Episode 11 – SFO – Basics: Where to start?
In our eleventh episode, Ismael Hajjar, Director at EY MENA Private, Family Enterprise, Family Office Advisory joins Yann Mrazek, Managing Partner at M/HQ to discuss the basic steps of starting a Single Family Office (SFO), as well as their use in practice.
Key Takeaways
Single Family Office (the “SFO”) structures are increasingly gaining in popularity among family businesses in the Gulf Cooperation Council (the“GCC”).
Regionally, there are three jurisdictions providing SFO regimes: the Dubai International Financial Centre (the “DIFC”), the Abu Dhabi Global Market (the “ADGM”), and the Dubai Multi Commodities Centre (the “DMCC”).
See our fact sheet:
Private Wealth Series (II)
SFO in the UAE: Which Options?
[Yann Mrazek] What is a SFO?
[Ismael Hajjar]
A SFO can be compared to a commercial enterprise. But a very special one as:
- Its only clients are members of one single-family and legal entities controlled by them; and
- Its activities are determined by a menu of services that is bespoke to each SFO.
A SFO may remain virtual. Alternatively, it may be incorporated as a distinct private legal entity separated from the family business.
The assets under management are the family’s own wealth, often accumulated over several generations.
A SFO is restricted to provide services to members of one single-family, contrarily to a multifamily office (the “MFO”).
[YM] What are the services provided by a SFO?
[IH]
It is essential for each and every SFO to design a menu of services that is fully aligned with the family’s circumstances, wishes and expectations.
At EY, we have developed a methodology to support families with the design of bespoke FO menu of services that is based on 4 pillars:
- Strategy;
- Governance;
- Advisory; and
- Financial Planning.
[YM] talk to me about these 4 pillars!
[IH]
These 4 pillars include many sub-pillars that represent services that the FO could provide to its clients such as e.g. financial advisory and reporting, succession planning, family training and education, investment management, philanthropic management, tax and legal, conciergerie…. We named our approach Family Office Leading Practices as it was developed based on interactions over the years with thousands of family offices around the Globe.
[YM] Why to set up a SFO?
[IH]
There are many reasons why one would consider setting up a SFO, but the main two are to (i) professionalize how the family’s overall wealth is managed and protected and (ii) ensure a smooth intergenerational transfer of wealth and reduce intra family disputes, especially as complexity increases from one generation to the next.
The Main benefits of a SFO are:
- Separation: creating a distinction between the family’s business and the family’s wealth.
- Governance and management structures: the SFO provides for high transparency when it comes to dealing with the complexities of a family’s wealth, which minimizes the potential of future conflicts and maximizes investment opportunities.
- Eliminate conflicts of interests between the expert advisors and the family when providing strategic insights such as investment advices.
- Centralization and institutionalization of the overall wealth management activity allow for:
- Formalizing investment procedures;
- Appropriate investment due-diligence and decision-making process (e.g. investment committee);
- Promotion of family involvement; and
- Maximizing investment returns for all family members.
- Risk management: consolidation of performance management and reporting helps advisors and families to take effective decisions.
- Privacy and confidentiality: the SFO is the only entity that keeps all the information for all family members, covering the entire portfolio of assets and general personal information.
- Professionalization of other services: e.g. philanthropy role, concierge services, communication and education to meet the family’s mission and goals.
[YM] Some key considerations before setting up a SFO
[IH]
Some key considerations include:
Definition of the Family requirements and obtaining buy-in from the Family members
- What is the purpose of creating the Family Office and which jurisdiction is preferred?
- Who will be beneficiaries of the Family Office?
- Do we have a vision or mission statement for the FO, what are the objectives that the Family wants to accomplish?
- What do we need from the FO? Which functions will be included in its menu of services?
- Will the FO be a cost center and how will it be funded?
Capital vs. Costs:
- Must look at the minimum capital requirement under management of a SFO (if any in the jurisdiction).
- A SFO can become cost intensive depending on the set up and amount of in-house advisors.
- The family’s assets need to be sufficient to justify a stand-alone management and legacy planning structure.
Ecosystem:
- SFOs function best when operating from centres where they can benefit from sophisticated markets, legal, regulatory and tax structures.
- Access to know-how and recruitment of skilled employees is also key.
Make-or-buy services (in-house or outsourced):
- Keeping “in the family”: increases confidentiality, ensures independency of advisors and tailors the knowledge and skills to the family’s needs, assuring the alignment of goals and avoiding conflicts of interest.
- Outsourcing advice: may help decreasing costs, especially with regards to high-value professional skills.
Governance and management strategy:
- The needs of the family and the objectives of the SFO may change over time.
- Implementation of a thoughtful but flexible governance and management strategy is essential to the smooth running of the SFO and helps to avoid conflicts – especially regarding the next generations.
[YM] SFO and Foundations; compatible? Any benefits?
[IH]
Yes, absolutely! While a SFO will not always hold the assets but merely manage them, a SFO is still exposed to 3rd parties’ attacks and shares held in an individual capacity remain subject to probate procedure in case of demise.
This is where a Foundation adds value to a corporate structure. Compatible with all UAE asset classes (real estate, shares, portfolios), Foundations enable the entrepreneur and his/her family to consolidate and keep control over income-generating assets and investments, while protecting them from potential threats. They are equally effective for Muslims and non-Muslims.
