Private Client Explained: Family Offices
Contributed by Hugill & Ip Solicitors
08 December, 2021
Family offices managing the activities of High Net Worth Individuals and families have become gradually more important to the financial services industry in Hong Kong and other global financial centres. The territory has seen a dramatic increase in activities and developments around this subject. Hong Kong holds the key features to efficiently function as a global hub for family offices: it is closely connected with Mainland China; it has a wide expertise of individuals that can efficiently manage a family office; it is home to a very sophisticated financial market.
The Greater Bay Area ("GBA") is one of the wealthiest regions in Mainland China. It has a combined population of over 72 million people, and it is home to about 20% of the nations' HNWI total. It boasts a GDP of around HKD 13 trillion. The growing integration of Hong Kong within the GBA surely brings many advantages.
Q1. What is a family office?
A family office is usually a private company that operates an investment or wealth management business for one or more families. The company's financial capital is the family's own wealth. A family office is either a corporation or limited liability company. Employees are compensated according to their agreements with the family, in often cases including incentives based on performance and profits generated by the family office. Investments are usually allocated in real estate, private equity, venture capital and hedge funds.
A family office that supports multiple families is referred to as a multi-family office. Such family offices provide a wide range of services including investment advice, tax and estate planning, risk management, succession planning and support, as well as lifestyle and education management, assistance with charitable activities and other pursuits.
Q2. What is the main scope of setting a family office?
There is certainly a main component which is investment-focused, as well as compelling reasons that can facilitate succession planning and the risk prevention of family disputes. Family offices do 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 - often avoiding miscommunication or complications in managing and planning investments. In general, it removes the responsibilities of managing the assets and other needs from the family itself and enables it to concentrate on the pure business needs. In some circumstances - e.g. when a family has already sold their business - it can help a group of beneficiaries to maintain and grow shared assets.
Q3. What are the main differences between types of family offices?
Most family offices are either "single-family offices" - exclusively handling the affairs of one family - or "multi-family offices" - dedicating its services to more than one family. 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.
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 the range between HKD 150 million and HKD 1.5 billion.
Q4. What are the main advantages?
One of the advantages of setting a family office is to protect the families' privacy, reduce administration 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, then enlarging both the scope and the size of the family office.
Many HNWI 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. Some others prefer a single-family office as it is a bespoke service to specific needs and requirements of only one family. Each situation varies.
Q5. Should one set up a hedge fund instead as an alternative?
Differently than hedge funds or pension funds, family offices are not using third-party capital and then investing - in fact, they operate with an asset source belonging to single or multiple family. It is also to note that some hedge funds have in recent years converted into family offices since in many cases the sponsor has made enough money to concentrate on the management of his/her own wealth and not be subject to fund regulations. The set up and maintenance costs for a family office are usually lower than that of a hedge fund or a pension fund and it can cater for relatively lower asset size than a hedge fund or pension.
Moreover, the regulatory aspect needs to be considered: the primary regulator of hedge fund managers in Hong Kong and authorised hedge funds is the SFC. Private hedge funds do not need to be authorised, in fact the SFC regulates their fund managers as licensed corporations.
Q6. Or would it be more advantageous to set up a Private Trust Company?
A private trust company ("PTC") is established to serve as a trustee and manage the wealth of a single family. A PTC is an entity set up to act as a corporate trustee for the settlor's trust (or connected trusts). Licensing is not required in some offshore jurisdictions so long as the PTC does not offer trust or fiduciary services to the general public (persons unconnected to the settlor) or other unconnected trusts. A PTC can be managed by the settlor or any person(s) designated by the settlor who will act as director(s) of the PTC. Another common use for a PTC is a platform to carry out investments - the settlor and/or the family can have the control to make all investment decisions. A major benefit of using a PTC is succession planning, in particular when the trust holds shares in a family business.
Many families - usually owning assets under trust in excess of HKD 1 billion - appreciate the flexibility, control and privacy that a private trust company offers, even when considering the extra costs and personal responsibilities. At the other side of the spectrum, other families find that operating a private trust company is too expensive and problematic and often tend to opt for a multi-family office solution. Each situation is different, thus case by case considerations are necessary.
Q7. What changes can we expect for family offices with the launch of the GBA Wealth Management Connect?
For Hong Kong, the introduction of the Wealth Management Connect scheme will surely attract more HNWI from Mainland China to operate family offices in the territory. Proposed in 2019, the scheme follows the launch of Stock Connect in 2014 and Bond Connect in 2017, which allowed two-way investments in stocks and bonds between Mainland China and Hong Kong.
The scheme which launched on 10 October this year allows Hong Kong and Macau residents to buy mainland investment products sold by banks in the Greater Bay Area. Similarly, Guandong Province residents are also allowed to invest in financial products sold by banks in Hong Kong and Macau. The two SAR territories' residents can invest without being subject to specific restrictions, while for Guangdong residents it is slightly different: only few categories can participate in the scheme:
- They need to have a "household registration" (what in Mainland China is commonly known as hu kou) in the nine mainland cities of the GBA or;
- they need to have contributed individual tax or social security in these cities for at least five years and;
- they must also have at least two years of investment experience and a total family net worth of CNY 1 million or financial assets with a monthly balance of more than CNY 2 million.
At the start there are quotas limiting investment total and only allowing banks to sell the financial products (hence excluding local brokers), however most likely these rules will change in the future. The scheme only includes fund products classified as low and medium risk in Mainland China, e.g. money market funds, bond funds, stock funds and index funds.
The implementation of the Wealth Management Connect scheme is expected to bring a steady and measured growth as more financial products will be gradually introduced.
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