EFTA01093335

Creating A Finale Family Office to Manage Wealth and Sustain the Family WHAT'S INSIDE FAMILY OFFICE • Abstract Who. What. Why The SFO Universe Creating an SFO SFO Governance SFO Infrastructure SFO Advisors Compliance and Risk Management SFOs for Business-Owning Families Adapting to Changing Circumstances Technology SFO Personnel Global Trends in SFOs SFO Profiles About the Authors aceliimer nilizsznznnsi W HIT EPA PLR The benefits of hiring internal professionals exclusively devoted Angelo J. Robles to your family's financial and personal needs Amy Renkert-Thomas EFTA01093335 ABSTRACT A Single Family Office (SFO) is a private company of professionals who are dedicated exclusively to the investment, personal and legacy needs of one family. The concept of an SFO can be traced back to the Roman major domus (head of the house) and the medieval major-domo (chief steward)' as well as the British landed estate. The modem SFO originated in the 19th century by family dynasties who accumulated significant wealth created during the American industrial age. hi Ilara' IF YOU'VE SEEN ONE SINGLE FAMILY OFFICE, YOU'VE SEEN ONE SINGLE FAMILY OFFICE... L Interest in SFOs has grown during While a number of wealth the last twenty years with a new management firms call themselves wave of worldwide wealth coupled 'family offices; this white paper with global economic turmoil of the focuses on the "Single Family past decade. Extreme volatility, Office" or SFO—a privately-owned banking and business failures and and — run wealth management firm investment fraud, has motivated developed for one family. Each many families of significant wealth to SFO is as unique as the family who take control of their financial affairs founded it. As the saying goes: "If and preserve their family legacy. you've seen one single family office, you've seen one single family office." EFTA01093336 Investment-Related Management of Accounting, Tax Asset Protection Family Services Services Complex Assets Planning and and Risk Compliance Management Who, What, Why Some advisors say the monetary 7 threshold before a single family office (SFO) makes sense is between $50 million and $100 million in total assets... L .J EFTA01093337 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Fan* 4 WHO, WHAT, WHY Some advisors say the monetary threshold For the families that create them, an effective before a single family office (SFO) makes sense SFO can provide: is between S50 million and S100 million in total assets. Some family office professionals might • Control, coordination and integrated say $500 million or more. A better question to management of investment, business, ask: Is my family's wealth—in all its financial and philanthropic and personal services non-financial forms—being well-served by my • Privacy and confidentiality existing wealth advisory team? • Dedicated focus on the needs and requirements of the family Some SFOs are substantial wealth management Services and benefits customized to the institutions, with teams of experienced needs of the family investment managers overseeing fully diversified Coordination and management of portfolios, including hedge funds, private equity. outsourced providers direct investments, real estate, commodities and Purchasing leverage, fee minimization and other alternative investments. Other SFOs are cost savings smaller, managing more limited assets. Almost • Risk management and compliance all SFOs share the following features: • Alignment with the family's legacy. vision and values The SFO manages a complex pool of investment and personal assets. Investments are selected and managed with a long-term focus (typically, for multiple generations of the family). The creator of the SFO wishes to play an active role in overseeing investment management. The creator intends to avoid the conflicts of interest inherent in the existing wealth- management industry. ID 2013 Family Office Association and Angelo J. Robin EFTA01093338 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 5 WHO, WHAT, WHY (coNrD) Depending on the needs and wishes of the Asset Protection and Risk Management family and the size and complexity of the assets under management, the services provided by • Investment due diligence the SFO can vary widely. They may coordinate • Insurance services and oversee various types of investment-related • Hiring, background checking and services, management of complex assets, management of household, business and accounting, tax planning and compliance, asset family office staff protection and risk management as well as • Reputation management family services. Here are the most common • Personal security services elements that each category may include: • Medical management Investment-Related Services Family Services Development of an investment policy • Family bank and intra-family loans statement (ISP) • Philanthropy and charitable activities Development and implementation of an • Family mission, constitution and governance effective asset allocation • Family legacy and values • Sourcing and due diligence for direct • Next generation education and engagement investment opportunities • Organization of family retreats • Investment due diligence • Personal and property security systems and • Aggregation and reporting of investment procedures performance Concierge services (for example, travel planning, private aviation, personal Management of Complex Assets shopping) • Residential real estate • Commercial real estate • Operating businesses • Collections • Sports teams • Socially-responsible investments Accounting, Tax Planning and Compliance • Accounting and tax filings • Identification and engagement of outsourced providers • Tax planning • Development and coordination of estate plans for all family members • Trust implementation and administration • Administration of private family trust company O 2013 Family Office Association and Angelo J. Robles EFTA01093339 The SKI Universe According to Wealth X's World Wealth Report 2012 - 2013, currently there are approximately 50,000 families worldwide, defined as having at least $100 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences... L EFTA01093340 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 7 THE SFO UNIVERSE According to Wealth X's World Wealth Report and other business, investment and personal 2012 - 2013, currently there are approximately service providers. The family pays high fees for 50,000 families worldwide, defined as having at this disorganized array of overlapping services. least 5100 million in financial assets, excluding Worse, those fees likely are not fully disclosed, collectibles, consumables, consumer durables so the family can't quantify or compare them, or and primary residences. effectively negotiate with the service providers. Furthermore, many of the institutions they work The Family Office Association estimates that with have built-in conflicts of interest: brokers currently there are approximately 3,000 SFOs and other client-facing staff often receive higher around the world. Given the number of ultra commissions for selling the institution's own high net worth individuals, why are there so few investment products, giving them an incentive SFOs? Part of the reason is lack of awareness to push these products rather than choose and education regarding the benefits of an SFO, the product that best suits the client's needs fear of potential cost and complexity of set-up and circumstances. Families also rarely have and management, challenges in hiring capable the staff or the expertise to vet investment staff, and lack of professional guidance. All advisors or individual investment opportunities, these factors make families reluctant to create thereby heightening the chances that they may their own SFO. Also, the estimate doesn't inadvertently enter into a subpar investment, or include quasi-family offices: small private family worse, a Ponzi scheme or other fraud. investment companies of limited scale, or family offices embedded within family-owned and — Now more than ever, wealthy families need managed businesses. to coordinate their business, investment and personal relationships, centralize management But families that forego an SFO, whether by and oversight, implement appropriate due conscious decision or lack of awareness, face diligence and risk management procedures, and troublesome issues, particularly in times of manage their family affairs more effectively. For economic turmoil. These families often have a family of significant wealth, an appropriately fragmented and uncoordinated relationships structured and well-run SFO may be the answer. with multiple private banks, wealth managers 2013 Family Office Association and Angelo J. Robles EFTA01093341 Determine the Assess the Needs Develop a Business Purpose and and Objectives of Plan Create a Mission the SFO Statement Creating An SFO A critical early task in setting up an SFO is defining the mission of the family office... EFTA01093342 WHITEPAPER i Creating A Single Family Office to Manage Wealth and Sustain the Family 9 CREATING AN SFO Designing and implementing an SFO to fit investments? To preserve a family legacy? And your family's unique circumstances and needs why does the family want to manage assets deserves thought and preparation. While this collectively? Families planning an SFO should white paper can't cover everything a family take time at the outset to consider the purpose needs to know and consider in creating an SFO, of the SFO and its role within the family. the following can be a useful checklist. Families considering forming a SFO should put together a A critical early task in setting up an SFO task force made up of family leaders and trusted is defining the mission of the family office. advisors to lead the planning effort, with input Developing a short, focused mission statement from outside specialists as necessary. to guide the work of the SFO will help to avoid 'mission creep- in future years. The founders Determine the Purpose and Create a Mission should avoid drafting a mission statement that is Statement high-minded but vague and short on specifics. A family office consultant can help a family mold its What will be the purpose of this family office? vision and values into a practical and useful tool To manage liquidity generated by the sale of to guide the work of the SFO. a business? To oversee a portfolio of direct 2013 Family Office Association and Angelo J. Robles EFTA01093343 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Farnty 10 CREATING AN SFO (CONT'D) Assess the Needs and Objectives of the SFO client group, but can be equally critical for a first-generation entrepreneur who wishes to 1. Who are the clients? perpetuate the family's legacy over the long term. Other possible needs include property At the outset, make a list of all the individuals management and staffing, bill payment and and entities to be served by the SFO, such concierge services. as individuals, family branches, investment entities, businesses, trusts, trust companies and Develop A Business Plan foundations. The design of the SFO should take into account each client's unique needs and Once the clients, assets and needs have been requirements. itemized, the task force can begin the process of developing a business plan that outlines the 2. What assets will be managed by the SFO? services to be provided, a short- and long- term timeline, employee and outsourced talent Make a list of all the types of assets that required, service partners required (for example, the SFO will be responsible for managing: custodians, tax counsel, security services) and marketable securities, hedge fund interests, technology needs. MLPs, direct investments, operating businesses, residential real estate, commercial real estate, Budget farms, collections, aircraft, yachts, horses, sports teams. The SFO will need to hire or outsource A key objective in developing a business plan the specific expertise needed to oversee and should be determining a budget. Typically, SFO manage its particular asset pool. budgets are defined as a percentage of assets under management. SFO operating costs vary 3. What services do the clients of the SFO need widely—smaller SF0s, or those managing and want? complex assets, tend to cost more to operate than larger SFOs, or those managing a simpler Families with extensive investments, or with portfolio, because there are fewer economies of liquid capital to be invested, will need investment scale to exploit. The budget of an SFO managing management services including development an extensive portfolio of alternative investments of investment policy statements and asset and commodities for three generations of family allocation plans, manager due diligence, and members, all of whom also share a passion investment reporting. All SFO clients will need for modern art and house their collections in comprehensive and accurate performance multiple homes around the world, will necessarily reporting and accounting and tax-return be larger, both as an absolute number and as a preparation. Coordination of risk management— percentage of assets under management, than such as insurance, security and reputation the budget of an SFO managing a portfolio of management—is also a nearly universal need