US Health Care and Health Tech Innovation

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On March 28, 2019 District of Columbia’s Judge John Bates made a decision to dismiss the US Labor Department’s association health plan (AHP) rule. The AHP rule allows small businesses the affordability to pool together and provide health plans for employees in a competitive landscape. Judge Bates, however, saw the rule as an initiative to avoid Obamacare regulations. Once again, competition and choice in healthcare has been denied US small businesses, the backbone of national employment. The question now begs: if we cannot come to a workable decision on providing transparent health insurance options to the American people, how will we move forward on improving healthcare? The cost of US healthcare is predicted to reach 20% of GDP by 2025. We need to do better.

According to the Centers for Medicare & Medicaid Services, healthcare expenditures have skyrocketed from $28 billion to $2.6 trillion over the past 50 years. US taxpayers are bearing the brunt of this increase, with no foreseeable solution coming forth to mitigate the burden. The remedy here is not to block competitiveness in health insurance services, but to increase health technology in our nation’s hospitals, health centers and clinics. We need to become proactive: that is to say, not throw valuable insurance money after reactive, outdated medical facilities and treatments, but invest in the latest preventative, diagnostic and reporting technologies to foster transparency and innovation. As stated in HP’s Megatrends, we need to “shift from standardized, reactive and centralized care to personalized, preventative, decentralized…care for all US citizens” through health technology.

First, let us clarify what health technology entails. Health technology refers to all advancements in procedures which improve both the quality and cost of providing healthcare to individuals and communities. The National Information Center on Health Services Research and Healthcare Technology (NICHSR) lists the following highlights that create a health technology demand:

  • Increasing prevalence of chronic diseases
  • Advances in science and engineering
  • Aging populations (baby boomers)
  • Increasing prevalence of chronic diseases
  • Third-party payment, especially fee-for-service payment
  • Financial incentives of technology companies, clinicians, hospitals, and others
  • Off-label use of drugs, biologics, and devices
  • Strong, growing economies

The United States fits all of the above requirements, and then some. The Trump administration has been on the frontline to advance health tech, starting with electronic health records (EHR). The Centers for Medicare and Medicaid Services (CMS) announced the MyHealthEData initiative in 2018. This program is supported by the White House Office of American Innovation, as well as the National Institutes of Health and Veterans Affairs, among others. MyHealthEData shall give electronic access of all health records to patients and allow patients to choose providers based on cost and accuracy transparency. Patients will be able to share their data with whichever provider they choose. This is a revolutionary concept in healthcare! According to Jared Kusher, President Trump’s advisor, the Administration is working diligently to solve the interoperability of health data within the nation’s healthcare institutions. Prior administrations have spent over $36 billion with no clear results in fully digitizing or maintaining the accuracy of health records. Lamar Alexander, R-Tenn and Chairman of the Health, Education, Labor and Pensions Committee supports the Administration’s interagency HER plan, stating an impact on over 125 million US patients. We are comforted to see such federal initiatives be redirected to solve transparency and cost issues within healthcare.

The US healthcare industry is geared to be most impacted by Industry 4.0. As delineated by HP’s Megatrends, digital technologies such as 3D printing and emerging technologies such as augmented reality haptic holography, microfluids and autonomous robotic caretakers are now a reality, and benefits both provider and patient alike when mainstream.

  • 3D printing has been introduced to many large private US hospitals, and is making strides in lowering the cost of customized diagnostic devises and patient implants. 3D printing can actually mass produce the hospital buildings as well as customized instruments, tools and medication needed for patients.
  • Haptic Hologram technology is no longer science fiction. This new augmented reality software converts 2D medical imaging such as MRI scans into virtual reality images. Why is this important? This technology allows the surgeon to do a holographic pre-run of surgery on the actual patient without dissection! So, when the actual procedure begins, the diagnosis, time and accuracy of surgery will be dramatically increased.
  • Microfluidics is described as “an entire lab on a tiny microchip.” The tiny microchips give a full diagnosis the patient using a minute sample of patient fluid. The process is not invasive, has a lower test cost and are perfect for point-of-care (POC) tests for urban and rural populations.
  • Artificial intelligence in geriatric health care sector is on the upward trend. AI makes hospices “smart” to actually providing individualized robot caretakers that can immediately detect health changes in the elderly patient.

