The Simpson family has decided to have their Family Office run by David, a solicitor in a small specialised London tax practice, because they want flexibility and hands on practical help, with their investment and other specialist advice bought in as needed. They decided that being locked into a bank, large law firm or large accountancy practice’s Family Office is a negative move. They want direct control with easy immediate access to David, with the family doing as little or as much as they want themselves so the costs of running the Family Office are kept appropriate to their requirements ensuring it makes economic sense from the start.

Simpson Family

• John and Patricia in their mid sixties have successfully built up a mail order business “CountryAccessories” in the UK currently turning over £20M pa. They own the shares in the business. They own the freehold of their main distribution centre worth £5M and have a share portfolio of £750,000 and a number of buy to lets with net equity of £4M. They have a private pension with £1M mainly in cash as well as other cash deposits.

• Cheryl their daughter 33 is married to Charles and they have 2 young children. Cheryl became a director of CountryAccessories three years ago and Charles works in publishing. They have a house worth £1M with a mortgage of £300.000.

• Peter their son 30 is a doctor and has a girlfriend Petra who does not work. Peter lives in London and has a flat worth £500.000 with a £200.000 mortgage.

• Yvonne their youngest daughter who is 25 and has a degree in music and has not yet made up her mind where her vocation lies. She is renting a flat in West London with a girlfriend.

• John’s brother Richard (57) who is a manager in CountryAccessories and his wife Roberta (54) who does some part time work for the company but is mainly interested in horse riding. They have a house with small equestrian facilities worth £800.000 and a mortgage of £200.000. They have a son Toby (26) and a daughter Tanya (22).

Issues for John and Patricia

• The family gets on well and the business is solid. They would like Cheryl to take over the business but feel she needs more experience. They want to “semi-retire” within next few years and spend more time travelling and with the grandchildren. They may want to buy a home abroad. They find it difficult to talk to the family about the distribution of their wealth.

• Patricia is interested in property and has been successful in running their buy to lets. She enjoys interior design and would like to be more involved in this.

• Their share portfolio has not been very successful. Neither have a background in the stock market and they accept there has been at best benign neglect here. John is unhappy he always misses the rallies.

• They are a little concerned about Petra. She comes across as bohemian and they are conservative and have some doubts about her suitability as a future wife for Peter. She also comes from a family with little wealth and this raises the usual concerns. On the other hand she is very sociable and gets on well with people and Peter is happy with her.

• Richard is reliable but not ambitious and is happy at a middle management level. He does not want to be a member of the board. Roberta is willing to help out but her horse riding comes first. They have given them the deposit money for their house and think they may need to help them further in the future.

• John and Patricia have an aversion to trusts and want a simple arrangement under which they either own assets or give them away.

Consulting the family

• John and Patricia started by talking to the family about a Family Office. The family were taken aback by this as it had never happened before. Lots of ideas were thrown up by them which irritated John. He wondered why he had started the process as no one understood the obvious. Maybe the best option was just to sell the business, make some gifts and then retire.
• Patricia played an important role here noting down what was said, discussing it with David their solicitor and ascertaining what the real needs, aspirations and possible roles were of the family members. The wide ranging roles that John and Patricia currently have from running the business and investments to dealing with family day to day issues were listed and areas which were being neglected through lack of time or expertise were set out.
• They could see that all members of the family wanted to cooperate with each other but that roles had to be agreed for each of them. Patricia and John put names of family members against the roles they had and an indication of how likely it was they could in time fill the roles. Areas which could not be filled by family members were marked as possibly having to be outsourced to professionals.

Creating the structure

• It was decided to run the Family Office as a flexible “club” structure run by John and Patricia. All members of the family would be members, including spouses and Petra, as it was felt best to have an inclusive arrangement even though this involved an element of risk.

• John would move to a part time role in the company so he had more time to run the Family Office. An older person with experience at board level in a large quoted company would be appointed on a 2 year contract to work with Cheryl and act in part as her mentor. His role was crucial in the transition about to start.

• There would be a formal monthly meeting of the Family Office and family members were expected to attend at least 6 meetings a year. The net assets of the family would be reviewed in a structured way each month with a report and valuation on the share and property portfolio. Underperforming buy to lets would be reviewed and sold where appropriate. The redecoration and marketing of the properties at the end of each letting would be systemised with a view to getting better rents on each fresh letting. The performance of financial advisers and managing agents would be benchmarked at each meeting.

• There would also be a monthly report on the company’s monthly trading figures compiled by the new external director. It also enables family members to become involved in CountryAccessories and for John to assess them. Younger members would have an opportunity to work for a short time in the company under the new external director’s eye which distanced them from John.

• Family members could decide whether they wanted their personal assets managed within the Family Office.

Benefits and obligations

• John liked the idea of family members having to make an effort and put something in to the Family Office in order to get something out. The idea was everyone had to contribute in some way, which concentrated the family members’ minds and kept them together.

• The Family Office decided John and Patricia would grant Cheryl, Peter, Richard and Roberta interest only mortgages of £100.000 each so that their payments of interest were now made to John and Patricia and not to commercial lenders. The intention of John and Patricia was to write these off in due course. They thought it best they keep paying some money to their commercial lenders so they could build a good credit history.

• There would be no changes in the share structure of the company though this would be kept under review for the next 2 years. John favoured the idea of transferring shares only to family members who were working in the company. The next 2 years would see whether Cheryl could take on the role and whether other family members would become involved.

• Roberta would be sponsored by the company for her equestrian competitions. In return she would be involved in promoting the company’s “Country” branding. She would with Tanya be the administrator of the Family Office which would keep costs down. Her children Toby and Tanya would be encouraged to become more involved in the business. John thought Toby was commercially minded and as he got on well with Cheryl he wanted to get him more involved in the business. The Family Office would see how this could be encouraged.

• The Family Office started to collect health insurance premiums from the family at the same rate as they were currently paying. The idea was to self insure so that the premiums were held by the Family Office and not paid away to a commercial insurer. Limited cover was arranged for very serious illnesses but smaller health care bills would be paid direct by the Family Office to the doctor.

• Patricia would see whether a flat could be bought in London which Yvonne and one of her friends could rent via the Family Office. The flat would have to be suitable as a buy to let investment on a medium term basis. Patricia would have more time now to concentrate on property investment and look beyond buy to lets at property renovation opportunities in London. Petra could be brought into this which would enable Patricia to have more contact with her. It also gave Patricia the chance to keep in closer contact with Yvonne.

• It was decided to prepare a shortlist of investment advisers who would assess the pensions and other investments. John was not sure what he was invested in. It was agreed that suggestions from Family Members at the monthly meetings would be put to investment advisers. The advice given by investment advisers would be monitored regardless of whether an investment was made. Charles would have a role here. His business experience in publishing could be used here. Peter was not interested in the business but could be brought into the investment side of the Family Office. John liked the idea of Charles and Peter working together on this as they both had strong but different educational backgrounds and the message it sent out was that spouses were trusted.

• Interest rates being obtained on bank accounts were derisory. The Family Office would see where better rates could be obtained by pooling funds. They also needed to look at holding funds in say euros. The deposits could also be used to get access to better investment advice.

• Investment and legal documentation would be organised so that the position could be ascertained quickly.

• A ski chalet would be bought. This would be used only by the family both in and out of season with a local agent managing it.

• The Family Office would look at possible scenarios involving the family on an ongoing basis and try to pre-empt problems.