publicly-traded securities for a single family unit. of SFO clients. Development and coordination Family office consultants can be very helpful of estate and tax planning, possibly including in determining a reality-based budget for an management of a private family trust company, SFO, given a specified clientele, asset pool, and is an obvious need of a multi-generational service requirements. ID 2013 Family Office Association and Angelo J. Robles EFTA01093344 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Farnty 11 CREATING AN SFO (CONT'D) SFOs are not inexpensive to operate, and the available budget. The plan should also the future clients of the SFO may balk at the specify whether such expertise will be provided projected cost at first. However, when compared internally - via SFO staff - or outsourced. Once against the current expense of managing the the staffing needs are determined, the issues family's assets—taking into consideration all of location, office space needs, technology, costs, fees and expenses—the expense of an security, administrative support etc. can be SFO will likely be lower. Certainly, because addressed. the SFO will be custom-tailored to the family's needs, the return on that expenditure will be At this point in the process, CEO candidates higher. should be identified (if this task has not already been completed). Because the CEO of an The budget will drive the creation of benchmarks SFO must work closely with the family, the to set expectations for SFO performance. office staff and with a wide array of outside service providers, the CEO must have excellent How will the cost of the SFO be funded? An organizational, management and 'people skills. SFO serving the needs of a multi-generational Choosing a CEO purely because of his or her family must consider how the costs will be technical expertise in investing is generally allocated and charged to individual clients of a mistake. Because the CEO carries out a the SFO. Tasks classified as "needs" by a client high-level executive function and serves as the may slip to the category of "nice to have but family's face to the outside world, candidates not necessary today" when that client finds he should have proven experience leading, must bear the cost. Future conflict between managing and communicating successfully family office clients or between the family and in a wide variety of complex situations. Once the office can be avoided if the method of identified and hired, the SFO CEO will take on allocating expenses, determining the expected the role of carrying out the build-out of the SFO contributions by each client, and collecting fees in accordance with the plan. is made explicit from the outset. Leadership and Staffing The plan should identify the expertise required to meet the specific needs of the SFO's clients, given the specific assets to be managed and 2013 Family Office Association and Angelo J. Robles EFTA01093345 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Farnty 12 CREATING AN SFO (CONT'D) Staffing Oversight SFOs often hire investment team members The SFO should be overseen by a board of with extensive prior experience at private directors, which will meet regularly and be banks, investment houses and hedge funds. responsible for setting strategy and overseeing Such talent is highly sought after, candidates the CEO. Most families control the board of often demand—and get—co-investment rights their SF0s, to ensure that strategy is in line with or bonus compensation based on investment the family's wishes. Many SFOs are following performance. The SFO should take care in the lead of private businesses and bringing structuring such arrangements, particularly independent advisors onto the board to provide in light of the Dodd-Frank Act's requirement outside perspective and expertise. that family offices comply with RIA registration requirements unless they fit a very narrow Contingency Plan exemption. SF0s, both new and established, should seek advice of experienced counsel Planning for the SFO should include when bringing on new investment team development of a contingency plan that outlines members or adding new benefits such as carried procedures to be followed in the event of a interests. natural disaster, extreme volatility in the financial markets, theft, or technology breach or failure. All staff members, at every level, should go At the most basic level, the contingency plan through a background check and sign non- should include provisions for ensuring the safety compete, non-solicitation and non-disclosure and security of the family, its critical information agreements. Whether the SFO is large or small, and tangible assets, safety of the SFO staff, it should have an employee policy manual. The off-site backup of all information, and a plan for manual should be reviewed and updated at least re-establishing critical office activities off-site as annually by knowledgeable counsel. quickly as possible. 2013 Family Office Association and Angelo J. Robles EFTA01093346 SFO Governance Successful SFOs have strong governance structures to ensure that the organization is operated in accordance with the family's mission and values over multiple generations... L J EFTA01093347 WHITEPAPER Creating A Single Family Office to Manage Wealth and Sustain the Family 14 SFO GOVERNANCE Governance has long been a focus of corporate stewardship, oversight and management— investors, but until recently less attention has himself. Unless the controlling owner has a been paid to how SFOs are governed. An SFO formal governance mindset, he generally will that is intended to serve a family for generations prefer to run the SFO "lean and mean," without a would be wise to take time to develop and lot of staff or formal structure, making decisions implement an effective and appropriate on the fly in accordance with the his intuitive governance structure that can significantly assessment of what's needed at the moment. improve the longevity and success of the office. The controlling owner will often rely on a key advisor or staff member who "gets it" and knows Some families shy away from the term how to implement the controlling owner's plans, -governance: This term can bring to mind long who understands what is needed and does lists of onerous rules, regulations and policies. whatever is necessary to make that happen. At its core, governance is really nothing more than a set of rules that define how an It's critical to recognize that this sort of organic, organization will make decisions, large or small. first-generation govemance generally works For governance to be effective, the owners, quite effectively, at least in the early years. overseers (the board of directors or advisors) The office runs, makes investments and and management will need to be informed, accomplishes tasks. However, when the SFO understand their respective roles, rights and comes to be managed for a wider group— responsibilities, and operate the organization typically, upon the controlling owner's death, accordingly. when the assets pass to descendants or trusts for their benefit—the absence of established, One of the challenges of SFO governance is articulated policies will create a power vacuum. that the needs of the organization may change Without the founder around, suddenly no one radically—and very suddenly—over time. really knows who's in charge, what needs to be Commonly, a successful individual will create done, who's responsible for doing it, or how that an SFO following a liquidity event of some sort. performance will be measured or compensated. The founder will build the SFO structure to If the next generation hasn't been prepared suit his own needs and interests. As with any for their new roles, there may be a struggle for business run by a controlling owner, there isn't dominance, or the opposite: fearing conflict, a great need for formal governance at this stage family members may simply abdicate. The SFO of the SFO because the owner is fully informed, may slowly collapse, or a non-family member understands the goals and objectives of the may come to fill the vacuum, for good or for ill. SFO, and handles the critical roles—ownership, 2013 Family Office Association and Angelo J. Robles EFTA01093348 WHITEPAPER Creating A Single Family Office to Manage Wealth and Sustain the Family 15 SFO GOVERNANCE (coNT•o) Successful SFOs have strong governance The SFO's strategic plan goes beyond structures to ensure that the organization investing and includes education of family is operated in accordance with the family's members, to promote effective stewardship mission and values over multiple generations. over the long term. These governance structures must be robust yet flexible enough to withstand family conflict, An SFO can do much to align its operations generational transitions and cataclysmic with the family's interests, particularly in times changes in the investment environment, whether of generational change. Some SFOs find anticipated or unanticipated. The following are that family office meetings become a venue key elements of a good governance structure: for family members to air family grievances. The SFO can encourage and support the The family has articulated its mission, development of a Family Council to provide a values and vision for the future, and the forum for discussions of family issues separate strategic plan of the SFO is built around that and apart from the SFO. SFOs can play a key core. role in promoting family education, modeling The powers, rights and responsibilities of best practices, training next generation owners, board and management are clearly family members, and fostering an attitude of spelled out and followed. stewardship. The owners have appointed a board of directors or advisors to provide perspective, SFOs are typically designed to serve multiple access to specialized experience/skills, generations of a family, but an SFO is not and to set strategy and investment policy. eternal. Over the past decade, there have been The board includes individuals who are well-publicized stories of substantial SFOs that not members of the family, members of the crumbled under the conflicting demands and management team, or paid advisors. high costs of serving tens or hundreds of family • Management is free to implement the SFO's members, each with comparatively modest strategy, without interference or meddling holdings. Other SF0s, recognizing that they from the family or the owners. could no longer achieve the family's mission There are regular owners' and board and vision, or that the mission and vision had meetings, with written agendas and changed in such a way that the SFO's activities complete minutes. Information necessary for were no longer cost-effective, have undertaken effective decision-making is distributed well carefully orchestrated dissolutions. Families in advance of voting, and there is adequate should recognize that dissolving an SFO is time for discussion. inevitably a complex, expensive and time- SFO performance reports are dear, consuming process, and seek the advice of comprehensive and timely, so that decision- families and consultants who have navigated this making can be based on accurate and experience successfully. complete information. 2013 Family Office Association and Angelo J. Robles EFTA01093349 Dodd Frank Private Trust Structuring Carried Insurance and SEC RIA Company Investments Interests Registration SFO Infrastructure How the SFO will be structured depends on the jurisdiction(s) in which it will operate and the types of investments the family owns. L I EFTA01093350 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 17 SF° INFRASTRUCTURE How the SFO will be structured depends on the within the definition of a "family office" or qualify jurisdiction(s) in which it will operate and the for an exemption as a bank trust company must types of investments the family owns. Many U.S. register with the SEC. While some family offices SFOs are structured as limited partnerships or have opted affirmatively to register with the SEC, limited liability companies, and are organized others are greatly concerned by the increased similarly to hedge fund administrative burden and loss management companies: of privacy that registration would the SFO entity does not own impose. SFOs are strongly advised any of the assets it manages; rather, it is a service entity to consult with securities Generally speaking, any that provides services to the counsel who have experience individual or entity providing SFO's clients on a contract Investment advice" must basis. with family office regarding register as a Registered the potential impact of SEC Investment Advisor (RIA) unless Dodd Frank and SEC RIA an exemption is available.2 Registration rules on their structures and Registration is costly and operations. entails detailed disclosures that While some SFOs are owned families typically are reluctant by their clients, others are to make. An RIA must maintain owned by an individual family member or one and preserve specified books and records, and or more senior staff members. Many families make them available to Commission examiners are reconsidering their SFO structures in light for inspection. An RIA must also implement of new rulemaking adopted in June 2011 