These technologies are already in use and are being further developed by companies such as HP and IBM, with support from large private healthcare institutions via innovation labs. While many may initially believe these technologies to be expensive to implement, we recall that prior administrations have spent billions of dollars on health care ‘reform’ with little change in our healthcare crisis.

From a policy standpoint we applaud the White House Office of American Innovation and the Health and Human Services department for currently moving forward with the Administration’s interagency plan to improve electronic health records interoperability, and suggest working with such agencies as the National Information Center on Health Services Research and Healthcare Technology (NICHSR) on emerging technology assessments innovation labs to make US healthcare technology the most innovative and accessible to US citizens. The US healthcare insurance reform is currently in legal bottleneck to the detriment of the American people. It’s time to refocus time and financial energy on augmenting our actual healthcare institutions to provide the most beneficial, accurate and transparent healthcare through health tech innovation.

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Blockchain: U.S Regulation and Governance.

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Blockchain technology is far more than a buzzword. Dubbed “the Internet 3.0”, this distributed ledger technology known best as the data documentation for cryptocurrencies is changing our data management and transactions at breakneck speed. Blockchain technology has inaccurately been held as synonymous with Bitcoin. While Blockchain technology developed to create a foolproof transaction and payments system for Bitcoin, Blockchain goes far beyond crypto, and has now extended reach into countless industries, including government transactional systems. The differentiated structure behind this technology has made it a conundrum to most, and its decentralized base brings many questions to the table regarding regulation. Yet, it is absolutely necessary to understand the workings of this technology and so develop the most optimal regulatory dictates to ensure that the U.S. financial system, business and payment transactions swiftly and safely adapt to digital changes in the global marketplace.

BLOCKCHAIN METHODOLOGY

Blockchain technology is revolutionary in its checks and balances for accuracy, transparency and time to completion. While very technical in nature, we explain the basics of Blockchain. The Blockchain distributed ledger has these main attributes:

  • Recorded information is stored and time stamped.
  • The ledger of transactions is public and transparent.
  • The ledger is decentralized. Transactional information inclusive of contracts is sent to separate computers, or nodes in the Blockchain. This is called a peer to peer (P2P) network.
  • The ledger transactions have what is called a hash function that cryptographically maps information, or input, to ensure that there is a unique digital signature for each transaction step. Any minute change in transaction creates a separate hash. This function ensures that there is no deliberate fraudulent duplication of any one transaction.
  • Transactions and processes within the Blockchain need consensus to be sealed. To prevent malicious blackhat processes or unforeseen crashes, the Blockchain system triggers “Byzantine Faults.” Byzantine Fault Tolerance (BFT) mechanisms require repetition of the same data from each transaction in each node until full consensus is reached. Nodes require a “proof-of-work” consensus to validate transactions in the fastest possible time, which is also part of data mining.

The explanation above is deceptively simple, yet very powerful in terms of speed and transparency. We see that while Bitcoin and other crypto currencies appear to be widely speculative, the actual Blockchain technology is purely methodical, and highly useful in shaping failsafe transaction structure. Naturally, the most concerning feature of Blockchain transaction is its decentralized system. While each Blockchain transaction process may be accurate, the players on a P2P decentralized network can be fraudulent. For example, a private Blockchain set up by a drug cartel can have perfectly accurate transaction processes. Regulation and tracking standards are definitely needed when it comes to the Blockchain.

U.S. BLOCKCHAIN REGULATION

Thus far the U.S. Government has shown support for the development of Blockchain regulation and governance within the context of the technology’s growth and expansion. U.S. Congress has created the Congressional Blockchain Caucus to handle legislation pertaining to Digital Ledger Technology (DLT) and cryptocurrencies. In September 2018 co-chair of the Congressional Blockchain Caucus Tom Emmer (R-MN) introduced the “Resolution Supporting Digital Currencies and Blockchain Technology” bill, the “Blockchain Regulatory Certainty Act” and the “Safe Harbor for Taxpayers with Forked Assets Act.” These bills encourage the federal government to monitor Blockchain entities that may or may not need to register as money transmitters. Moreover, the bills provide suggestions for taxation of digital assets via crypto taxation guidance. Thus far under IRS Notice 2014-21, digital currency is treated as property rather than a foreign currency. According to Emmer, the US private sector needs clarity when it comes to Blockchain technology in order to lawfully expand innovation and growth.

