In the days before air travel and telecommunications shrank the planet, members of wealthy families used to live within close range both of each other and the source of their wealth. It was therefore the residence of the patriarch or other key family members that determined the location of the family office.
Today, the opposite holds true. Wealthy families are becoming ever more dispersed geographically, while individual members may flit between a number of properties in a variety of disparate locations. This has served not only to increase the importance of the family office in maintaining focus and communication, but also means that its central location has shifted to where it is most convenient for most family members. In many cases, this will be offshore.
“Wealthy families tend to start living near the place of wealth creation and often, during the creation phase, the greatest risk can be that the creator has too little control,” says Andrew Rodger, head of Stonehage Family Office in London. “But after the wealth has been created, the realisation can dawn that the greatest risk has changed – too much control can be a risk in terms of relevant expertise, family safety, tax issues or potential litigation. There has to be a distance in terms of control between the assets and the creator.”
No two family offices are exactly alike because no two families or their interests and activities are exactly alike. They may need holding companies in different places or a combination of structures around the world but, geographically, the location for the family office is selected on the basis of different considerations, including confidentiality and access to the necessary expertise.
But unlike choosing a situs for an offshore structure, it must also be easily accessible, because problems usually arise when families lose their grip on what they have, and somewhere that is physically and culturally appealing, because it will also serve as a place where the family will meet.
“In setting up a family office, there are generally three things for a family to worry about: where they live and work; where their wealth is located; and where their wealth management operation is situated,” says Rodger. “People live naturally where they want to live and often where it best suits them from a personal tax perspective. So the next question is where to locate their wealth and holding structures.
“It is not simply a question of which jurisdiction offers the best tax advantages, there are lots of other considerations – the quality of people available, the legal system and practical accessibility. Families need to know their trustees and, just as importantly, the trustees need to know and understand the family, so distance and time zones are significant. New Zealand, for instance, offers an excellent trust environment but it is a very long way from London. This raises important practical issues.”
Where a single location is not obviously sufficient, families may need to select jurisdictions based on a variety of other criteria. They may prefer to place the general office and administration in one location, generally somewhere offering stability, tax neutrality and high levels of privacy, while the investment function resides in one of the world’s big financial hotbeds like London, New York, Tokyo, Zurich, Frankfurt or Sydney. That explains why Switzerland, Luxembourg and the UK – together with the pick of its offshore territories and dependencies (the Channel Islands, Bermuda and Cayman Islands) – have long served as home to so many offices of wealthy foreign families.
Competition among these jurisdictions is intensifying and, not surprisingly, given global economic trends, the competition is fiercest from Asia and the Middle East, where jurisdictions are making concerted efforts to retain the assets of their wealthy families rather than watch them leach away to the Paradeplatz or St James.
Singapore has emerged as a contender, amending its trust law as part of a concerted effort to become the leading investment jurisdiction. And the effort seems to be bearing fruit. Last December, Credit Suisse became the fourth big bank to attempt to lever itself into the family office space in Singapore in as many months, launching its first family office hub for ultra-high net worth clients with at least $100 million in investible assets. It followed similar service launches from HSBC, Citi and UBS. Of 90 families that UBS identified globally for its family office programme, 14 were in the Asia Pacific region.
Hong Kong meanwhile is currently in the process of updating its Trustee Ordinance in a bid to keep pace with its Asian rival and, in the Middle East, the Dubai International Financial Centre became the first jurisdiction to introduce regulations designed specifically to create a platform for wealthy families to manage private family wealth and family structures.
The 2008 framework excludes single family offices from many of the regulatory constraints placed on conventional organisations in the centre, and is the first in the world to define a family office in legal terms.
But these financial centres are also, particularly since the 2007 financial crisis, attracting the wrong kind of attention from national and international agencies that are attempting to unearth undisclosed taxable assets that have been hidden offshore. The well-publicised leaks of bank data from Liechtenstein and Switzerland, US legal actions against UBS and other banks, and the Organisation for Economic Cooperation and Development’s campaign to force recalcitrant jurisdictions into transparency through black listings and tax information exchange agreements have all served to undermine the edifice of offshore secrecy.
“In dealing with the family office space, the problem of undeclared funds is not generally an issue,” says Philip Marcovici, former Baker & McKenzie partner and director of Liechtenstein-based multi family office Kaiser Ritter Partner. “To a great extent these bank accounts are concentrated towards the lower end of the wealth scale. Families with offices tend to be more sophisticated and better advised so they should have regularised any outstanding tax issues years ago. But the move towards tax transparency is damaging their ability to keep their affairs confidential because it is easy to get caught up in the net.
“These families are more focused on maintaining privacy and they appreciate the legal protection of information that they get in places like Switzerland and Liechtenstein, rather than in London. If this is compromised they may decide to move. It is those jurisdictions and service providers that understand the distinction between tax transparency and personal transparency, and which can assist family offices to navigate between them, that will attract their business.”
In Bermuda for instance, although exact numbers are not available, there is no doubt that a significant number of private trust companies and family office structures have been formed. “Yes, we have TIEA agreements with most major countries and are increasing these numbers,” says Cheryl Packwood, chief executive of Bermuda Business.
“However, we also ensure that there is a genuine, legal reason for inquiry into an individual or company’s account; that this is not merely a ‘fishing expedition’ and that it goes through the proper channels and is carefully documented and examined. Clients who operate within legal boundaries and channels are protected and can conduct legitimate business here.”
