m and the Milken Institute Global Conference. It’s a mix that avails his members of many of the

o ld s s a est minds f om a id R benstein o Fo nde and o O of e a lyle o to ay al o Fo nde ete iel f om James anos Fo nde and esident of yni os Associates to is bo n alte O ien a scientist so ital to t e f t e of a tificial intelligence that the U.S. fast-tracked his visa application the way it did for Albert Einstein.

o g t is agg egation of many of t e o ld s finest t in e s and doe s . Robles offe s is membe s an en iable loo into t e f t e of global b siness and finance ealt and social

trends, technology, and philanthropic opportunities most likely to make an impact. And all to advance interests unique to wealthy families and the professionals who serve them: wealth protection and growth, philanthropic impact, and the use of technology to address concerns ac oss t e boa d financial legal and social.

Mr. Robles has appeared on Bloomberg Television and Radio, and has been quoted in the Wall Street Journal, Thompson Reuters, Institutional Investor, Opalesque, Registered Rep, HFM

ee n estment e s e a edge e y nstit te i ate Asset anagement and many other media outlets.

Author



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Arie Y. Levy-Cohen

. e y o en is a t o g t leade in t e field of ealt ese ation and tail is ositioning of in estment o tfolios and mo e ecently since 2010 in t e itcoin bloc c ain s ace. A ie sta ted his career as an international entrepreneur based out of Barbados and later moved to New York

e e as a ent e a italist e a tici ated in t e eme gence of t e nte net. e late o ed as a private banker in Zurich Switzerland where he honed the skills that ultimately landed him at Morgan Stanley, where he acted as Financial Advisor, International Client Advisor and Private

an e nning bot e e y afen o and e O o .

As a dual licensed Financial Advisor formerly working for both Morgan Stanley Wealth Management and the Morgan Stanley Private Bank N.A., Arie serviced institutional and ultra ig net o t clients foc sing c stody of all m lti c ency fiat c ency oldings t o g

its Wealth Management Global Currency Platform, Precious Metals services through the MS Commodity and Precious Metals desk in addition to all value added services available to institutional wealth management clients.

In his role at Morgan Stanley, he also served as an investment advisor to a number of think tanks, incubator groups, venture capital funds, business development companies, private e ity ent es single family offices. o e ecently . e y o en as been most inte ested in identity management and security as it applies to Wealth Management and has been instrumental in the shaping of several digital currency enterprises based in New York, including a non ofit leading ca ital ma ets team of ofessional ee s.

ently A ie is e lo ing dist ib ted ledge a lications and se cases fo global financial se ices fi ms ilst ee ing to is oots in nt l an ing ealt anagement ecio s

etals. it access to a ig ly alified team of Fin ec and y to ofessionals A ie s extended focus will center around Identity and Cryptographic Security.

Contributor



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The Family Office Association (FOA) is an affinity group dedicated primarily to the interests of Single Family Offices. FOA is intended to provide members with educational information and a forum in which to exchange information of mutual interest. FOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, FOA does not provide tax, legal or financial advice.

Materials distributed by FOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation or recommendation by FOA. Any investment decisions you may make on the basis of any information provided by FOA is your sole responsibility.

The FOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of Family Office Association. All other product and service marks on materials provided by FOA are the trademarks of their respective owners. All of the intellectual property rights of FOA or its contributors remain the property of FOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the FOA web site.

The information presented by FOA has been obtained by FOA from sources it believes are reliable. However, FOA does not guarantee the accuracy or completeness of any such information. All of such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

Disclaimer



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To learn more about FOA contact:

Angelo J. Robles of Family Office Association 20 5 0 2 . angelo familyofficeassociation.com

Family Office Association500 est tnam A en e ite 00

een ic onnectic t 0 0

. familyofficeassociation.com

FOA White Paper - Single Family Office _ The Ultimate Wealth and Legacy Protector

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