under substantive compliance programs, prepare and the Dodd Frank Act, defining family offices. file reports with the SEC, and provide detailed These new rules eliminate the "private advisor written disclosures to their clients (known as exemption," which many SFOs relied upon to ADVs). Every RIA is subject to SEC audit. avoid having to register under the Investment Failure to register may subject an advisor to Advisors Act of 1940. An SFO that does not fit criminal and civil sanctions and penalties. O 2013 Family Office Association and Angelo J. Robles EFTA01093351 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 18 SFO INFRASTRUCTURE (coNrD) SFOs may avoid registration by: one investment will affect another. For example, if the SFO holds commercial real estate, each Structuring ownership and operations to fit parcel of real property likely will be held in within the -family office exemption to RIA a separate entity. If a passer-by slips on the registration; sidewalk in front of one building, incurs a severe Outsourcing investment responsibility to one head injury and sues for medical expenses and or more third party RIAs; or lifetime maintenance, any liability in excess of Establishing a Private Trust Company the SFO's casualty coverage will be limited to (PTC). the assets of the entity that owns that building, thereby protecting assets held in other entities. Private Trust Company SFOs are increasingly utilizing sophisticated With a PTC, a family-created entity rather than holding structures such as tracking partnerships. a third party serves as trustee of the family's A tracking partnership permits family office trusts. Private Trust Companies are sometimes clients to hold different partnership assets in recommended by advisors as a mechanism to different percentages, with performance results avoid RIA registration, but PTCs may also offer tracking accordingly. substantial additional benefits for the SFO: By way of example, assume the tracking Greater participation and input by the family partnership has four separate classes of than would be possible if an outside, third interests: Class B (bond portfolio), Class S party served as trustee; (indexed stock portfolio), Class A (alternatives • Common administrative and decision- portfolio) and Class R (REIT portfolio). making policies and protocols for all trusts; • More knowledgeable and focused fiduciary Partner 1, an individual seeking a broadly oversight for family businesses, alternative diversified portfolio, might hold a 10% investments, start-ups, real estate, and interest in Class B, a 10% interest in Class other non-public investments held in trust; S, a 20% interest in Class A and a 15% • Greater privacy and confidentiality; interest in Class R. • Better understanding and knowledge Partner 2, a trust intended to fund education of family circumstances and needs of expenses for Partner l's 10 grandchildren, beneficiaries. might hold 40% of Class B and only 5% of each of the other classes. SFOs seeking to establish a PTC Partners 3, 4, and 5 would hold the balance of the interests in each Class, each in primarily to avoid RIA registration accordance with their individual investment are advised to consult knowledgeable goals. securities counsel with experience A tracking partnership gives partners the advising family offices. investment flexibility they would have if they formed several partnerships, but permits them to Structuring Investments trade between classes from time to time without recognizing gain or loss for tax purposes. The various investments managed by an SFO are typically held in individual limited liability entities, to limit the risk that losses or liabilities of 2013 Family Office Association and Angelo J. Robles EFTA01093352 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Farley 19 SFO INFRASTRUCTURE (CONT'D) Tracking partnerships offer considerable Insurance flexibility, custom-tailoring of client portfolios, and a consistent governance model for SFO clients. A critical task for any SFO will be monitoring However, they also bring with them complex tax, and managing risk for the family, SFO clients accounting and reporting issues, and so need and their holdings and interests. Property and to be designed with the help of knowledgeable casualty, liability, health and life insurance legal and accounting counsel and managed with typically will be overseen and coordinated by care. SFO staff; developing relationships with an insurance firm that has experience working Carried Interests with SFOs, knowledgeable staff and a comprehensive offering A carried interest is a of insurance products can share of profits from a SFOs are strongly advised to seek significantly improve the partnership or LLC that guidance from tax and accounting scope of coverage while is paid to a participant advisors before putting in place any reducing costs. Certain who did not provide any assets, such as private jets capital to the venture. carried interest structure or incentive and other aircraft, require A carried interest may compensation plan for SFO staff. unique holding structures, provide a tax-efficient insurance coverage and mechanism to fund regulatory compliance. family office expenses, and may be used to structure incentive compensation opportunities As the SFO grows and its clients and for SFO staff. investments change over time, it is a good idea for the family and CEO to undertake a structural Particularly in light of Dodd Frank and the SEC's audit from time to time, to make sure that the family office exemption, staff participation in SFO structure is optimal for its purpose. The SFO investments should be reviewed to ensure audit may uncover opportunities for eliminating that they do not unintentionally trigger RIA or reorganizing holding entities within the registration requirements. structure, thereby reducing reporting, accounting and compliance expenses for the SFO. 2013 Family Office Association and Angelo J. Robles EFTA01093353 SFO Advisors • A well-run SFO will have a clear process for selecting and vetting advisors... L EFTA01093354 WHITEPAPER d Creating A Single Family Office to Manage Wealth and Sustain the Family 21 SFO ADVISORS Most SFOs will draw on the expertise of a variety which may offer the family greater access to of outside advisors, including (but not limited expertise at lower cost. An extreme example of to) lawyers, accountants, bankers, insurance this trend is the virtual SFO, an entity without providers, investment advisors, philanthropic an office or even dedicated staff of its own; consultants and information technology rather, SFO services are provided by a group of specialists. Seeking advice when needed, advisors on a contract basis, quarterbacked by contracting for services, and coordinating one of those advisors. the efforts of these specialists will be a major responsibility of the SFO CEO and staff. The advantages of having an in-house, dedicated team to manage the SFO are clear: A well-run SFO will have a clear process the team's focus will be undivided; its skills will for selecting and vetting advisors. While be matched to the needs and requirements many members of the SFO team will have of the family and the SFO's specific assets experience working with various service rather than those of each team member's providers, it is important for the team to have own general client base; the family's privacy clear procedures for selecting advisors to avoid and confidentiality will be maintained and the conflicts of interest or playing favorites. Many expertise will be on-call and available whenever SFOs establish budgets for advisor-related needed. Very generally speaking, in-house expenditures on an annual or more frequent service providers will tend to be more focused on basis, thereby prioritizing needs and giving SFO and responsive to the family's needs, and their staff dear parameters for defining the scope of work will be under the sole control of the family. each project with advisory team members. Highly confidential and mission-critical services should be the first priority when determining Performance of existing advisors should be which activities will be handled in-house. reviewed from time to time to make sure that the services they provide are of high quality and The advantages of outsourcing SFO services are appropriate to the problems the SFO faces. are significant as well: lower cost, exposure to Are the advisor's services responsive, relevant, a broader range of advice and the perspective comprehensive and delivered on a timely basis? and experience gained from serving multiple Does the advisor coordinate with other service similarly situated families; economies of scale providers working on the same issues (for and access to higher-level expertise, particularly example, does tax counsel work effectively with in areas where the SFO's investments or needs the SFO's outside CPAs and internal accounting don't justify the expense of a full-time individual team?) Does the advisor alert SFO staff to newly or bespoke service. Very generally speaking, arising or unexpected issues or opportunities? outsourced service providers tend to have better Is family privacy and confidentiality respected? access to a wider range of information, and are Are the advisor's fees appropriate to the work subject to the discipline and best practices of accomplished? the wider marketplace. Highly complex services requiring substantial capital investment and While some SFOs have sought to develop in- delivered in rapidly changing environments and house expertise in most areas, SFO observers circumstances should be the first priority when have noted a recent trend toward outsourcing, determining which activities will be outsourced. 2013 Family Office Association and Angelo J. Robles EFTA01093355 Investment Risk: Investment Risk: Accounting and Estate Asset Protection Background Fund-Related Reporting Tax Reporting Planning and Reputation Checking Risks Management Compliance and Risk Management COMPLIANCE AND RISK MANAGEMENT 1 While most SFOs are founded to provide investment services, perhaps the most important role of the SFO is to monitor and manage risk for the family... L EFTA01093356 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 23 COMPLIANCE AND RISK MANAGEMENT While most SFOs are founded to provide volatility, redemption limitations or "gates" investment services, perhaps the most important can impair the SFO's ability to generate role of the SFO is to monitor and manage risk liquidity. for the family. With all investments and related activities managed by a single team, the SFO Successful funds may become too large to is in a better position than any individual family function optimally in a given market, hurting member, advisor or service provider to measure returns. risk systematically and ensure that SFO assets are protected from risk in its multiple forms. As the Madoff Ponzi scheme and other recent frauds have illustrated, governmental While a comprehensive risk-analysis discussion oversight of funds and investments is is beyond the scope of this paper, a well-run extremely limited. Fund investments SFO can manage the following risks a family deserve careful due diligence before capital may face: is committed and regular oversight reviews for as long as the investment is in place. Investment Risk: Fund-Related Risks Offshore funds may offer even less SFOs typically invest a substantial portion of transparency than U.S. funds, and may the family's wealth in mutual funds, hedge funds create expensive tax reporting obligations. and private equity funds in an effort to diversify the portfolio and boost alpha-related returns. Investment Risk: Reporting However, investing in funds can bring a variety of risks that need to be monitored by the SFO An SFO can't monitor what it can't measure. and its advisory team: SFOs manage complex webs of private entities owning a broad portfolio of private and public Funds are often touted a way to diversify investments, all of which report their individual a the SFO portfolio, but this diversification performance at different times and in different effort can backfire when multiple fund formats. As a result, generating timely, accurate managers are investing in the same security and comprehensive investment performance or sector. It can be difficult to monitor such reports is one of the most difficult—and concentrations due to lack of transparency expensive—challenges for most SFOs. As at the fund level. An independent investment detailed on page 30, when a family considers advisor may be able to provide greater creating an SFO. it should plan to allocate a clarity than the SFO staff alone can achieve. substantial portion of the annual budget to investment performance reporting-related Hedge funds may exhibit "style creep" as expenses. SFOs that shortchange reporting managers venture into new markets to capability often find themselves trying to make enhance returns. decisions with inaccurate, outdated information. • Particularly in times of extreme market 2013 Family Office Association and Angelo J. Robles EFTA01093357 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 24 COMPLIANCE AND RISK MANAGEMENT (CON D) Accounting and Tax Reporting compliance. If the trustee of the trusts is a Private