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RISK MANAGEMENT R


eal-world risks exist, such as theft, accidents, liability for negligence and even weather-related disasters. Risk management through insurance and legal


asset protection are strategies to combat some of these risks, which can seriously impair generational wealth. Although most advisers do not enter this area of the advisory process, they have an opportunity to add value if they can recognize a need. Family offices often express concerns about


protecting their wealth, even though most had no asset protection plans in place. Many wealthy families lack adequate asset protection plans or risk management, with owners saying that the processes are just too complicated, while others lack sufficient guidance to protect their family fortune. It is important for families to bring in the expertise of specialist professionals who understand the unique requirements of UACs – and risk management is no exception. Family offices face various risks in their everyday


business and could be held legally accountable for services provided to their clients. In addition, family members need to protect their assets from many threats like lawsuits and accidents. Trustees of family trusts also face liability for their acts as trustees and, as such, face fiduciary obligations to beneficiaries. In certain situations, such as gross negligence, a trustee may be legally barred from indemnification by the trust, despite an indemnification provision. In short, risk management and asset protection for UACs is an important subject that is often overlooked by both advisers and clients. Even though family offices are private, owners and professionals who work for these entities are not insulated from liabilities commonly associated with public companies. In many countries, legal responsibilities of family


office executives fall under the same laws as the ones for corporate governance. Family offices have directors and officers with the same fiduciary and employment practices obligations as corporations. For example, if a family office executive performs trust operations services, he or she will assume the fiduciary duties associated with being a trustee. Also, family office executives are subject to federal statutes governing hiring practices and conduct in the workplace. The best defense against potential family office liability is to conduct the business affairs following a corporate best-practices model. Some of these best practices include having both inside and outside directors, establishing guidelines for the conduct of business and giving the family office staff performance evaluations in the context of their job descriptions. One popular and successful strategy for protecting


privacy and assets in the United States (and similar strategies could be used in other countries) is known as the asset-protection trust (APT). An asset-protection trust is a trust established under the laws of a country which are more favorable to asset protection and


privacy objectives than the laws of one’s home country. The market for APTs is rapidly expanding in response to concerns about litigation. The reason for the popularity of this technique is that it acts as an ultimate safety valve, providing an additional layer of protection for plans designed to avoid frivolous deep-pocket litigation. Many individuals, wary of the potential for abusive lawsuits and frustrated by widespread violations of personal privacy, view the APT as an important component of a sound financial plan. In the United States, an APT looks like a standard domestic trust in that the settler (grantor) is the person who transfers the assets to the trust and the trustee is generally a trust company. In a typical trust, trustees are given discretion to accumulate or distribute income among a specified class of beneficiaries. The settler may be one of the named beneficiaries, together with a spouse, children, or grandchildren. One unique feature of this kind of trust is the role of the protector. The protector is a person, designated by the settler, whose consent is necessary for certain activity by the trustees. The term of the trust may be limited to a period of years or it may continue after the settler’s death. One way to use an APT is to transfer cash, securities


or other liquid assets to an account established under the name of the trust, at a bank of your choice, in a foreign jurisdiction. The protector then advises the trustees on the manner in which the funds are to be held or invested. Income can be distributed to the beneficiaries or accumulated in the trust. Assets held in an overseas trust account – in a country with strict bank secrecy laws – can be a legitimate and powerful legal strategy for sophisticated individuals who are willing to tolerate some degree of inconvenience and additional expense to successfully achieve a particular result.


In my book, Advising Ultra-Affluent Clients and


Family Offices, I delve into three main areas of risk management: family office risk management, individual family member risk management, and two key strategies for asset protection. UAC advisers need not be experts in this area, but should be knowledgeable about key risk management and asset protection issues. Knowing this information can help add value to your relationships, especially if you recognize an area of need that the family hasn’t thought of. UAC advisers are well-positioned to support clients by delivering trustworthy advice on the risks a family faces and solutions for insurance and risk management issues, helping to ensure long-term financial security and peace of mind.


Michael M. Pompian, CFA, CFP is author of Advising Ultra- Affluent Clients and Family Offices. He works with some of the largest family offices in the United States as director of the Private Wealth Consulting Group for Hammond Associates-based in St. Louis, Missouri. Prior to joining Hammond Associates, Pompian was a wealth management adviser with Merrill Lynch, a private banker with PNC Private Bank, and served on the investment staff of a family office. Email mpompian@haifc.com


FAMILY OFFICE: ASIA TOMORROW 75


“Many wealthy families lack adequate asset protection plans or risk management, with owners saying that the processes are just too complicated, while others lack sufficient guidance to protect their family fortune”


OPERATIONS


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