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David Guin, of Withers Bergman

Financial Planning > UHNW Client Services > Family Office News

The 3 Types of UHNW Clients and How to Serve Them

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There is seldom a quiet time in the legal and financial professions, but the last several years have clearly been some of the busiest in memory for professionals focused on serving high- and ultra-high-net-worth clients, according to David Guin, a partner and the leader of Withers’ U.S. corporate practice team.

This is due in part to a confluence of high-level regulatory and economic factors, Guin says, but also due to the fact that family offices are now estimated to be overseeing tens of trillions of dollars in assets globally.

Simply put, there is a lot of work to do when it comes to stewarding such a tremendous amount of accumulated wealth in an efficient and compliant manner — especially when a client has ties to multiple countries and different legal jurisdictions to contend with.

As Guin emphasized in a recent call with ThinkAdvisor, beyond supporting the sheer scale of investment activities undertaken by family offices today, advisors and attorneys are also being called upon to deliver a broader range of services.

This is true for single-family offices focused on the needs of one family’s wealth, Guin explains, and for emerging multi-family offices providing a growing range of professionalized services.

Ultimately, Guin says, it is a challenging but rewarding time to be working in this area of the law, and he encourages financial advisors with high- and ultra-high-net-worth clients to be mindful of emerging trends.

Those who fail to deliver responsive, cutting edges services to their clients — and those who fail to keep their clients on a solid legal footing — risk losing this coveted business.

THINKADVISOR: Would you say a lot of your clients are relatively similar in terms of the challenges and opportunities they face?

DAVID GUIN: I would say they do share some broad characteristics, but they are split into a few different buckets.

First, there is a group of clients who still have their primary wealth tied up in an operating company. They are operating a business and dealing with financial investments on the side, and that’s a challenge for them.

The second group of clients has at some point of time switched from their wealth being primarily locked up in operating companies to primarily being held as financial assets. That obviously means they have a different set of issues and needs.

And then we also have what we call our founders’ practice, if you will. One of the things that comes up a lot there, with the markets freezing up a little bit, is looking for ways to create liquidity.

These are people who perhaps expected to go public already and sell their shares of their company to make their money, but as this kind of activity slows a little bit with the broader economy, supporting them is about trying to find ways to create liquidity.

Is it fair to say that sourcing liquidity for this founders’ group at this current moment is relatively difficult, given some of the concern and skepticism we have seen about lending in this economic environment?

Well, it’s interesting, because I think in this space it is more difficult to source liquidity, broadly speaking, but there are also financial intermediaries out there that are focused on serving this market, and they have remained more active than you might expect.

But yes, to go out and find a private equity buyer for a closely held business, for example, that’s harder today, and so is getting a regular bank loan against your shares. That’s also probably harder right now, yes.

But, there is still a dynamic liquidity market that we can help our clients take advantage of, and there is always the ability to cut deals within a particular company. For example, if one of the founders wants to create some liquidity, you can often find another investor in the company that is willing to increase their stake.

To return to the other two client groups you mentioned, what challenges are the operating company clients facing?

Primarily, they need help and support to keep their growing personal wealth in order, so that they can remain focused on the success of their core business.

Something else we try to counsel these clients about is creating a kind of firewall around their independent assets versus their operating company. This can get harder and harder to do as their independent assets grow and require more time and resources to manage effectively.

We’ve certainly had experience with new clients who come in, and we see they have been effectively running their family office out of their operating company. That is definitely not the best practice.

If you have other shareholders, especially, it can create conflicts of interest, and if you eventually go to sell the company, trying to explain to an acquirer which expenses and things were personal and which were from the company — getting that all spelled out can be a real hassle.

To the extent it is feasible, we are trying to help our clients to keep these worlds as separate as is possible. Sometimes it is harder, and sometimes it doesn’t make as big of a difference, but it’s always important to think about.

Not to get too deep into the weeds, but are there a few best practices you would point to here?

Well, the real key is to avoid running expenses that are personal through the company, to start with.

It’s not always possible to have completely different staff, so a lot of the time we’ll see the accountant and lawyer for the company also be the accountant and lawyer for the family, for example. This is OK, but it can cause issues if you aren’t working to keep the two worlds separate.

Again, the key thing is how you are running your expenses and how you are keeping personal wealth holding structures free and clear of the operating company.

You really should not put personal investment structures under the operating company. If you end up selling the company or bringing in another investor down the line, it can be a difficult process to unwind and unpick all this stuff.

For the other group of clients, those who have gone through a liquidity event and are stewarding their wealth via a family office, what issues are they facing?

Given the nature of my practice, a lot of the challenges I work on for this group are similar. It’s about trying to instill professional compliance practices in that family office setting, though different clients put a different amount of emphasis on this.

Frankly, some clients are very interested in having the best practice-style compliance policies and procedures, to the extent that they will basically organize their conduct around what a registered investment advisor would need to do. They run their family office with a full-blown set of policies and procedures, and that’s great.

Other clients are much less focused on this, so we need to spend a fair amount of time helping them stay in order and helping them see the importance of the day-to-day, more mundane compliance work.

One positive trend we are seeing in this group is more family offices looking to team up together to pursue what you could basically call club transactions. Here, someone will lead the charge on researching and organizing a big transaction, and they will invite their family office friends to participate in the actual investment.

This is an emerging opportunity I would highlight for your readers, and we’re doing a lot of work in this area for both leading investors and those joining into attractive deals.

Do you agree with other attorneys who see the coming few years as sort of a crunch time for legal resources for high-net-worth clients? There are big potential estate tax changes on the horizon, for example, and there are concerns that clients might not be able to access the expertise they need in a timely and reliable manner. Does this concern you?

Yeah, it does. Taxes and estate are not my personal area of practice, but I’ve been here at Withers long enough to see both how anticipated and actual tax law changes can really cause a rush.

Regardless of the specific area we are talking about, it is important to get your planning done far enough in advance of any big change so that you can be sure to get the support you need. Because yes, it is very possible that people will get swamped and they just won’t be able to take on new work.

Another thing that can happen is that you are trying to get something done quickly before a big change takes place, and so you don’t have enough time to give adequate thought to what is actually going to be in the best interest of the client long term — taking into account all the other considerations that come into play.

There are ways something can seem like a good idea, because you are looking at a specific policy deadline, but the stewardship of this kind of wealth can be so complicated that you can do yourself a real disservice in the long run by rushing a decision.

It’s why financial advisors and legal resources need to work together. It’s all fine and good to create some legal structure or some investment plan, but if that structure doesn’t actually promote the client’s financial goals, it isn’t worth a whole lot.

What other trends should our readers be aware of when it comes to family office operations and compliance matters?

One important thing to conclude with are the growing issues around privacy and cybersecurity.

Again, this is not my particular area of practice, but my Withers colleagues are seeing more and more concern in this area, especially as data privacy laws proliferate globally. That’s a challenge not just for family offices, but for all the operating companies and family-owned companies.

I think a lot of people still fail to appreciate the risks and dangers that are out there and what is required of an organization to keep itself safe. In my particular world, this comes up the most in the M&A context, where the buyer is asking about what the seller has done in terms of cybersecurity.

Pictured: David Guin


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