Trust Company (PTC), the SFO will Most SFOs handle tax reporting and estimated typically manage administrative and investment payments for family members and other SFO functions for the PTC. clients. Most of these clients will have local, state and federal tax filing obligations; some Asset Protection and Reputation will need to file in multiple jurisdictions. With Management the increasing prevalence of complex holding structures incorporating multiple pass-through A major creditor claim—whether from a divorcing entities and grantor trusts, the task of complying spouse, an injury occurring on family property, with tax reporting obligations is growing steadily or consequences of a vehicular accident—can more difficult. The risk is significant: failure to file be a significant threat to a wealthy family. How accurate tax reports and make timely payments a given asset is titled, held and insured can be can subject the client to audit, interest and critical to managing such threats successfully. penalties. In addition to working with in-house The SFO generally will be responsible for and outside accountants to ensure timely filing managing asset protection strategies and for and payments, the SFO will need to stay ahead implementing multiple strategies (such as of tax law changes and new filing requirements. limited liability holding structures, insurance, As demonstrated by the recently implemented indemnification agreements) where particular rules requiring disclosure of foreign bank circumstances warrant a layered approach. accounts (the so-called FBAR requirements), SFOs for celebrities and prominent families are the cost of failure to comply can sometimes be developing detailed risk-management plans that greater than the value of the asset. lay out procedures for family and staff to follow in the event of an incident or emergency. Such Estate Planning plans are particularly important for families that travel abroad frequently or entertain extensively. Most SFOs play a key role in helping clients to put in place effective tax planning and ensuring With the rising use of computers and social the planning is properly implemented. As with networking sites by family members, many SFOs accounting and tax reporting, the prevalence are also developing reputation-management of complex investment and wealth holding protocols to reduce the risk of identity theft, structures leads to equally complex estate kidnapping, extortion or harassment of family planning structures. The SFO will generally members. be responsible for coordinating with counsel on the development of estate- and gift- Background Checking planning strategies and updating planning as circumstances and assets change. SFO clients The biggest risk to a wealthy family is an inside often include one or more multigenerational job: a theft or other crime perpetrated by a trusts created by prior generation family member of the family's inner circle of staff, members, and the SFO is typically responsible advisors and service providers. Most SFOs for handling much of the administrative work for undertake detailed background checks of existing and new trusts, including maintaining potential hires, and many do extensive vetting of accurate books and records, producing detailed advisors and service providers as well. accountings, and handling tax reporting and O 2013 Family Office Association and Angelo J. Robles EFTA01093358 SFOs for Business- Owning Families SFOS FOR BUSINESS- OWNING FAMILIES 1 Building the family office apart from the business also increases opportunities for involvement offamily members who don't participate in the business... L EFTA01093359 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 26 SFOs FOR BUSINESS-OWNING FAMILIES Many business-owning families create an the same time, which should staff attend to first? informal family office within the business Risks of gaps in reporting and compliance rise administrative group. The company's accounting exponentially when staff is responsible for both team handles personal tax filings and financial the business and the family office. record-keeping, while administrative staff keeps track of insurance, record-keeping and, often, Families with operating businesses increasingly bill-paying for senior management, and possibly are developing separate family offices to handle for other family members as well. The benefits their personal investments and manage their of an embedded SFO are obvious: the family non-business assets. Having a separate office can leverage an existing resource, so the family provides for greater privacy and confidentiality, office is efficient and cost-effective—or seems and allows for hiring staff with the specific to be. skillsets required by the family office. Family office staff won't be subject to the hiring There are serious drawbacks to an embedded practices of the corporation, permitting the SFO. First and foremost, the focus of a family development of an SFO-specific organization office—wealth preservation—is different than chart, responsibilities, compensation, and work the focus of an operating business. Staff often practices. A separate structure for the family doesn't juggle the varied responsibilities well, office also encourages a longer-range focus for and skills that are critical in the business realm the family's own strategic planning. don't necessarily translate into the family office realm. For instance, partnership accounting Building the family office apart from the business and reporting for trusts and complex investment also increases opportunities for involvement structures is quite different than corporate of family members who don't participate in the accounting, and staff may lack the time, training business. By expanding family involvement, and technology to handle both jobs well. The the SFO can become a force for strengthening legal structure and governance of an SFO are family cohesion. Some families are using their also quite different than those of a business, SFOs to create entrepreneurial venture funds, and substantial missteps and mistakes may investing in promising new businesses or occur when business practices are automatically technologies, thereby increasing the odds of carried over to family office matters. Priorities expanding rather than simply preserving the may be unclear. For instance, if an emergency family's capital. occurs in both the business and family office at O 2013 Family Office Association and Angelo J. Robles EFTA01093360 Adapting to Changing Circumstances r For redemptions of SFO investments, as with redemptions of interests in any privately held, illiquid entity, the challenge will lie in valuing the redeeming client's interests in the SFO's funds... EFTA01093361 WHITEPAPER Creating A Single Family Office to Manage Wealth and Sustain the Family 28 ADAPTING TO CHANGING CIRCUMSTANCES As families grow and circumstances change, prepare for a time-consuming process. It often their SFOs will need to change and adapt in takes longer to dismantle an SFO than it took turn. Anecdotal evidence suggests that the ratio to create it. Closing an SFO or redeeming a between the assets managed and the number client out of interlocking and complex investment of clients served is an important predictor for the holding structures is a multi-step process, even long-term success of an SFO. The larger the if every investment is liquid and notice periods value of the assets, and the smaller the number are short. When the investments include hedge of clients, the more efficient and cost-effective funds with long notice periods and gates, the SFO will be. This is not to say that there extensive commitments to private equity funds, aren't successful family offices for very large natural resources, and real estate, generating clans, but as the number of clients grows, SFOs the necessary liquidity can take years. For must strengthen management and governance redemptions of SFO investments, as with and manage service creep to remain viable. It redemptions of interests in any privately held, can be particularly difficult for a SFO serving illiquid entity, the challenge will lie in valuing a large family to remain cost-effective when the redeeming the client's interests in the family members have widely varying personal SFO's funds. Such interests will be subject to assets and net worth. In such circumstances, discounts from capital account value—generally, unless a single family member is willing to bear quite substantial discounts—and the process the expense for the entire office on behalf of of determining redemption value can be a the rest of the family, spreading the cost of the flashpoint for conflict among SFO clients. The SFO's services through pricing mechanisms redemption process will be most successful can be extremely difficult and, if not done with when the process for requesting redemptions full transparency, can generate conflict and and determining redemption values is set forth dissension. in writing and agreed to by all the clients of the SFO at the outset. Strategies that SFOs have employed to deal with changing circumstances include: Recognizing that clients will periodically need access to liquidity, and that unplanned-for Dissolving, to permit clients to create their redemptions and dissolutions can be extremely own, smaller SFOs or join a multi family difficult and time-consuming to navigate, many office (MFO) SFOs have created family banks. A family bank offers SFO clients the opportunity to borrow Reducing the number of clients served against their interests in SFO investments or to ('pruning the tree') to permit focus on a take partial redemptions. Family banks have a subset of clients with common needs number of advantages: they provide clients with access to liquidity at affordable rates and reduce • Narrowing the services provided by the SFO clients' need or desire for redemptions. They (for example, focusing only on investments also make liquidity available to all clients on the and requiring family members to contract same terms, unlike handling requests for liquidity outside the SFO for accounting, tax on an ad hoc basis, with larger/more important reporting, bill paying etc.) clients potentially getting preferential treatment. Bringing in outside clients, thereby becoming a MFO Families who opt to dissolve their SFOs or significantly reduce the number of clients should 2013 Family Office Association and Angelo J. Robles EFTA01093362 Key Technology How to Meet Needs For SFOs Technology Needs Technology r A critical early task in setting up an SFO is defining the mission of the family office... L 1 EFTA01093363 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 30 TECHNOLOGY To be successful, an SFO will require robust aggregated view of their balance sheet, technology as well as an appropriate structure. income and cash flows across multiple Many SFOs fail to optimize their technology custodians and financial relationships. capabilities, either due to a lack of execution The package should also enable robust or simply a lack of awareness around available ad hoc reporting (including risk metrics solutions. Below is an outline of the six key and performance analytics) on each family technology needs for SF0s, along with a member's comprehensive net-worth picture. roadmap for meeting those needs. 5. Investment and analytics tools: Increasingly, Key Technology Needs For SFOs SFOs are either insourcing all or portions of the CIO function to gain greater control 1. Family portal and document vault A and transparency over their external document vault permits encrypted/secure investments. A SFO with any degree of connectivity and communication among in-house CIO function will require portfolio SFO staff, family members and interested management and trading systems, as well parties, along with electronic storage of as market data and manager research/due all family documents (family history, legal diligence databases. agreements, wills, statements, etc.). 