Economy & Business
The lure of family offices
Taiwan risks missing out on the burgeoning business of family offices. What can be learnt from Singapore and Hong Kong?
By Paul Shelton
There are various ways of defining a family office. Put simply, a family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least US$50-100 million in investable assets, with the goal being to effectively grow and transfer wealth across generations.
Another definition would be any firm that is investing money directly on behalf of the ultimate principal. As compared to hedge funds, pension funds, endowments, and other institutions, family offices are not pooling third-party capital and then investing. They are operating with the assets of a single or multiple family.
The benefits of a family office are also said to include greater privacy and confidentiality. A family office is typically a sole entity (as opposed to a complex corporate structure involving subsidiaries). The family office keeps all information for all family members, covering the entire portfolio of assets, activities, tax, and general personal information.
Other commentators also argue that as a sole entity there is greater transparency in the governance of the entity, a simpler management structure, the potential for higher returns and better risk management practices, all of which are certainly aspirational goals.
Whilst US$50-100 million was mentioned above, it seems that within the family office community, most practitioners prefer to be able to point to a net worth threshold of at least US$100 million as the starting point for a family office. A family office may be solely structured around one single family or multiple families (presumably as the generations continue to grow and expand). The size of assets under management can range widely from a few hundred million to billions of dollars. Some family offices can involve investment advisors rivalling the size and complexity of some institutional investment firms, or the family office may use just one individual advisor.
Generally, family offices see wealth generation as their main goal but that does not exclude those that look for capital appreciation and even growth. The approach taken depends on the nature of the family.
Family offices are on the rise, and therefore much more visible, not only because of the increase in large multi-generational family wealth but also because wealthy individuals and families have concluded that they can operate their own family office at a much lower cost than traditional institutional wealth managers and still maintain strong performance. The family office sees no need to pay large management fees to institutional investment funds which generally operate with expensive operational, administrative and performance costs.
It is also the case that family wealth has been the result of expertise in certain industries or fields of enterprise. By utilizing that expertise, a social network built over time and leadership know-how, the family office regains control over their wealth and investments and may even be able to create more wealth.
Some observers have also noted that family offices operate on a much longer timeline than traditional institutional investors. Many institutional investors are looking to lock away funds until retirement age. Family offices look across generations and not a fixed timeline. Family offices may be concerned about investments going out to third or even fourth generations and this is especially so if the assets continue to generate cash flow for the family.
Working with or for family offices is also inherently different from traditional institutional investment firms. Whilst acknowledging that there is no uniformity to family offices, one striking difference is the speed and flexibility that family offices have over traditional firms. The investment decisions may simply come down to the decision of the principal in charge of the family office and this allows investments to be made much more quickly. Conversely, family offices may also act very quickly should they decide to exit an investment. This also translates into a leaner organisation and the ability to adapt to quick changes of direction.
The decision by a family office to invest or exit may be driven by non-financial decisions. It may be as simple as whether there is a family relationship or a particular passion. It is their money, and it is their decision.
At present the family office space remains a dynamic structure which is growing quickly and is likely to continue to grow. Furthermore, service providers and even governments are now spending more time thinking through the best way to attract and service these clients. As family offices continue to grow, so does the need for additional support and incentives to operate from supportive jurisdictions. Which brings us to the question of the status of family offices in Taiwan.
But before we do that, let’s look at how family offices operate and the support they receive in Singapore and Hong Kong, sometimes viewed as aspirational financial markets for Taiwan.
As so often in Asia, Singapore is perceived as being ahead of the pack. The Singapore Economic Development Board (EDB) is a government agency under the Ministry of Trade and Industry. It is responsible for strategies that enhance Singapore’s position as a global centre for business, innovation, and talent. The EDB is also highly ambitious in attracting family offices to Singapore. EDB’s website boasts that as of 2021, some 700 family offices had chosen Singapore as the center of their operations. The EDB also boasts that some 54% of those family offices plan to increase asset allocations in the Asia Pacific region over next five years and in this era of ESG and sustainable investments, the EDB maintains that 68% of family offices in Asia Pacific were already engaged in sustainable investments by 2020.
Singapore’s EDB points to established professional tax and legal firms with dedicated private client practices and family office advisory teams that possess the technical proficiency to protect and grow wealth and investments of families.
Family offices established in Singapore can also benefit from Singapore’s network of 25 free trade agreements and more than 80 Double Taxation Agreements (DTAs). These DTAs are cited as ways for family offices to better manage withholding taxes from overseas investments.
Singapore maintains that it is continuously developing knowledge and expertise to enhance the family office ecosystem through partnerships with the public and private sector. Family office professionals have the opportunity to sharpen their skills and keep abreast of new information and regulations through initiatives by various networks and associations in Singapore.
