Hong Kong already has the know-how to become a hub for family offices in Asia. But some tweaks are necessary, banking legend Kathryn SHIH says.

Hong Kong’s hopes of securing a preeminent position in the fast-growing family office sector are underpinned by the extensive experience and relevant expertise the city’s financial institutions already possess.

They lead the region in terms of investment banking, asset and wealth management services and are therefore well placed to advise enterprising families on how best to plan and structure their investments to protect holdings, generate returns, avoid conflict, create a legacy, and ensure a smooth transition to the next generation.

With all the talk of initiatives and incentives to attract such businesses and become a regional hub, there is a sense of breaking new ground. But most of the precedents and patterns are already well established, having evolved in Europe and the United States over the past few decades.

Offering guidance across the board

Now they are being adopted and adapted to meet the needs of families in Asia which have more recently moved into the ultra high-net-worth bracket. Such families can benefit from guidance on everything from tax domiciles and legal jurisdictions to financial planning, trusts, private equity, insurance, and philanthropy.

“The new interest in family offices is a function of the creation of wealth,” says Kathryn Shih, the former Asia-Pacific President of UBS AG who now serves as a board member of Swiss-based bank Julius Baer. “This segment provides financial firms with multiple touch points and service opportunities and, in some ways, is at the pinnacle of wealth management. With so many newly minted billionaires, it offers great growth potential. But the financial institutions involved must also be able to offer some unique selling propositions.”

It’s essential to start by reaching an agreement on the right structure. That typically involves making decisions about the comparative advantages of the tax and legal codes of different locations, considering the geopolitical aspects, and assessing the likely operating costs. Other factors to consider include the ease of travel, the availability of talent, and how roles and responsibilities should be divided among family members and outside professionals.

“At the set-up stage, it is also important for families to decide on their investment horizon and how active they want their investments to be,” Shih says. “They need to be clear about objectives, whether it is wealth preservation, growth at ‘X per cent’ over inflation, or to go for more ambitious wealth creation targets. They also need to think about the scope of assets, both liquid and illiquid, and whether funds will be held by a trust, a company, a mutual fund, or in individual names.”

Making choices as a family

Once the ownership structure, goals, interests, jurisdiction and staffing have been decided, the next step is to seek advice from a financial firm on actual asset allocation and the execution of the planned investment portfolio.

Some family offices will take a deliberately conservative approach, favoring blue-chip stocks and bonds, tracking the main indices, and sticking to what they know best. Others may opt for more active investment strategies, perhaps leaning towards late-stage private equity plays heading for IPOs, up-and-coming Green industries, or tech- themed start-ups.

It’s important that these choices are executed in line with the family charter and that a mechanism is in place to make agreed adjustments as and when they are necessary.

“After getting things started, I think it is best to leave core investments in active businesses and illiquid assets – and the extent of delegation – unchanged for three years,” says Shih. “Otherwise, family office staff can get frustrated and confused. However, within the liquid investment and private markets space, where there is more volatility, I believe strategies should be reviewed on a quarterly basis, though frequent major changes should be avoided. That becomes costly and can be more emotional than planned.”

Outlining social objectives

Shih adds that it has now become common practice to set out non-financial objectives alongside the financial ones. This allows a family to outline the social objectives they want to achieve and what kind of legacy they hope to create.

Planning for this obliges families to consider whether direct philanthropy or delegated philanthropy best serves the cause, and also motivates them to discuss how much they want to invest.

Such initiatives often prove a good way to get members of the younger generation involved early on, by fostering their engagement and commitment. If a charitable foundation is established, something which is very easy to do in Hong Kong, where donors can claim tax deductions of up to 35 per cent of the assessable income or profits, this can provide a neat introduction to other family office meetings, activities, issues and contacts.

“Most families want to leave a legacy,” Shih says. “It may be something as simple as setting funds aside for the university education of grandchildren or providing capital for entrepreneurial endeavors. It might also involve creating something in a community where the family name will be given prominence. Or it could be to promote certain values and bring greater unity.”

However, as with the other forms of investment, there must be clear guidelines and principles, a well-defined structure, close supervision, and agreed mechanisms to allow for change.

“The legal advice has to be very current and very well researched,” Shih says. “Ultimately, harmony is created when there is transparency, fairness, trust, and shared values.”

Level the playing field

Noting that Hong Kong has now made it a policy priority to attract more family office business, she suggests a few steps to help to level the playing field with Singapore and capitalize on advantages that already exist.

For instance, Hong Kong’s taxation rules are fairly straightforward, but more thought could be given to connecting the set-up of new offices to the approval of immigration status and residency permits for close family members. This would provide a “total package”.

In addition, it makes sense for financial institutions, trust firms, law firms, and accountants to establish tailor-made training to ensure designated staff can meet needs and expectations. That must go beyond basic regulations and product knowledge to develop a mindset that can anticipate and circumvent possible difficulties.

“We need to build up the infrastructure and train personnel,” Shih says. “There are things you should say and do, but these families are special, so the most important part is listening.”