6. Infrastructure and security: SFOs have 2. General ledger accounting: A double- traditionally self-hosted their data and entry accounting system, with workflow technology solutions. In other words, they and accounting controls, integrated with have acquired and managed their own investment and financial reporting, permits IT equipment, software and processes. the SFO team to track the inflows and However, outsourced providers now offer outflows of the family members, office and cloud-based virtual hosting services in related entities. highly secure (SAS 70 Level II and ongoing security audit testing certification) and 3. Financial administration: The SFO cost-effective hosting environments (with accounting package should provide for disaster-recovery support). SFOs should management and payment of all expenses consider the cost/benefit and ongoing and accounts receivable and payable, flexibility of the latest hosting options. ideally, with integration and auto•posting to SFOs also must consider their IT staff and the general ledger. Automation, along with organization: whether full time IT employees the appropriate controls (verification and are needed or whether IT support can be approval workflows), is critical to manage adequately outsourced. the volume and complexity of transactions most SFOs face. 4. Aggregated data, analytics, and reporting: The accounting package must be capable of providing family members with an ID 2013 Family Office Association and Angelo J. Robles EFTA01093364 WHITEPAPER I Creating A Single Family Office to Manage Wealth and Sustain the Farnty 31 TECHNOLOGY poNnv How to Meet Technology Needs 2. Selection: SFOs that undertake an IT strategic-planning process leading to an Because IT is a mission-critical function for RFP process have a myriad of options every family office, SFOs must take a strategic concerning the types of technology approach to designing, selecting, executing and approaches they can take due to the ever- maintaining their IT systems and resources. increasing number of vendor solutions The task of developing a strategic plan for IT emerging to meet the unique needs of investment is complex. For this project, the SFO SFOs. Some SFOs opt to leverage and would be wise to engage a consulting group with integrate a number of disparate stand- specific experience designing IT solutions for alone vendors to meet their needs. For SFOs. example, they may use a general ledger from a provider such as Intuit, QuickBooks 1. Design: Whether upgrading an existing or Microsoft, coupled with a reporting technology infrastructure or starting anew, package such as SAP Crystal Reports, firms an SFO needs to begin by assessing its such as the Rackspace for Cloud hosting, technology needs and requirements, taking financial administration from the bill pay into consideration all the family members, capabilities of their banking relationship, business and investment entities, office etc. Others leverage a single provider to staff and external advisors that must be meet the majority, if not all, of their needs supported. SFOs are increasingly adopting (examples include: Wealth Touch, Archway institutional-like requirements around their Technology Partners, and RocklT). Families IT in terms of mobile and real-time online with more limited current and forecasted accessibility, tools for trading, analytics needs, who believe they can ably execute and research and, most of all, looking to and maintain their technology themselves, achieve greater transparency. In particular, typically take the former approach. Those SFOs seek greater visibility into all of their who need a more robust and scalable direct and manager fund investments, solution are increasingly partnering with real-time evaluation of the level of risk single-source providers. SFOs should (through standard deviation, VaR, etc.) and also be aware that a number of financial look-throughs on asset class, holding and institutions have begun developing in- geographic exposure across investments. house capabilities or partnering with leading They also require monitoring of counterparty family office technology providers that offer relationships and clarity about their global families and SFOs IT solutions and related asset allocation at the entity, household and services such as access to market data and individual levels. These needs should all be tools to manage risk, analytics and trading. reflected in the strategic plan. The strategic- Their technologies may be integrated into planning process will include documenting, the family offices investment management confirming and prioritizing needs and and banking systems or on an Ala carte requirements, as well as developing due- basis. These options are often viable diligence criteria for vetting potential solution and cost-effective for SFOs (as they are providers. For example, the due-diligence typically subsidized or simply included for criteria will likely include: insource vs. no additional charge as part of the overall outsource, buy vs. build, firm size/tenure, services). security standards and reference checks. Ultimately, the process will lead to a request for proposal (RFP) and evaluation of service providers who meet the criteria. O 2013 Family Office Association and Angelo J. Robles EFTA01093365 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 32 TECHNOLOGY (CONTD) 3. Assessment of multiple-solution approaches team or an external IT consultant to and providers: Gamer detailed cost data in implement the chosen IT solution. Using an the evaluation process and benchmark the outside team for implementation can speed cost projections against peers. up the upfront implementation, but in the maintenance phase that can become costly When evaluating options, SFOs should over time. Those SFOs that opt to outsource select the solution(s) that provide for all their technology needs via a financial of their requirements, allow flexibility and institution or third-party partner will often scalability for ongoing growth, require be able to get up and running more quickly limited investment in maintenance and than those that choose a more customized enhancements, and above all, ensure or in-house approach. SFOs with relatively the privacy and security of the data and uncomplicated reporting needs that they documents of the family. One of the outsource to an external provider may objectives of the process should be to be able to use modular options, or may achieve collective buy-in across the staff choose to take advantage of the provider's and family members who will use the IT configuration and customization abilities (at system. additional cost). 4. Execution: Experience suggests it is the 5. Maintenance: IT costs for SFOs vary execution phase that creates the greatest widely depending on their IT needs, the challenges for SFOs, making ease- number of entities, global reach, assets of-implementation a key priority in the under administration (AUM), type of assets selection process. It is not enough for an and liabilities, and the approach they SFO to establish criteria, circulate an RFP, take to the IT environment. The total IT evaluate providers and choose a solution. budget will typically include: consulting Sufficient resources (including funds, time, support throughout the process, hardware focus and attention) must be allocated for costs, software license fees and annual implementing the chosen solution. Some maintenance costs (typically a percentage SFOs have sufficient technical expertise of license fees), outsourced operations to evaluate and select an in-house fees (typically annual fees based on the integrated solution leveraging multiple complexity of services such as aggregated software providers, but most find it overly reporting or financial administration: e.g. burdensome to implement, configure and number of entities. number of transactions, customize, integrate and test the chosen AUM, etc.), professional services solution. Other SFOs taking the in-house configuration and customization of solutions, multi-solution approach will engage the and hosting and data management. software provider's professional-services ID 2013 Family Office Association and Angelo J. Robles EFTA01093366 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 33 TECHNOLOGY (CONT'D) For illustration purposes, based on industry of entities, alternative investments, transaction research and interviews and surveys, SFOs and bill payment flow, etc.), customization needs can expect to maintain an annual IT cost base and geographic dispersion. (software, operational outsourcing, hardware and hosting fees, and IT staff) of 10-15 bps of For budgeting purposes, SFOs must consider their AUM. The large majority of SFOs have ongoing upgrades (software and infrastructure), moderate IT requirements. They can choose a research and development costs, evolving basic general ledger and manually create reports requirements of the office and family members, via Excel, while maintaining a small or part- the pace of change in technology capabilities, time IT staff. These SFOs typically have annual and the complexities of IT security and data costs in the $50,000-$150,000 range. However, management. Given these considerations, SFOs that have significant IT requirements many SFOs that previously chose to handle IT often leverage one of the leading family office in-house are increasingly looking to outsource services-outsource providers (Wealth Touch, their core IT needs to third-party providers, Archway Technologies, or Rockit for example), while maintaining a small IT staff to attend in addition to IT staff and other IT software and to less complex office and individual family infrastructure. They might see total costs of member needs (e.g. property and personal use $3 million to $ 4 million+, driven largely by the vehicle connectivity, security, mobile device complexity of their balance sheets (the number management, etc.). 2013 Family Office Association and Angelo J. Robles EFTA01093367 Chief Chief Chief Chief Legal Director of Director of Family Executive Bookkeeper Family Executive Investment Firiarcio, Officer Philanthropy Information Office Assistant Seam:, Officer Officer Officer (CLO) Technology Manager Or.,or (CEO) (CIO) (CFO) SFO Personnel r Given the importance of talent, the family —I should strongly consider interviewing and selectively working with one or multiple recruitment professionals that have experience with staffing senior SFO L positions... EFTA01093368 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 35 SFO PERSONNEL With the mission statement, infrastructure and all Hiring the Team the other pieces in place, the family is now ready to source and hire the SFO team. The most common SFO positions are outlined below. It is recommended to hire carefully With any position, there needs to be a clearly and prudently to ensure the right personnel. A defined mandate and job description, a process family should hire only the employees that are for hiring and a due diligence investigation absolutely required initially, while outsourcing conducted for all potential hires. An employee other functions. Over time, additional employees handbook outlining protocols and procedures can be hired to replace outsourced services in a drafted by an employment attorney is phased approach. recommended. In addition, the attorney needs to draft non-disclosure and privacy documents Chief Executive Officer (CEO) for all interviewees and further documentation, including employment agreements, for all hires. The Chief Executive Officer (CEO) should be a business savvy, highly experienced professional SFO Recruiters who spearheads the SFO. Trustworthiness, leadership, communication and the unwavering Given the importance of talent the family should ability to execute the family plan are essential. strongly consider interviewing and selectively This is a role for an "Expert Generalist". working with one or multiple recruitment professionals that have experience with staffing Job Responsibilities senior SFO positions. Usually, the CEO is an experienced business Compensation Specialist professional and leader, with experience in the specific sectors in which the SFO invests. The The SFO should engage a compensation CEO should have broad knowledge in finance, specialist experienced in SFOs to assist in accounting and other technical areas; however, designing a compensation and benefits plan to he or she does not have to be a true expert in attract, retain and motivate the most qualified every technical aspect of the SFO. candidates. More than simply base salary ranges, a compensation specialist artfully There are times when a very strong financial, designs a compensation package that may accounting or legal background is preferable include short and long-term incentive bonuses, to business and leadership savvy. The right carried interest opportunities, co-investment CEO for an SFO that runs multiple operating opportunities, qualified retirement plan offerings, businesses will likely not be the right CEO for insurance, and deferred compensation (409A) I an SFO that invests primarily in public markets. phantom stock "golden handcuff' strategies. The There is no set formula and the SFO and its right mix aligns interests, encourages long-term personnel must be customized per a family's employment and productive relationships. needs. 