Episode 13 – SFO – The Do’s & Don’ts
Single Family Office (“SFO”) structures are increasingly gaining in popularity among family businesses in the Gulf Cooperation Council (the “GCC”).
In our thirteenth episode, Ismael Hajjar, Director at EY MENA Private, Family Enterprise, Family Office Advisory joins Yann Mrazek, Managing Partner at M/HQ to discuss the top 5 Do’s & Don’ts of managing your Single Family Office (SFO).
Key Takeaways
The top 5 Do’s
Treat your Family Office like a business
- Professionalize every aspect of it focusing on people, processes and technology
- Good governance and operational excellence
- Hire the right people with the right skills to perform the services
- Formalizing procedures (e.g. investment) and perform appropriate investment due-diligence and decision-making process (e.g. investment committee)
- Centralization and institutionalization of the overall wealth management activity
Select the right jurisdiction
- FO ecosystem
- Regulatory and legal frameworks available
- Availability of talent and service providers
- Close to the family
- Ability to create substance in the jurisdiction
Segregate private from business
- Mixing private wealth with corporate can create cash flow issues in the operating business and risks to the sustainability of the family business
- Foster entrepreneurship: It is about keeping it alive + story of the initial entrepreneur in every business -> reconnecting with his values + family office and family bank to support entrepreneurship
- Develop future leadership: Preparing the next generation to be resilient in future crises and teaching them how to work together. It is never too early to start. We have helped some families build plans that start at pre-school children all the way to young adults
Promote transparency
- Transparency and honest communication are critical to build trust within any group of individuals including a family or a business. + share story about two paths to succession planning
- A FO 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
Aim for diversification
- Investment diversification but also talent diversification to leverage on the family capital + share example diversification through family talent (Khaled and Renewable Energy)
- Adopt portfolio ownership mindset: Consider the value of your family’s total portfolio of businesses and investments to take strategic decisions. Definition of success + Change is constant so portfolio needs to change over time (detach from emotions to expand + economy of the future)
The top 5 Don’ts
Think your Family Office should do everything by itself
- The most successful FOs in the World find the right balance between in-housing and outsourcing
Proceed without a clear and well-articulated strategy
- Bespoke menu of services
- Define family requirements and obtain buy-in from all stakeholders including family
- 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?
Think only billionaire families can afford a Family Office
- The family’s assets need to be sufficient to justify a stand-alone management and legacy planning structure BUT (i) not all FOs are doing investment management (bespoke menu of services and (ii) there are great MFOs out there
Think that it is over when the Family Office is set up; it has just started!
- Stress-test the various components of the FO on a regular basis to identify risks and mitigate them
- Review the performance of the FO team and service providers on an ongoing basis
- Adopt a flexible structure as the needs of the family and the objectives of the SFO may change over time
- Contingency planning
Think that a Family Office must (necessarily) own assets
- Some of the most successful and sophisticated family offices do not own any assets and are acting as a management / advisory company
- A FO may not necessarily be the best choice from asset protection, succession planning, tax or confidentially to own the assets