When good luck goes hand in hand with diligence
| 22. Juni 2009 |
| Press article In Benjamin Franklin's Poor Richard's Almanack, first published in 1732, Father Abraham – a venerable old man with long white hair – cites the words for which this great personage has now become famous: “Diligence is the mother of good luck". This maxim is particularly applicable to family fortunes whose diligently crafted structures ensure solid performance over several generations. |
 By Pierre-Alain WavreChief Executive Officer Family Office Geneva |
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The role played by a Family Office in structuring assets can be especially tested in times of economic and financial crisis such as we have been experiencing over the past few months. Experience showed us that it was only by structuring a fortune in advance, both rigorously and independently, that it was possible to limit possible disappointments that stem from adverse performance on the financial markets or of the economy. And this is precisely why a method that has been specially adapted for organising the fortunes of families whose assets exceed 100 million continues to prove its worth. This method comprises three main components, as outlined below. The secrets of a solid wealth protection structure The aim of the first component is to protect the family's assets over several generations, in particular by using appropriate wealth planning. |
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 At the start of the relationship with a Family Office, a methodical consultation process must be held that results in an in-depth understanding of every element of a given situation.A relationship manager therefore has to know which questions to ask so that all of the succession, taxation and legal issues are covered. The next step in protecting the assets might then be, for example, to put in place various optimisation structures, such as trusts, foundations or any other legal structure, depending on the different jurisdictions to which the family members are subject. By optimising the assets from a taxation point of view, its long-term preservation can thus be guaranteed. It should also be noted that the solution recommended for protecting the assets is generally better when it is the result of several minds working together, namely internal Family Office specialists, hand-picked international legal and tax experts, as well as advisors with whom the family has already established relationships. A view of long-term asset growth The second component is a structure that seeks to grow the family's wealth over several decades. An overall target therefore has to be fixed for risk and long-term return, taking into account different factors such as the professional and personal goals of each family member. In addition, ordinary liquidity requirements have to be fixed, together with a margin for extraordinary needs, using, for example, a predictive short, medium and long-term cash-flow model. At the same time, an in-depth review of commitments and extreme scenarios is essential. On occasions, the Family Office also acts as a mediator when differences of opinion arise on certain subjects relating to the allocation of the assets. For instance, when a wealth structure incorporates a substantial investment in a family company, the Family Office may be asked to offer innovative solutions that result from an objective view. The Family Office can thus be called upon to act as a liaison within a well defined family governance structure. Appropriate asset allocation must also be detached from all dictates of fashion as well as being based on an open architecture, incorporating the best investment vehicles available on the market. The latter should, however, be selected solely as a result of rigorous quantitative and qualitative evaluation. |
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| Experience showed us that it was only by structuring a fortune in advance, both rigorously and independently, that it was possible to limit possible disappointments that stem from adverse performance on the financial markets or of the economy. |
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The various investments made will obviously differ according to the specific needs of each family. Nevertheless, the asset classes proposed are often identical, albeit with different proportions. Moreover, in addition to traditional assets like equities and bonds, a solid financial base does allow part of the capital to be allocated to less liquid alternative assets that sometimes offer more attractive returns in the long term, such as private equity, certain hedge-fund strategies, artworks or even real estate. This notwithstanding, one of the consequences of the current crisis is that a segregated asset-management approach for sizeable fortunes has to be reinforced, to the detriment of investment funds and other variable and changing liquidity and collective investment vehicles. In addition, an appropriate asset allocation aimed at achieving long-term growth must not rest solely on statistical measures and historical quantitative data, given that an approach based on Meyer Guggenheim's adage “Always go in for the big development when the business barometer is low” often results in less than fruitful results for the investment. Basically, a Family Office has to ensure above all else that the family clearly understands the proposed wealth structure and especially that it feels at ease with how that structure may develop, depending on the different possible scenarios for financial market and macroeconomic performance, as these may vary considerably. |
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 No successwithout careful monitoring By constantly monitoring how the assets are performing, it is possible to make any necessary adjustments. Consequently, the third component in the structuring of a family's assets by a Family Office is to measure, monitor and carefully evaluate the performance of that fortune over time. This then makes it possible to detect and prevent any inconsistencies and to gauge if the assets are progressing well in line with the expectations and targets fixed. Furthermore, sophisticated performance measurement tools, such as those used for global custody, allow the family a clear and simplified view of the performance at any time. This approach should be supplemented by valuations of non-financial assets not held in custody. Substantial fortunes are no guarantors of success unless there is an appropriate level of diligence at every level of the organisation of a family's assets. The experience of an accomplished practitioner in the field using a platform that has demonstrated its worth over time can thus prove indispensable. * Leading German industrial and philanthropist born in Lengnau, Canton Aargau (1828-1905), who established the Guggenheim family fortune and set up its Family Office business. |
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