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For high-net-worth families, asset management may be a constant headache given the multitudes of services often involved, including financial advisors, accountants, and administrative staff. Succession planning, too, is a common concern that requires extra attention and time. As such, an increasingly popular vehicle for these families to manage such assets is the family office.

This is the first in a series of articles that explore the value of family offices for high-net-worth Chinese families from a legal perspective.

What is a family office?

A family office is an organization that completely manages a family’s wealth, and can be a single stop for the family for all its financial and lifestyle needs. The services offered by each family office depend entirely on the needs of the family and can vary widely.

A family office may offer a broad variety of financial services, including investment management services, budgeting, tax planning, estate and wealth transfer planning, bookkeeping, and general business and financial advising.[1] The office may provide more mundane services as well – making bill payments and coordinating travel plans may number among these, as well as any number of other lifestyle services that the family may require.[2]

The family office may differ based on type, as well. The more traditional type of family office is the Single Family Office (“SFO”), which often consists of employees that may include an accountant, a bookkeeper, a property manager, and investment professionals. The SFO is defined by its dedication to a single family.[3]

The Multi-Family Office (“MFO”), on the other hand, serves multiple families. Although it loses the singular focus of the SFO, the MFO is preferable for families who want to share the costs of operations of a family office with others. [4]

Why a family would want to establish a family office

The family office, as a single centralized organization that intimately knows the family’s needs, is able to take the family’s specific values and goals into account when determining its financial strategy. The family, whether concerned about its increased liquidity following the sale of a family business, or seeking merely to preserve its assets for succession planning, may bring these considerations to the family office employees in preparing the office’s strategy.

For instance, those family offices oriented towards succession planning may offer financial education for the heirs, teaching the next generation how to manage the finances effectively once it transfers to their name.[5] The family office may take other plans and values into consideration as well, such as philanthropy and politics.

The family office’s lack of dependence on third-party providers means that it has the ability to pursue less traditional investments such as subprime mortgages, European sovereign debt, and corporate buyouts.[6] Again, the family office is solely accountable to its family and the family’s values. As such, investments may yield higher returns.

Finally, for the privacy-conscious wealthy family, having a family office that handles all of its financial information means its confidentiality is preserved solely within the staff of the office.[7] There is no need to share this information with a number of varying third-party providers and independent investment managers.

Possible concerns

The most obvious drawback of establishing a family office is the cost associated with it. A SFO is only worthwhile for a family that has at least between $100,000,000 USD to $500,000,000 USD in assets[8], although the typical SFO would manage between $500,000,000 USD to $1,000,000,000 USD.[9] A SFO may require $1,000,000 USD to operate per year, since ideally, the operating expenses of a SFO should only be one percent of the assets being managed.[10] MFOs may be more accessible for families with assets of $25,000,000 USD or less.[11]

Other concerns include particular issues in establishing and running a family office. For instance, the family should carefully consider the jurisdiction in which they plan to establish the family office with view to which jurisdiction would have a sophisticated tax and legal structure,[12] and would be most aligned with the family’s financial strategy.

Bearing in mind that the family office would be closely tied to the family and would be the primary manager of its finances, careful planning in its creation would be crucial to ensure the longevity of the family office and to prevent unnecessary conflict. For instance, deciding on staff would be of primary concern, particularly with view to the fact that the staff would be the parties who are privy to often closely-held financial information of the family. The family should trust its staff and feel comfortable with them so as to prevent future fall-out.[13]

Conflict may arise within the family as well. Differences in perspective in financial strategy may cause discord. For instance, given that family offices are often established for longevity – in that the wealth is meant to be kept stable in preparation for future transfer to the next generation – return on investments may not always be as high as one might hope. Some family members may prefer greater returns to longevity and stability.[14]

Trends in China

Since the reforming of the Chinese economy in 1978, China has seen soaring numbers of billionaires over the years. As this first generation of Chinese business owners has begun turning their minds to investing and transferring their wealth to the next generation, Asia has seen a corresponding rise in family offices. Singapore and Hong Kong have been popular destinations thus far.

Chinese families generally look offshore to establish their family offices. They may have made this decision out of convenience, with regard to considerations such as whether they have offshored their funds and where, or where their family is living outside of China. Commonly, Chinese families seek to establish a base in a country in which they seek to have their children receive their education, and as such would establish a family office accordingly.[15]

Reducing exposure to regulatory and macroeconomic risks are common considerations as well. Given confidentiality and privacy are values typical of many wealthy families, Chinese families, in particular, may fear the suspicion of local authorities, should information regarding the depth of their wealth become public.[16]

Future discussions

In future articles, we will explore the various legal structures for family offices, legal structures for family offices investing in real estate projects, proper governance for family offices and the considerations when a family office invests with other parties.

[1] EY family office guide, Ernst & Young.

[2] What is a family office and how can it benefit my family?, Hutchinson Family Offices.

[3] What is a “family office” – an insider’s perspective, CV TrustCo.

[4] Ibid.

[5] Complete Guide to starting a family office, Cleverism.

[6] Family offices become financial titans, The Economist.

[7] EY family office guide, Ernst & Young.

[8] Ibid.

[9] Family offices become financial titans, The Economist.

[10] Considering a family office? Here’s what you need to know, RBC.

[11] Family offices become financial titans, The Economist.

[12] EY family office guide, Ernst & Young.

[13] Ibid.

[14] Ibid.

[15] The wealthy are coming, Bloomberg.

[16] Ibid.