The family office wealth management industry is growing faster than ever before. But in Russia, the family office as a set of services rendered to wealthy people has appeared only comparably recently.
Starting from the early 1990s, when the USSR ceased to exist, the first Russians who could publicly declare their wealth began to appear. Given a very unstable legal framework and the overall situation in the country, such individuals often didn’t manage their assets properly, as they were mostly busy with generating their wealth. Moreover, most of the new Russian millionaires were young and could tackle their problems without the need for permanent support.
Now, the average age of high net worth Russians has reached 50 and above, and their objectives are changing accordingly. They’re aiming not only to preserve or spend their money, but also to ensure that the family’s wealth is well managed to achieve necessary compliance with local and international legal and tax requirements; safely transfer the wealth to their children from generation to generation; and involve other members of the family in their businesses.
Current State of Family Offices
In Russia, family office services still aren’t used in all applicable situations, and there’s no clear understanding of what a traditional family office is and how it works.
In most cases, when the patriarch and his family realize that they need to use a full range of traditional family office services, they’ll first seek such services abroad. This approach isn’t a perfect one because it’s only suitable for those with considerable wealth who have assets located mainly internationally and families who already spend most of their time abroad. On the other hand, the market for family office services and an adequate range of professionals available in Russia are only now emerging, and it’s difficult to find or to offer locally the range of services, opportunities and quality provided by foreign experts. In addition, many Russians are obsessed with maintaining confidentiality; therefore, they may seek assistance abroad regardless of the price and availability of such services in Russia.
Regulation and Types of Offices
Currently, there are no specific Russian rules or regulations with respect to family office services. Moreover, information on the particularities of family office services can be obtained only from very limited and fragmentary public sources and from the practices of consulting firms and banks that deal with private clients.
In Russia, the methods and corporate forms required to establish and operate a family office depend on the type and location of the assets being managed, as well as the nature and number of users of such services.
Family office as part of a business group company. Structuring services in this way is a standard solution for wealthy individuals who have a big business locally and are able to use its resources. At best, it can be formed as a separate department within an existing company of the business group. Another frequent practice is to vest certain employees with additional responsibilities, sometimes without extra remuneration.
Having a family office as part of an existing corporate unit has its pros and cons. One of the main advantages is its cost, as it doesn’t involve a lot of additional expenditures. Employment costs won’t be as considerable as they would be with a single professional family office. For many Russians (even high net worth individuals), cost still remains the principal criterion. Other important factors can be the minimum time spent on dealing with an in-house family office, because it’s always at the disposal of a patriarch with a dependable staff.
The main disadvantage of this structure is that it’s difficult to keep information disclosed to the in-house staff confidential. The risk of leaks is higher if several individuals own the business.
Moreover, in-house specialists usually don’t have particular experience and expertise in family office services and private wealth management, not to mention the conflicts of interest that can arise.
Family office services rendered by consulting firms. This set up is somewhat similar to the multi-family office concept found in international practice. Some consulting companies render family office services to multiple families. They provide wealth management programs that are a combination of financial and investment advice, accounting and legal services, as well as tax and estate planning.
Russian consulting firms (and private bank departments) usually provide high-quality services under terms of strict confidentiality. Additional benefits arising from providing family office services in this form are a high level of professional expertise, easy access to international experience and practice, and independence. Consulting firms also take into account important aspects such as succession planning.
Nevertheless, Russian consulting companies don’t usually specialize in family office services. They render such services to clients in addition to legal and tax services, with only occasional support.
Family office as a separate legal entity. In Russia, the most common services provided by a single family office are legal and tax support, wealth management, administrative and concierge assistance, as well as training of the younger generation. Usually a Russian SFO (as in international practice) is comprised of administrative, legal, accounting, investment and other professionals involved in providing SFO services exclusively for the benefit of any particular single family. One of the primary advantages of an SFO is the focus on the needs of one family and its representation. Having one consolidated group of professionals means that a family member need only interact with one central source and not a number of different service providers.
It should also be noted that when one of the activities of the family office is managing the wealthy individual’s foreign assets on his instruction, certain tax risks arise when such assets are effectively managed from the Russian Federation.
The main advantage of an SFO is full control and privacy. In Russia, wealthy families tend to wish to exercise overall control over the experts advising them, which maximizes their privacy.
The primary obstacle to having an SFO is the high cost. Separate premises, technology, highly qualified personnel and access to the best services and investment vehicles are very costly. If the scope of the services required is limited, it makes sense to use a multi-family office or any other option rather than to establish one’s own SFO.
Ideal Set-Up for Wealthy Russians
Family offices are often global in their geographical presence and investments. A perfect set-up for a large family office is to have separate SFOs in several target countries acting independently from each other and dealing only with the issues arising in each particular jurisdiction.
If there are global or multinational tasks, it’s vital to allocate them among different family offices in the jurisdictions in question. Moreover, there are considerable risks related to the management from Russia of foreign assets held by Russian high net worth individuals because in such a scenario, Russia may be considered the effective place of management of the assets, which leads to tax risks. In practice, if there’s no way of establishing a foreign family office for such activity, we recommend engaging an independent foreign advisor or professional manager.
As mentioned above, most of the activities likely to be undertaken by a family office aren’t subject to licensing requirements in Russia. However, if a high net worth individual is in need of services in Russia that are subject to licensing (such as professional activity on a stock exchange or the purchase and sale of securities), external contractors holding the necessary licenses may execute such operations, or the family office itself should obtain the license.
A Promising Framework
Russian private wealth still is one of the fastest growing in the world. While the first generation of Russian businessmen is in place, the next generation requires professional attention and care. Yet, the principal source of such services offered in Russia is still foreign or international providers or at least their practice and experience. A growing need for domestic experts first and foremost is rapidly building the market for onshore family office services in Russia.
This is an adapted and abbreviated version of the authors' original article in the November issue of Trusts & Estates.