Andreas Vladimerou
Senior Manager
K. Treppides & Co Ltd
Nowadays, wealth is increasing rapidly among some of the world’s richest families to the extent that, for many of these families, it makes commercial sense to have their own custom-built family office.
An upward trend is expected to continue, as wealth levels keep rising alongwith the demand for related management services.
For most family offices, the greatest challenge to overcome is the successful transfer of the family structure to the next generation.
What is a family office?
A family office duty is to look after the key operations and functions of the family wealth, which, in its easiest form is the private office for a family of substantial wealth.
It can serve as the central hub for a family’s legacy, governance and succession.
The purpose of an office can vary from handling key family assets and core holdings (tax compliance, accountancy, property and estate management, legal, investment services, etc) to include more advanced wealth management structures, whereas often supplying family members with educational, professional and lifestyle services.
The number of staff working in the office can vary from one to 100 employeesor even more staff, depending on the type and number of services it provides.
It can further support the education and development of family members, facilitate family governance, coordinate communication and resolve issues within the family enterprise.
Succession Planning and the Next Generation – what is the danger?
The threatarises when the founder decides to be less involved in the business and the youngest family members are suddenly left with a “substantial wealth” with no idea how to manage it.
Why do you need to have a succession plan?
The ideal scenario for a family business is to continue to grow for future generations without any difficulties. However, it might be difficult to find the right successor within the family to lead the business into the future.
The next generation might not be interested in a position within the family office or might not have the capabilities to lead the office after the current generation steps down. However, it might also be the case that some of the youngest family member sare willing and capable to take over the family office functions, but at the end there can only be one prevailing chief executive officer.
On the contrary, non-family members might be better qualified to take over the role and therefore to run the business in a more efficient and effective way. In other words, non-family members might also be the right successor to lead the business into the future.
This whole process is called business succession planning.
The implied rule of 92%
Rule states thatthe 92% of a family’s wealth is lost by the third generation. The main reason behind this is that families tend to focus merely on ‘hard needs’ (such as business operations, investment strategy and assets allocations) at the expense of recognizing the importance of ‘soft needs’ (such as succession planning, philanthropy and the responsibilities associated with having access to such vast sums of wealth).
Historically, having a poorly implemented succession plan, or no succession plan, can contribute significantly to families losing almost all their wealth by the third generation.
To prevent this, the establishment of a family office has an implacable role to prove that the said rule is wrong.
What does a succession plan look like?
The succession plan usually consists of four parts.
A private family trust company set up as the trustee for all the family members,within which there is an investment committee run by external investment professionals, and a distribution committee staffed by family members to oversee any distributions requested by family members who are beneficiaries of the trust. Furthermore, there is a family council that rotates on an annual basis so that all family members get involved in decision making.
Another vital part of the succession plan is the education and the continuous involvement of the youngest family members in the business from an early age to gain suffice experience. As a result, this will enable them to learn more about the so called “hard needs” and “soft needs”.
Cyprus as a jurisdiction of choice for high net worth families
High net worth families may choose Cyprus as their jurisdiction of choice to locate their family office.
Cyprus is considere done of the most attractive European tax jurisdictions by many major business organizations in Europe to maintain and enhance the many tax benefits offered to multinational companies and individual investors.
Cyprus has a robustmarket-driven economy supported by a stable democracy and an attractive tax and legal framework that is driven by a well-educated and highlyskilled workforce.
What conclusions can be drawn?
Summing up the above, at the end of the day, a family office is only as good as those running it and the right mix is crucial – both in terms of providing for the key professional services needed by a family officeand the softer skills required for diffusing difficult family issues and ensuring individual family members fit into the family’s vision for the future.
Due to the length of time it can take to educate and train the next generation, family offices should start succession planning at least five to ten years before any anticipated transfer of control. It is never too early to start to educate the youngest family membersfrom an early age as this will only make the ultimate transition much smoother when the time comes.
K. Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 35 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.
Contact Details:
avladimerou@treppides.com
www.treppides.com
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Kristellina Tower, 12 Arch.Makarios III Avenue, Mesa Geitonia, CY 4000 Limassol, Cyprus
London: 7 Milner Street, London SW3 2QA
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012
Tel.: +357 22678944, +357 25822722