2013 Family Office Association and Angelo J. Robles EFTA01093369 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 36 SFO PERSONNEL (corat) The CEO needs to be engaged in all aspects mission and vision. This is why leadership, of the SFO, yet understand the importance of business savvy and communication are delegating (with oversight and accountability). a constant theme in the description and The CEO needs to communicate on an on-going responsibilities of this role. Using a sports basis with the family and focus on the SFO's analogy, the family is the sports franchise mission. This position answers directly to the "owner" and the CEO is the "coach" who needs family leaders and SFO board/committee. to maximize and coordinate the efforts of all the "players" (i.e. employees). For a CEO to be effective, he or she must have the ability to engage multiple family members CEO Salary Ranges and Compensation and generations. Education and motivation of the younger generation will critical to the long- As of this writing (2012) the CEO in a small term success of the family and the SFO. An SFO commands $300,000 - $600,000 and in a understanding of family dynamics and the ability larger SFO (or small SFOs with more dynamic to facilitate critical family discussions effectively requirements and/or family members that see is also important. the value in a great aspirational candidate regardless of cost) can cost anywhere from A CEO should embrace modem technology $500,000 - $2,000,000, inclusive of base salary, as a family communication and business short-long term incentive bonuses, deferred management tool to advance the success of the compensation and, possibly, co-investing SFO in servicing the family. opportunities. Depending on the family's desires and Experienced family office advisors and principles expectations, a well-connected and business- highly recommend aligning and motivating the savvy CEO can source business, real estate and CEO and CIO (and at times other positions) other opportunities for the family. with co-investment opportunities to attract truly top tier talent. SFOs are competing with global Additionally, some families desire to seed fund institutions and so must have commensurate and develop partnership interests with talented compensation to attract, retain and motivate the traders (i.e. hedge fund, private equity, etc.), as best talent. In a more dynamic CEO role, often well as invest in emerging growth companies. with more direct and alternative investments, A proactive CEO can help with sourcing and a commitment from the CEO to commit a vetting these opportunities. percentage of their salary, bonus and/or deferred compensation to co-investment opportunities The CEO needs to carry out the mission and can be mutually beneficial. coordinate effectively all aspects of the SFO in a synchronized effort in fulfilling the family's 2013 Family Office Association and Angelo J. Robles EFTA01093370 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 37 SFO PERSONNEL (CONTD) Chief Investment Officer (CIO) the actual investing of a particular allocation, such as cash management, bonds, equities, The other primary most senior position in an real estate and commodities. In addition to SFO is the Chief Investment Officer (CIO). (or instead of) traditional long-only managers, Broadly this role falls into two camps: direct alternatives managers may be selected for a investors, and allocators to managers. given allocation to add shorting, leverage and derivative strategies. The choices on money True Investors managers are generally presented and approved by the family leaders and investment committee. Although less common than allocators, many larger families and entrepreneurial families CIO Salary Ranges and Compensation see the value in being direct investors. This commonly means hiring a CIO with significant For many SFOs, the CIO will be the greatest and successful direct investment and investment expense and also its greatest generator of value. banking expertise. Direct investors typically Direct investor CIO base salaries can range from scour the globe seeking opportunities, making $250,000 to $500,000. However. factoring in larger and more long-term allocations than an annual cash bonus and deferred compensation allocator would typically make. from incentive allocations in deals sourced by the CIO can bring total compensation for a top There are advantages to being a direct investor: direct investor CIO to several million dollars or keeping it all intemal, controlling the investments more. and truly knowing what you own. Such an investment philosophy better controls taxes, The CIO for an allocator SFO commonly falls the exit from such specific investments often into a base salary from S200,000 - $400,000 receives more favorable capitals gains tax with bonuses ranging from $200,000 to treatment, and can reduce investment-related $600,000. Some allocator SFOs provide expenses deferred compensation in the form of incentive allocations, though such incentives are less For SFOs that seek to be direct investors, the common than for direct investor SFOs. CIO must have a very strong grounding in direct deals and investment banking, while outside In addition, both CIO types are often presented managers are used to execute the other asset with the opportunity to co-invest along side the classes in the allocation that are not the direct family in addition to the before-mentioned family focus of the CIO. Over time, the SFO may elect allocation as part of a deferred compensation to build out internal expertise and take a more plan. direct investing approach in these other asset classes as well. Some SFOs require the CIO to co-invest, seeking full commitment into the investment and Allocators aligned interest. More commonly, SFOs are allocators. In this Both the direct investor and allocator models scenario the CIO needs to be first and foremost will generally require the SFO to hire junior excellent at planning, organizing, sourcing analyst(s) to source and evaluate opportunities. (money managers and business opportunities), Total costs can vary and include some of the due diligence, monitoring, validating and same structure of salary. bonus, deferred reporting on all investment activities. compensation and co-investment opportunity as in the CIO position. Salary levels + bonus The CIO of an allocator SFO needs to source typically total between $150,000 - $300,000 per best-in-class money managers who carry out analyst. ID 2013 Family Office Association and Angelo J. Robles EFTA01093371 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 38 SFO PERSONNEL (CONTD) Chief Financial Officer (CFO) desire to constantly view updated cash flow reports, family income and expense statements, For families with substantial business interests as well as financial statements (i.e. balance and/or significant personal, trust and partnership sheet). The CFO needs to perform this function accounting requirements, the CFO is a highly and maximize utilization of the applicable desired professional addition to the SFO. infrastructure and technology systems at their disposal in preparing documents and reporting. Traditionally, the candidate would have a If there is no CFO, then the CEO may take on strong combination of business and personal this function directly or manage and compile the accounting background, preferably from the Big data from internal sources (CIO, bookkeeper, Four, as well as CFO experience in a successful accountant, etc.) or outsourced providers. private company. Although sometimes sourced to bookkeeping It is not uncommon in scenarios where the family and/or an executive assistant, the CFO may also has multiple business interests for the SFO handle bill paying for the SFO as well as the CEO, to be a CFO by training, with a very strong family. accounting background, and that accounting function remains core to their CEO duties. The CFO commonly assists in evaluating business and real estate opportunities for the Job Responsibilities family, managing lines of credit, business and family loans, as well as cash distributions to The CFO position within an SFO differs from family members. a traditional CFO position in other companies in that this position is also responsible for A combination of business and personal financial the personal tax issues and returns of the management capabilities is highly preferred for a family members (including family trusts and CFO, but if the family has a specific need for this partnerships). In large SFOs with multiple role, the expertise of the CFO may reflect that accounting personnel on staff, this may be under need and then the CFO can coordinate hiring or the supervision of the CFO. outsourcing for the other areas of responsibility. The CFO should be experienced in complex CFO Salary Ranges and Compensation multi-generational estate planning and needs to coordinate efforts with family legal council Base salary frequently ranges from $175,000 - (whether in-house or outsourced). In certain $250,000. Salary, combined with short-long term areas of extreme tax specialty on these issues, bonuses, deferred compensation and (although the CFO should source appropriate accounting less common than the other senior positions council and coordinate efforts. noted) may include co-investing opportunities, combined compensation frequently will range The CFO should coordinate with the CIO on between $300,000 - $550,000. SFOs created tax strategies for the family involving their by financial figures frequently prefer CFO type investment portfolio. Tax overlay, capital gains 'CEOs' so that the investing aspect remains decisions on sales, and many other aspects the domain of the family principal; in such dictate that an efficient SFO has synchronized cases cash flow, business management / efforts among all personnel. Coordinated and accounting, personal accounting, partnership integrated management is one of the primary and LLP interest as well as estate planning are benefits of establishing a SFO. paramount talents in the key executives. Many family leaders, as well as the CEO, O 2013 Family Office Association and Angelo J. Robles EFTA01093372 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Fan* 39 SFO PERSONNEL (CONTD) Chief Legal Officer (CLO) combined compensation frequently will vary between $300,000 - $550,000. A Chief Legal Officer (CLO) is common in more substantial SFOs. However, as stated Director of Philanthropy throughout, it is all about what is best for the family's needs. A key benefit for the family is Some families elect to create a Director of building out an SFO organization that is highly Philanthropy position. Most commonly, the customized. family's philanthropic initiatives are directed through a separate entity, such as a family Job Responsibilities foundation(s), as opposed to directed by the family SFO. Families with highly complex and/or multiple business interests can benefit greatly from hiring It is always recommended to create separate an in-house legal professional. The CLO can entities for the SFO and the family foundation(s). evaluate business, real estate and complex Until a family's philanthropic mission and giving investment opportunities from a different level is sufficiently expansive to warrant hiring perspective than the other senior executives a full time director, typically an engaged family of the SFO. The CLO can negotiate business member assumes the responsibility for the role. transactions and perform closings as well. Most families of significant wealth desire The CLO may be hired for both business and to improve their ability to identify and verify personal needs, or have a focus on the personal philanthropic opportunities for causes that are family needs, organizing and monitoring family in alignment with their family values, investment trusts and partnerships, as well as trust & focus, and personal passions. More often, the estates issues. decision is based on passion and engagement, and less so by financial motivations. As noted earlier in the section on CFO, for the principal who remains an active investor (this is Job Responsibilities how their wealth was created), a highly talented and trusted attorney can be the choice of the The family member or director selected to CEO. undertake this endeavor needs to understand how philanthropic endeavors fit within the family Families of significant wealth often need multiple mission statement and business plan. Focusing specialized experts in business, patents, active family members and engaging younger litigation, marriage law/pre-nuptials, trust & generations in their passions is critical to this estates, etc. A well-diversified and connected role. CLO can manage these areas through internal staff and outsourced relationships and The Director of Philanthropy, along with a coordinate all efforts. specific philanthropic advisory committee, sources and vets philanthropic opportunities CLO Salary Ranges and Compensation aligned with the family mission statement and business plan. If the family seeks outside Similar to the CFO position, base salary contributions, fundraising experience is frequently ranges from $175,000 - $250,000. preferred, with both traditional and online Salary, combined with short-long term bonuses, expertise. Executive management experience deferred compensation and (although less at a foundation or other charitable experience common than the other senior positions would be recommended. noted) may include co-investing opportunities, 2013 Family Office Association and Angelo J. Robles EFTA01093373 WHITEPAPER l Creating A Single Family Office to Manage Wealth and Sustain the Family 40 SFO PERSONNEL (CONTD) How the family should donate money to various SFOs have critical computer needs and highly organizations involves legal and tax implications. specialized software requirements that all need This is best left to experienced in-house or to be supported and upgraded on an ongoing outsourced legal and tax professionals. Family basis. foundations, charitable remainder trusts, and charitable lead trusts are all viable options. This position should positively impact family The Director of Philanthropy should assist connectivity and communications as well as in managing the process and distributions costs and control of the SFO. to charity (no matter the vehicle), as well as following through to gauge and measure the This position can range from $100,000 - results. $150,000, depending on the complexity of the technology infrastructure