Carey Olsen Cayman Islands partner Bernadette Carey and senior associate Sarah-Jane Hall explore the challenges of managing family wealth. They emphasise the role of family offices in preserving and growing wealth, providing professional services, and supporting family members.
An original version of this article was first published by IFC Review, July 2024
Family dynamics can become complicated in the blink of an eye. Add significant wealth into the mix and a myriad of issues can arise, each warranting careful monitoring. As families evolve and expand, and the global footprints of family members extend into new jurisdictions, including offshore regions, it becomes even more important to ensure that the right advisors are in place to guide the family on important legal, tax, wealth management, business education and reputational issues as and when they arise. And should disputes (however minor) inevitably crop up, having strategies in place to assist with their swift resolution is of the utmost importance.
With all these factors front of mind, a solution-orientated and highly connected family office can be an attractive mechanism, not only for preserving and generating a family's wealth, but also providing a stabilising presence to support key stakeholders.
Establishing a framework geared for success
Most family offices are established as a result of a patriarch or matriarch owning a successful family business: conceived from a wish or need to enjoy many of the services more commonly offered by professional institutions and firms, they require an easily accessible team dedicated solely to the specific needs of the family. A dedicated family office team, functioning correctly, will generally act as a central co-ordination point to preserve and manage the family's wealth and to provide any other services required by the family members.
Location
While there is increasing interest in the establishment of 'virtual' family offices, having bricks and mortar remains the preference for most ultra-high-net-worth families. Careful regard should generally be given to the physical location of the headquarters of the family office and where the family office 'leads' should be located. While it is usually preferable to choose an offshore jurisdiction for tax efficiency and regulatory reasons, as well as the availability of highly qualified personnel and advisors in these locations, it is also important for the family office to be accessible in person to family members. Therefore, choosing the right geographical jurisdiction is key for the family.
Helpfully, many offshore jurisdictions such as the Cayman Islands offer an attractive mix of key factors that lead to the successful operation of a family office: easy access, an extensive and modern infrastructure, a legislative and regulatory environment that is easy to navigate, a sophisticated professional services industry, and a stable economy and political environment. These factors have contributed to family office establishment enquiries soaring in recent years in this jurisdiction. The robust judiciary, on hand to help with the efficient resolution of disputes should they arise, is also highly coveted.
The family office team
Getting (and keeping) the right team in place within the family office is not the simplest of tasks and requires close attention. There are no specific or fixed staffing structures for a standard family office; they can be modelled to each family's particular needs and wishes. However, it is important that new hires have experience in managing wealthy families and are highly skilled in managing issues when they arise. The extent to which family members are involved within the business of the family office is also up for debate: some family members may wish to be involved in the day-to-day activities of the family office, while others may only wish to have a high-level supervisory role. However, for offshore structures in particular, it is still very common for controls to be built into the family office planning so that any significant decisions can only be taken with the express consent of family members.
It is not uncommon for contentious situations to arise when decisions made by the family office are unpopular with family members, and the fire can be further fueled if there is a family relationship between the decision-maker and those impacted by the decision. In many circumstances it may be appropriate to ensure, from the outset, that family office employees maintain an appropriate degree of distance and professional reserve in their interactions with family members, such that their decision-making is always objective.
Including non-family, non-executive directors on the board of the family business can be a very successful way to strengthen the business – and lessen emotion-driven conflict – as it allows for an objective outside view of the performance of the business, while still valuing the skills and strengths of family members. Of course, scenarios will inevitably arise over time that require the specialist services of other external service providers, and the family office should be empowered to appoint external advisors as needed to assist in the continued smooth running of the family business.
Building a trusted partnership
Once up and running, a primary objective of a good family office should be to develop strong relationships with the family itself.
Communication
Getting to know each family member and what makes them tick is an imperative first principle; regular engagement across family branches and generations is fundamental. Communication is obviously a key part of this, and there should be clarity within the family office around what will be communicated, to whom, when, and in what manner. This involves understanding each family member's preferred communication style, and taking steps to effectively address challenges they may face in receiving and absorbing important information will go a long way to reducing missteps. Most modern family offices find that hosting regular family meetings and allowing for open discussions about the family business and wealth can help to set clear expectations and dramatically reduce misunderstandings in the long run.
Goals and governance
An important function of the family office is to help the family set its objectives and find a way of achieving long term aims, working collaboratively together. Identifying shared goals helps focus minds, and can even be enshrined in a 'family constitution' if that suits the family's working style. At minimum, this is likely to encapsulate the family's philosophy and sense of identity, focusing on questions such as "who are we?" and "what are our shared values?" From there, having formal governance structures in place within the family office should provide transparency, accountability, and foster engagement. Clearly identifying key roles, responsibilities, and decision-making processes will assist greatly in avoiding ambiguity that could lead to disputes. Going even further, making detailed succession plans with input from all stakeholders can help smooth inheritance and leadership transitions, thereby reducing potential conflicts.
Bringing family members into the fold
Building a healthy partnership will also require the family office to properly engage with all family members. Failing to engage across generations can be detrimental to the family's wellbeing and undermine the perception of the family office, reducing its efficacy and contributing greatly to conflict. All members of the family need to be fully-educated as to the family office's role within the wider family structure – which can vary greatly from family to family.
It is increasingly common for family offices to arrange a more structured programme for the education of family members and sharing of information between generations, with efficient and effective succession front of mind. These programmes may involve regular, in-person family meetings and retreats that combine strategic workshops with more informal social events, which can be an effective tool for bringing the family together and developing a unified strategy. They can also be a great way of engaging younger generations with the business of the family, introducing governance principles, and promoting financial and investment literacy at an early age.
Difficult conversations
As is clear from the above, openness and transparency are integral to the successful operation of a family office and family relationships generally. Secrecy and autocracy can and do sow the seeds of suspicion and discord, leading to unnecessary disputes, and the family office can play an important role in starting difficult conversations when necessary. This can include talking through 'what-if' scenarios (such as a dip in the economy, or more personal issues such as if there is a divorce in the family) and putting in place appropriate contingency planning. For instance, it is often sensible to adopt a family-wide policy regarding pre-nuptial and post-nuptial agreements, as this can take some of the pressure off individual family members.
Alongside qualified professionals, the family office may also have a role to play in addressing issues experienced by certain family members. For instance, working through problems with addiction, gambling, or financial irresponsibility, which, if left unchecked, can devastate family relationships.
Crisis management
Of course, despite very careful planning, disputes within family offices or about family wealth can still arise and take a number of forms. Disputes can manifest as disagreements over inheritance, problems with defective structuring or decision-making, claims to specific assets, or even direct grievances against individuals based on perceived injustices. When it comes to disputes arising amongst family members, it is vital for the family office to act impartially and even-handedly, including, if appropriate, hiring specialist third party providers such as mediators to help resolve the conflict.
Acknowledging that some disputes cannot be amicably resolved, it can be sensible to include a form of 'exit plan' for family members if relationships deteriorate completely. Family members may, over time, determine that the direction taken by the family office does not meet their own personal goals or wishes, or they may simply be interested in reducing their stake in or involvement with the family business and going their own way. Having tools to enable this separation in a structured and sensible way is an effective conflict minimisation strategy.
Promoting healthy family interactions and relationships
Running a family office can be hugely rewarding and can successfully bind family ties through generations. By carefully managing family dynamics, assisting all stakeholders, and facilitating healthy family relationships by setting the agenda and being on hand to navigate any sticky issues, the family office will have established a recipe for success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.