HKUST Business School Magazine

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.” Biz@HKUST 30 Cover