required. Families are encouraged to organize applicable philanthropic giving vehicles only after they are Family Office Manager fully committed to giving. The first step is to develop a philanthropic strategy built around the The Family Office Manager is a unifying position family mission statement and business plan. A that focuses on the SFO running as efficiently truly engaged family member is often needed to and effectively as possible. This position can drive this process. Philanthropy is an excellent involve HR functions (managing directly or way for younger family members to feel active in in coordination with an outsourced firm). The the family decisions. Family Office Manager frequently is the conduit for the family and in-house staff and assists with Philanthropic giving goes deeper than tax coordinating outsourced professionals. benefits, and helps to teach the younger family members about compassion, giving and choices. The Family Office Manager is commonly less defined by a traditional role than other positions. Director ofPhilanthropy Salary Ranges and The position requires a person of diverse talents Compensation who learns quickly, is highly organized, and initiates solutions. If going outside the family to fill the position, salary can range from $100,000 - $200,000. In smaller SFOs, the Office Manager will coordinate business and personal services for Director ofInformation Technology the family, in conjunction with the executive assistant. Large SFOs frequently hire a Director of Information Technology (IT). This position is This position can range from $100,000 - vastly underrated and should be considered in $150,000. all SFOs. This position advises and coordinates the technical infrastructure of the SFO. Many O 2013 Family Office Association and Angelo J. Robles EFTA01093374 WHITEPAPER I Creating A Single Family Office to Manage Wealth and Sustain the Family 41 SFO PERSONNEL (CONTD) Executive Assistant Bookkeeper This position often supports the CFO, or in Families can have one or multiple executive smaller SFOs without a CFO, may take on assistants depending on the size and number additional responsibilities. Managing payroll (or of employees of an SFO. Frequently, there is an coordinating with an outsourced firm), handling executive assistant to the key family leader(s) receivables, paying business and personal and another executive assistant assigned to key family bills, coordinating medical and insurance SFO personnel. claims, processing and coordinating mail (this may also be handled by an executive assistant) The responsibilities of this position, particularly are just some of the traditional responsibilities of at the personal level, can vary widely. An this position. executive assistant may act as the primary person coordinating household management This position can range from $50,000 - $90,000. and personal household staffing needs. They may manage multiple personal matters such as Family Security Director medical information, insurance, family vehicles, child care, and collectibles. They may be the Many families are rightly concerned about primary conduit to the family leader for personal security and are finding a need to hire a appointments, calendar management and Security Director to manage and mitigate family children's needs. residence, business, cyber and outside activity risks. If not a direct employee of the family or the Personal service and impeccable organizational SFO, the security director can be an outsourced skills are the hallmarks of this qualified specialist. In larger SFOs, the Family Security professional. Being infallible under pressure and Director is also responsible for the security proactive in the identifying and meeting needs of measures within the SFO, including offices, the family or key SFO personnel. The executive technology security and family safety. assistant is excellent at communication (written and verbal) and proficient in technology. This position can range from $100,000 $200,000. This position can range from $75,000 - $135,000. 2013 Family Office Association and Angelo J. Robles EFTA01093375 I Trend 1 F1- Trend 2 Trend 3 fa Global Trends in SFOs SFO success depends in large part on how effectively the family reevaluates and reexamines its goals and objectives... L EFTA01093376 WHITEPAPER 1Creating A Single Family Office to Manage Wealth and Sustain the Family 43 GLOBAL TRENDS IN SFOs Trend 1: There is tremendous upside potential • Building a cross-border family agenda for successful development of family offices in • Anticipating global political change strategic growth markets of Asian, Latin America, • Mapping tax, legal and regulatory priorities the Middle East and Russia that adapt to the • Evaluating strategic relationships following global and industry realities: • Embedding family vision and values and an ethos of responsibility in the SFO culture • A tectonic shift in family wealth from mature to strategic growth markets. The SFO success depends in large part on nature of this new family wealth is, by how effectively the family reevaluates and definition, entrepreneurial. reexamines its goals and objectives, especially • 75% to 80% of first-generation family as family leadership changes, against this wealth will likely be transferred within the standard set of common imperatives. next decade. • Say adios to the traditional tax-neutral Trend 3: An SFO's approach, tone and offshore family wealth model. SFOs in achievable results vary in different parts of the strategic growth markets must vigilantly world, requiring global advisors to adopt different monitor the tax, legal and regulatory strategies—especially in a post-financial crisis environment in jurisdictions where wealthy environment. families maintain assets. • Family education and governance, which Family governance and family wealth-planning enable families to link their values across strategies may be unfamiliar to SFOs in generations, must become a priority for certain strategic growth markets, but they are global SFOs. increasingly aware of the adage of •shirt sleeves • Operational efficiencies require families to shirt sleeves in three generations." Many of means that have newer family offices recognize the need for proper family governance to outsource and delegate critical portions and family wealth-planning strategies during the of SFO management to highly trusted lifetime of the family wealth creator. advisors. • Global political risk requires However, even after implementing a family entrepreneurial families to evaluate and governance system during the design phase manage, where possible, how certain of an SFO, families must constantly refine and geopolitical upheavals (such as the Arab reevaluate their values, vision and mission Spring, for example) will impact their throughout the fife of their SFO. businesses and their SFOs. First-generation entrepreneurial wealth creators Trend 2: All global families—regardless of in strategic growth countries now demand geography, industry, ethnic make-up, dynamics independent, thoughtful and authentic advice and individual objectives-share certain and family client leadership from their bankers common imperatives to effectively develop and advisors. Instead of hawking opaque relevant standards in the following areas: financial products to meet artificially mandated sales quotas, everything now must be carefully • Retaining top management talent and individually tailored to meet the complex • Sustaining growth and profitability business and personal needs of the families— • Optimizing global capital structure which is the way it should have been all along! • Adapting to evolving risk profile O 2013 Family Office Association and Angelo J. Robles EFTA01093377 The Modem Single The Modem Single The Modem Single Family Office 1 Family Office 2 Family Office 3 SFO Profiles A full-time general counsel with deep experience on direct deals and hedge funds oversees the SFO's global dealings, direct investment and seeding activities... L J EFTA01093378 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 45 SFO PROFILES • The Modern Single Family Office 1 This family office was created in 2003 in New and travel the world to narrow their ideas down to two or three core themes for which to do -deep dive' research. In the spring of 2011. most York by a successful proprietary quant trader at of the portfolio was allocated as follows: a large global bank. Its primary mandate was to aggressively manage his assets by pursuing • 18% in mortgages and credit, exceptional long-term returns. Currently in his • 15% in equity-event driven and equity long/ late 40s, this wealth creator is married with two short, young children. • 14% in macro/emerging markets, • 8% in quant strategies The SFO employs 11 individuals. The CIO, a • 6% in direct positions and hedges including former hedge fund manager, formalized the highly convex option trades as protection SFO's investment philosophy: to create positive from disruptive market events absolute returns that have low correlation to 40% in real estate, private equity, seed major market indices, by focusing wholly on deals and carbon credit arbitrage generating alpha. From lime to time, tactical bets are taken on directional long or short The SFO operates with a central prime broker opportunities. The CIO hired an analyst to and works with 15 smaller niche-focused hedge- custom design and maintain a technological fund managers who traffic in less crowded platform for account aggregation, reporting spaces and have most of their personal wealth and an analytical risk management tool, plus invested in their funds. These relationships come top-level researchers, operations people and IT with advisory board seats, favorable terms and professionals. A full-time general counsel with high transparency. deep experience on direct deals and hedge funds oversees the SFO's global dealings, direct Internal talent with connections to the industry investment and seeding activities. helps the SFO source smaller managers through fellow SFOs, traders, analysts at institutional The top-tier professionals, who have been banks and other hedge fund managers. The through a few market cycles, know how to SFO opted not to bear the cost and time of hiring manage risk and anticipate reversals. They direct and internal investment teams, but it has receive attractive compensation, including pulled investment teams from other institutions, base salary and a discretionary bonus. Senior such as one team of Ph.D.s lifted out to do a managers receive phantom stock. Profit specific trading strategy. After the team was participation consists of half cash and half in an spun out, the SFO remains part owner of this investment with the fund which vests in three independently operated investment firm. years. when they achieve and exceed their investment activities. All investors, principal and Family principals will someday step back from outside the investment vehicle, pay full fees, the risk as the importance of preservation, which are currently 1 and 10. charitable giving and their own legacy come to the fore, but for now they are fully engaged with The SFO's investors consider multiple the market. investment opportunities several times a year 2013 Family Office Association and Angelo J. Robles EFTA01093379 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 46 SFO PROFILES (coNrtv The Modem Single Family Office 2 salary, a bonus for a part of the portfolio in which he has full discretion, a piece of the carry, and A successful entrepreneur created this family a carry on the overall portfolio performance if it office in 2005 after the sale of his insurance beats internal benchmarks. company. He hired a dynamic individual who is sophisticated in finance and entrepreneurial They actively maintain relationships with 11 pursuits as CIO, and who is a first-generation global banking institutions (while focusing on American and second-generation of wealth. four key relationships) to access top bankers, researchers and traders, and for benefits The CIO's father emigrated from Asia in the such as custody, lending, research and cash 1970s and launched a successful medical management, although the office rarely services company, which he sold in the 1980s. participates in opportunities that the banks The family managed its own assets initially and recommend. Instead, the banks' talent helps the became appalled by the lack of transparency SFO flesh out ideas and collect the consensus and high fees associated with equity trading. on the Street. A global trusted network of fellow The founder created a software program that SFO investors, bankers, traders, hedge fund would consolidate all public equities listed on managers, VCs and angel investors invigorates global stock exchanges and founded a broker- the office with new investment ideas. The dealer and clearing firm that they marketed to SFO directly seeds emerging hedge fund active day traders in the late 1990s, which they managers, as former prop desk trading talent sold for a significant sum in the early part of are in transition due to the regulatory climate. this century. The founder's younger son created The CIO talks weekly with many members of and directed the family's SFO and focused on the investment committee—key executives