“Service providers in Bermuda know and respect that their clients have legitimate reasons to protect their personal private information,” says Randall Krebs, general counsel with Meritus Trust in Bermuda. “One of the things Bermuda clients like is that there is not a lot of fanfare or needless publicity used to promote Bermuda’s jurisdictional interests over the clients’ needs – there is virtually nothing needlessly published about our clients’ private personal business interests.”
Campden looks at the top 10 jurisdictions for family offices (in alphabetical order):
The British overseas territory situated around 600 miles off the coast of the eastern US seaboard is popular with family offices not least because of its English legal system and well established financial services sector. The island’s legislation regarding private trust companies has been popular with family offices. A PTC can be established where there is a need for a family office structure to manage the affairs of the family. Bermudian trusts are also favoured by family offices. They are free of taxes and stamp duty and can be constructed to suit a range of requirements. Financial services personnel on the island have a wide variety of expertise and Bermuda is known as one of the centres for life insurance among offshore jurisdictions.
The Cayman Islands was hit hard by the financial crisis, particularly when it came to its relationship with hedge funds, where many of them were registered. Questions arose over their level of transparency in the jurisdiction. Since then, the Cayman Islands has moved to clean up its reputation and the islands were admitted to the “white list” of the Organisation for Economic Cooperation and Development in August 2009. The jurisdiction has since strengthened its legal and regulatory framework as well. The Cayman Islands’ background in hedge funds ensures that it has plenty of expertise in this area – so family offices with a hedge fund bent have often had links with the islands, and no doubt will continue to do so.
The smaller of the two Channel Islands off the southern coast of the UK has been an attractive destination for family offices for years. The island’s financial services sector has expertise in a number of areas including trusts, reporting and accounting, fund administration and custody. Guernsey prides itself on having a strong regulatory and legal framework, with the jurisdiction doing much to meet, and indeed, exceed international standards. The financial sector manages around €400 billion of deposits and assets under management. A predictable legal infrastructure, backed up with top professional services firms makes Guernsey a popular choice for family offices.
Hong Kong, a Special Administration of Region of the People’s Republic of China, has always been a top financial centre, attracting very rich families from around the region. This has accelerated in recent years as many of China’s wealthiest families set up family offices in Hong Kong. Backed by its Western legal system and a strong regulatory framework, Hong Kong is one of the top locations for private clients in the world. The local authorities are in the process of updating some of their trust laws, particularly in regard to the powers and duties of trustees. This is expected to bring it more in line with other top offshore trust centres around the world.
Like its neighbour Guernsey, Jersey has been fast to comply with international regulatory and legal standards in recent years to keep groups like the Organisation for Economic Cooperation and Development happy. To strengthen its appeal as an offshore centre for family offices and the ultra-high net worth the island introduced a new foundations law in 2009. The big appeal of these new structures compared with other foundations is their flexibility. According to the Global Financial Centres Index, Jersey is the highest rated offshore centre. Expertise in areas like trusts, fund administration and investment gives Jersey the edge over many other similar sized financial centres.
In recent years, the principality has done a lot to try to reinvent itself after a number of scandals involving breaches of client confidentiality threatened to undermine Liechtenstein’s financial services sector. A big initiative has been the so called Liechtenstein Disclosure Facility – an agreement with the UK tax authorities allowing those with offshore bank accounts in Liechtenstein to reach a special agreement to pay off unpaid tax liabilities with the UK Revenue & Customs. However, no such facility exists with Germany or Austria, where the majority of offshore money in the principality comes from.
The Mediterranean Island has been actively trying to encourage family offices to set up in Malta and has had considerable success in recent years. The island’s legal and regulatory framework has been strengthened as part of Malta’s entry into the European Union. The country offers a useful nexus between Europe and Africa, which has enabled it to capture strong capital flows. The Malta Financial Services Authority is generally well respected and has helped with improving the jurisdiction’s reputation. The Maltese financial sector also works closely with banks across Europe and many top financial institutions have opened offices there.
The principality has always been a popular destination for the super rich and some use the location to base their family office. The Monaco Association of Family Offices was set up a few years ago to promote family offices in Monaco and represent their interests. Although no official figures exist, Monaco is reputed to be the headquarters of at least 50 family offices, making it one of the most important financial centres for family offices anywhere in the world. The benefits for family offices being based in Monaco include expertise, tax and the social appeal of mixing with some of the world’s richest individuals and families.
The Singapore government has been very successful at turning the city-state into an attractive location for wealth management, which has also meant attracting family offices. Experts reckon that at least 30 family offices/ investment offices have established a presence in Singapore in the last five years. The city-state’s success as an offshore centre for family offices has partly been due to pressure on European wealth centres like Switzerland to end banking secrecy, which has seen money leaving Europe for Singapore. Like Hong Kong, Singapore has a plethora of talent to pull on when it comes to offering services to family offices.
Switzerland’s famed banking secrecy rules may have been eroded in recent years as international pressure for greater transparency has taken its toll, but the Alpine state is still the gold standard when it comes to services for family offices. Hundreds reside in Switzerland and new investment offices are being set up all the time. A huge pool of talent exists to provide top services for the very wealthy and Swiss wealth managers have taken client relationships to a new level, which few other offshore centres can provide. Experts say Switzerland is home to at least a third of the world’s offshore money.