Global wealth-creation is rapidly moving from the Western hemisphere to Asia, as regional economies keep growing faster and wealth becomes more concentrated. According to statistics, the growth in the number of people worth US$30 million or more – usually called Ultra High Net Worth Individuals (UHNWI) – surged 19% in Asia, twice the growth rate of North America. China has taken the lead, with multimillionaires growing by 14%.
Such change has contributed to Hong Kong becoming the world’s wealthiest city, as measured by the number of people worth more than US$30 million with about 10,000 millionaires compared with 8,900 in New York. China can currently count 26 cities amongst a global total of 30 amongst the fastest-growing places for multimillionaires, even though overall the USA has still one third of the total number of such UHNWI.
As UHNWI seek wider diversification of their investments and prepare for succession within their family business, Hong Kong has been experiencing a boom of family offices, further incentivised by tax breaks or residency options.
Proper wealth and succession planning is essential
As already highlighted in our previous article “Generational Transition of Family Business and Wealth Preservation”, there are clear advantages in terms of management and flexibility for setting up such structure, which can often be integrated with a family constitution. The latter further enhances the vision and values of the founder of a business and helps to better manage family ties involved in the overall family wealth planning.
There is certainly a main component which is investment-focused for setting up such structures, as well as a strong reasons that can facilitate succession planning and the prevention of the risk of disputes within a family. Family offices can help families navigate diverse holdings and advice from an array of professionals. In fact, a family office can better coordinate and connect different professional functions, decreasing the chances of miscommunication or unnecessary complications in managing investment and general planning issues. For families with an operating company, a family office removes the responsibilities of managing the family assets and other necessities from the family, enabling them to concentrate on the needs of the business. For families who have already sold their business, a family office can help a group of beneficiaries maintain shared assets.
Different types of family offices
The majority of family offices are either “single-family offices”, which handle the affairs of one family, or “multi-family offices”, which deliver services to several unrelated families. Many multi-family offices start as single-family offices and then grow to take in other families in order to achieve a greater economy of scale. One of the advantages of setting a family office is to protect the families’ privacy, reduce administrative costs resulting from holding multiple family branches, and provide cost savings and investment opportunities due to the combination of wealth from multiple sources. Many households develop their family offices over time, often beginning with one trustworthy and loyal employee managing the family affairs and then enlarging both the scope and the size of the family office. This can also grow into a private company that ends up managing all family issues. Each case can differ in terms of management and structure from family to family, exactly like any other operating company does.
Another option is a “virtual family office”, a lean single-family office that uses a high level of outsourcing to keep the staff as low-cost and flexible as possible, particularly when the family wealth to manage is in the range between US$20 million and US$200 million. Such model started gaining popularity about two decades ago, particularly in London, Zurich and New York, as wealthy families wished to reap the benefits of having their own family office and the direct control that can be designed into such a structure. As the family office industry has expanded, this term has become more common and will likely gain traction in the future as families continue to seek out customized, affordable solutions. At the opposite end of the complexity spectrum is a “private trust company”, which acts as a permanent trustee for family trusts, as highlighted in our previous article “Trusts Focus week: Private Trust Companies”.
Cost-benefit analysis
High Net Worth families generally find a multi-family office more practical than the use of professional wealth management because of the additional services that fall under the multi-family office umbrella, including tax compliance services, philanthropic advisory, family governance, and education needs. Different multi-family offices have different choices of services and costs that families can choose, with the final decision usually being connected to a cost-benefit analysis.
An advantage of a single-family office is that it is a bespoke service to the family needs and requirements. It also offers better control, privacy and confidentiality. The downside is that it’s expensive, in fact – depending on the scope of the operation – the annual cost is estimated at about US$1.5 million.
Whichever option you might opt for, you must trust the professionals you work with, since trust is as important as talent. Our team at Hugill & Ip has extensive experience in dealing with Wealth Planning and Private Client issues – so if you need further advice on these subjects, please get in touch with us.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