in public securities. The older son worked on direct the SFO, select hedge fund mangers, bankers, private deals. The younger son also began traders and college professors—and presents actively managing and co-investing his own the consensus direction to the wealth creator, family's assets with those of this wealth creator. who is the final decision maker. The CIO has discretion over part of the portfolio, and is The SFO's 30 employees include investment accountable for the success or failure of his and foundation talent, a CFO, IT professional, decisions. bookkeeper and in-house legal counsel. The CIO's unique compensation includes base 2013 Family Office Association and Angelo J. Robles EFTA01093380 VVHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 47 SFO PROFILES (CONTD) The Modern Single Family Office 2 (cont'd) Favorable terms on fees on hedge fund investments are explored, but transparency and With minimal direct international exposure, the liquidity are paramount. The management fee for SFO owns stocks of companies with strong smaller managers only covers expenses, with an international exposure. It has no current direct incentive fee tied to success of the investments. allocation to hedge fund managers in emerging Because hedge fund managers achieve alpha markets, due to concerns about hedging risk and outsized returns early in the hedge fund's in such portfolios. The SFO maintains a small life cycle, the CIO makes managers put up first allocation to commodities, while markets of loss of capital where possible, to align them with concern include the opaque fixed income the interest of the investors. market, U.S. farmland, Australian real estate and gold and coffee bean prices. The SFO elected While the two families in this multi-family office to redeem equity positions allocated to hedge share risk tolerance, levels of service, expenses, funds, as those managers were not active or vision and purpose, its challenge will be to fluent in shorting. integrate the wider families as the generations age and the drive for absolute returns shifts to Current Allocation Includes wealth preservation. • 20% cash • 20% fixed income • 30% equities • 10% real estate • 15% direct private equity • 5% short-term position 2013 Family Office Association and Angelo J. Robles EFTA01093381 WHITEPAPER 1 Creating A Single Family Office to Manage Wealth and Sustain the Family 48 SFO PROFILES (CONTD) The Modern Single Family Office 3 The SFO's eligible voting members elected a five-person board. They serve as gatekeepers This European multi-generational SFO emerged to whom management reports and serve two- after the primary family business was liquidated. year terms. Board members generally refer all The original patriarch mandated that the family business issues to management, who present office's directors invest a significant percentage business solutions for the family office. Only of the SFO's assets in private and proprietary family members active in management can be business structures providing a high degree of solicited for anything and can direct matters to liquidity. the third-party management team. A dedicated third-party management team Expansion of beneficiary-eligible family distributes earned income from various members across many generations has forced businesses to family members and actively the need for an extensive and comprehensive supports and directs the businesses that infrastructure. The SFO needs automated generate consistent cash flow. This SFO does financial reporting and forecasting with footnotes not permit allocations of capital to outside in five languages. At the core is an operations or third-party money managers, which has program hosted across multiple international proven less volatile than beta instruments and servers, which integrates all family office has generated substantial returns on capital support needs including travel, common asset invested. One of its key allocation requirements usage scheduling, individualized security, is the ability to liquidate the portfolio without family and person-specific notifications, health having to rely on the sale of a core business or and emergency care, general and individual asset. financial reporting and banking access. The SFO was designed as a focal point for a close- Simple strategy guidelines were used with knit, cohesive and loving group, with emphasis each family beneficiary, and their collective during its creation on proper governance. needs were broken down into subsets. The organizational structure includes rules Direct beneficiaries and representatives for of governance that take precedence over the beneficiaries provide groundwork for good resulting financial entities and dictates the governance. Representatives are often a best utilization of the financial structure. The husband or wife who represents a family of five SFO's complex priorities, solutions and goals that is entitled to one share of the distribution, emphasize wealth creation and distribution to allow for one voice, preferably by bloodline. events to support multi-generational family Mandatory prenuptial agreements reduce members. potential future dissent and the consequence of losing one's beneficial stake. ID 2013 Family Office Association and Angelo J. Robles EFTA01093382 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 49 SFO PROFILES fcasinv The Modem Single Family Office 3 (cont'd) The SFO insists on annual audits and third- party administrators. Professional management This SFO eschews Wall Street's attempts to has no access to any accounts except petty force family offices into hedge funds, private cash. Its trusted regional law firm helps reduce equity and fixed income. Instead, it takes a costs, negotiates fees and places caps and grassroots approach to owning businesses and parameters. The SFO employs several firms targets the family's experience and skill sets to keep each on its toes and never allows to enhance rates of return instead of taking a its lawyers to control anything or have any shotgun, diversified portfolio of beta investments. discretion. The SFO has strategically outsourced personal security protocols with regard to health, The main consideration before investing is taxes, natural disasters, travel, kidnapping, extortion which has jurisdictional implications and financial and media management. structure consequences. Estate planning for future generations avoids costly disputes and International families are complex and keeping is constantly evolving based on tax changes. assets growing for a large family is risky. This The family believes sustainable charitable office has found a way to successfully manage evaluations are as important as investment both issues. allocations and does not solely rely on consistent donations each year. 2013 Family Office Association and Angelo J. Robles EFTA01093383 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 50 Conclusions For families with substantial financial resources, Creating a well-run SFO is a smart business an SFO undeniably provides the ultimate in decision. As with any business, it requires a control, privacy and customization for optimizing clear mission, a fully thought-through business the family's wealth, legacy and resources. plan and an understanding of the resources available internally and on an outsourced basis The collapse of renowned public and private in the SFO marketplace. An effective SFO is a financial institutions, the panic in the global highly valuable asset that preserves and creates economy, outright allegations of fraud among wealth for the family. financial superstars, and the proliferation of conflict-ridden investment vehicles make it It is important that the family electing to move imperative for high net worth families to consider forward with its own SFO follow all critical steps, creating an SFO to control a family's destiny and including hiring trusted consultants to help them build upon a legacy of sustainability. design the SFO and execute the plan. The family needs to be 100% dedicated to the creation and The CEO of a corporation does not run a management of its SFO. A half-hearted attempt multi-billion dollar business alone or make won't lead to a long-term positive return. every decision in finance, accounting, legal, marketing, and other areas. Similarly, the SFO Generations from now, after business interests should be viewed as a way for the family to have been liquidated and/or greatly dispersed build a talented, skilled and experienced team to and individual investments have been eclipsed, manage its wealth in all its forms. the SFO stands as the family's unifying entity, signaling a healthy and productive path for The ability to create a custom SFO has never those that follow. The family SFO stands as an been easier with the proper advice from emblem of the values established and nurtured dedicated SFO organizations and consultants. by the family for the world to see. New technology, selective outsourcing and the vast pool of talented individuals available in the marketplace allow for a family of significant wealth to create an SFO more efficiently and effectively than ever before. 2013 Family Office Association and Angelo J. Robles EFTA01093384 VVH1TEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 51 Authors Angelo J. Robles Angelo J. Robles is the Founder and CEO of the Greenwich, Connecticut•based Family Office Association (FOA). a global membership organization that provides private educational and networking forums with top experts, plus thought leadership and proprietary research about and for multiple generations of wealthy families and the professionals who run their single family offices. A member of the Princeton Council on Family Offices and the NYU Stem Family Office Council. Mr. Robles has a long track record of leadership positions at top financial service companies, including UBS. Before launching FOA, he engaged in several successful entrepreneurial ventures: He founded the New England chapter of the Hedge Fund Association (where he also served as president) and pioneered online retirement planning for Fortune 1000 executives with two Internet startups: 401KRollover.com and IRARollovers.com. At FOA. Mr. Robles has spearheaded a series of provocative and groundbreaking Q&As with industry experts, and white papers that address the unique needs of ultra high net worth families in the U.S. and around the globe. These publications provide in-depth case studies of vibrant, multi-cultural single family offices as well as sophisticated approaches to wealth protection and growth, philanthropy, technology, social media, legal, tax, insurance and lifestyle concerns. Mr. Robles has written several books and articles, and has appeared on Bloomberg Radio & TV and quoted in Thompson Reuters. Institutional Investor. Opalesque, Registered Rep, HFM Week, Investment News. EurekaHedge. The Luxury Institute. Private Asset Management, The Greenwich Times and many others. Amy Renkert-Thomas Amy Renkert•Thomas is the Joint Managing Director of Withers Consulting Group, an international consultancy helping families and entrepreneurs around the world with complex interests to articulate what future success means to them and to decide what they need to do to achieve it. In 2009 Amy founded Fisher Renkert Consulting LLC, a family enterprise consulting firm focused on governance architecture and family enterprise succession planning. Prior to developing her consulting practice, Amy was a Partner at Withers Bergman LLP, an international private client law firm, where she co-chaired the firm's Family Office Group. She ran her family's 5th generation manufacturing company from 1990.2002 and currently serves as an officer and director. Amy received her BA from Yale, her JD from Harvard Law School and her LLM in taxation from Case Western Reserve University School of Law. Amy resides in Woodbridge. Connecticut FOA would like to thank the contributions of: Greg Coules Logan Allin Jamie McLaughlin O 2013 Family Office Association and Angelo J. Robles EFTA01093385 VVHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 52 Footnotes ' Raphael Amit. Wharton School. University of Pennsylvania; WHARTON GLOBAL FAMILY ALLIANCE: Single Family Offices: Private Wealth Management in the Family Context 2004. 2 The authors wish to thank David Gum of Withers Bergman LLP. Wallace Head of Gresham Partners, LLC, Ryan Harding of McDermott Will & Emery, and Joseph P. Toce, Jr. of WTAS LLC for their assistance on SEC RIA registration requirements and related issues. 2013 Family Office Association and Angelo J. Robles EFTA01093386 WHITEPAPER / Creating A Single Family Office to Manage Wealth and Sustain the Family 53 Disclaimer 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 ofmutual 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 ofFamily 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 maybe, 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. 2013 Family Office Association and Angelo J. Robles EFTA01093387 To learn more about FOA contact: Angelo J. Robles of Family Office Association 203.570.2898 . angeloafamilyofficeassociation.com Family Office Association 500 West Putnam Avenue, Suite 400 Greenwich, Connecticut 06830 www. familyofficeassociation.com OFFICE FAMILY) EFTA01093388