To support the development of a deep talent pool in Singapore with the relevant skill sets to service the needs of family offices, the EDB works with its ‘partners’ to launch competency standards dedicated to family offices. The Monetary Authority of Singapore (MAS), in collaboration with the Institute of Banking and Finance (IBF), has launched competency standards dedicated to family offices. The MAS has developed a set of skills maps aimed to raise the level of competency of professionals working in and with family offices, provide guidance to training providers and financial institutions on how to design and calibrate training curriculum and provide a reference to family offices on the types of skill sets to look out for when hiring professionals.
Singapore’s shingle for family offices is “We set you up for success!”
Even with Singapore as a tough act to follow, Hong Kong has clearly faced a mix of challenges in recent years, including political turmoil and pandemic management, leading some family businesses to relocate to Singapore.
However, recognising the crucial role played by family offices as key investors, the Hong Kong government has stepped up its efforts to attract more of them in 2023, especially as the city makes a recovery in the post-Covid era.
On 21 March 2023, the Securities and Futures Commission (SFC) of Hong Kong issued quick reference guides to address frequently asked questions about licensing requirements, with one specifically catering to family offices. Under the new guidelines, single-family offices may no longer require a license, if they do not engage in a regulated business activity in Hong Kong.
The SFC of Hong Kong expects this new reduced licensing approach to boost the development of family offices in Hong Kong, particularly those catering to high-net-worth individuals and support the government’s broader strategy to strengthen the city’s position as a premier financial center in Asia. By reducing the regulatory burden, the exemption will make it easier for single-family offices to operate in Hong Kong.
This decision is also part of a broader strategy by the SFC to attract more private wealth management firms to Hong Kong. Hong Kong wants to be a premier destination for managing private wealth. In line with this, on 24 March 2023, the Hong Kong government issued a Policy Statement on Developing Family Office Businesses in Hong Kong, to foster a competitive environment for global family offices and asset owners, outlining a series of measures to develop family office businesses in the city.
The development is also expected to foster competition among family offices and traditional wealth management firms, ultimately benefiting investors through improved services and more competitive pricing. The new policy measures mentioned earlier aim to create a competitive environment for global family offices and asset owners in Hong Kong. These measures by the SFC Hong Kong include (but are not limited to) the following:
- A profits tax exemption to family-owned investment holding vehicles managed by single-family offices in Hong Kong
- A dedicated communication channel maintained by its licensing team for family office-related enquiries
- Funding the set-up of a new academy under the Financial Services Development Council, offering talent development services to industry practitioners and next-generation wealth owners
- A dedicated FamilyOfficeHK team in InvestHK which will expand its role to also cover services like facilitating philanthropic endeavours of wealth owners and assisting in education-related matters
- A new network of family office service providers.
Overall, the Hong Kong government’s focus on attracting family offices is a strategic move that recognises the importance of this segment to the wealth management industry in the region and Hong Kong is quite open to the need to compete with Singapore for a slice of the valuable family office market.
While Taiwan has an abundance of wealthy families, it seems that family offices have not been on the government’s agenda. In recent years there were some minor references to the government considering incentives in the broader effort to develop a local wealth management industry. However, so far, these have not amounted to much.
Taiwan is clearly aware of the developments in Singapore and Hong Kong and certainly some of the large domestic financial institutions provide some measure of wealth management. But it is that approach that we see family offices seeking to avoid.
Taiwan appears to want family offices to adopt the existing asset management licence regime. But that would seem to be a failure to recognise the unique characteristics of a family office. The family office is not investing on behalf of third-party investors, and they certainly aren’t in the business of selling investments to third parties.
It also is not the case that the government is somehow against investment. Browse through InvesTaiwan’s website and you will see quite clearly the investment aims of the government. These include (since 2019) an Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan, the Action Plan for Accelerated Investment by Domestic Corporations and Action Plan for Accelerated Investment by SMEs.
However, do a family office ‘search’ on the same website and there are ‘Nil Returns’ and yet it would appear counterintuitive when one of InvesTaiwan’s flagship aims is an Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan. That would seem a logical starting point to implement a feasible plan and structure to attract family offices to Taiwan.
Certainly, the government is making determined strides in other extremely important areas such as ESG and its 2050 net-zero pathway, but it is as though the concept of a family office industry has either not been considered or not regarded as a worthy objective.
It is possible to suppose that current cross-strait tensions could be putting some hold on the issue, but these issues are not new, and we still go about our lives and jobs regardless.
The Financial Supervisory Commission is not known for being behind the times, especially given initiatives like the recent announcement of the establishment of a new crypto and virtual asset bureau. The government is also continuing to gather case studies and is assessing what options are available to make Taiwan a better place to invest.
Taiwanese families want and need family office structures to manage their wealth through generational change. If they can’t do this in Taiwan, they may well take their business elsewhere, depriving Taiwan not only of vast sums of accumulated fortunes but also business and talent development opportunities. Let’s hope that authorities will soon realise the potential benefits of family offices and look to Hong Kong and Singapore for examples of structures, regulations and supporting measures to make Taiwan more attractive for setting up family offices.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.