Congressman Emmer’s legislation has since been complemented by U.S. Representatives Darren Soto and Ted Budd through the introduction of “The Virtual Currency Consumer Protection Act of 2018” and the “U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018.” These bills provide recommendations to the U.S. Commodity Futures Trading Commission (CFTC). Both bills focus on cryptocurrencies with regards to price manipulation, and examine U.S. Blockchain technology regulation in the global cryptocurrency universe. It is noteworthy that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) delineates virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.” In addition, Representative Warren Davidson (R-OH) has announced his plan to introduce legislation for the development of a new token asset class to facilitate regulation of initial coin offerings (ICOs). Representative Davidson has also offered suggestions for using Blockchain technology for the creation of ‘wall coins’ to fund the border wall between the U.S. and Mexico.

U.S. PUBLIC SECTOR BLOCKCHAIN IMPLEMENTATION

While U.S. Blockchain regulation is still in the infancy stages, Blockchain technology implementation within various public sector departments shows steady growth.
In 2018 the U.S. Food and Drug Administration (FDA) took steps to implement a Blockchain tracking system along the supply chain to increase food safety, especially in light of the nationwide E.coli scare that occurred with Californian romaine lettuce. The U.S. Department of Homeland Security (DHS) has currently employed Blockchain technology in its forensic analysis of criminal activity regarding both public and private cryptocurrencies. The U.S. Customs and Border Protection (CBP) and Transportation Security Administration (TSA) currently have request for proposals regarding Blockchain documentation solutions for accurate identification and fraud prevention. The U.S. Air Force is implementing Blockchain solutions in personnel training to build systems for proper security and logistics. And at the state level, Washington’s Douglas County Department of Commerce is set to pour funds into an entire Blockchain innovation campus.

BLOCKCHAIN OPERATIONAL RISKS

Hossein Kakavand, Bart Chilton and Nicolette Kost de Sevres’ “The Blockchain Revolution: An Analysis of Regulation and Technology Related to Distributed Ledger Technologies” examine the operational risks associated with developing the technology. We highlight the following risks which should be addressed by U.S. regulatory institutions as the Blockchain governance framework takes shape.

Software:

Blockchain software operates in a decentralized fashion. Thus, each owner would have individual transactional access, unlike central clearing software. If a new release of Blockchain software is not evenly installed, the likelihood of immediate consensus transactions may be diminished in reliability as a viable Financial Market Infrastructure (FMI). Bandwidth also may pose a problem when it comes to decentralized Blockchain capacity. With growing number of permissioned and permissionless Blockchains, and heavier transactions both in complexity and volume, there is a question of how to handle both national and global capacity, and which governing entity may be the backup for such capacity.

Cyberattacks:

On January 5, 2019, crypto exchange Gate.io reported a hack of Ethereum Classic worth more than USD$200,000. Oddly enough, the money was returned to the Gate.io by January 12, leading crypto experts to believe the hack was done by an ethical whitehat hacker to delineate consensus and security faults in the Blockchain. The Blockchain is not fully secure, especially due to its decentralized nature. There needs to be more failsafe measures implemented per transaction, and per financial governing entity to safeguard against cyberattacks.

Accountability:

There is an old saying, ‘who will guard the guards?’ This rings true for players in the Blockchain. One of the strengths of the Blockchain prides upon removing intermediaries, thus creating more transparency. However, the players in each transaction need to be savvy in understanding how peer to peer networks operate. Since only a limited percentage of potential users understand the Blockchain, we have systemic operational risk, which can only be mitigated with structured and practical education. In addition, and even more concerning is how to identify a definite entity responsible for ‘crucial repair’ should the Blockchain suffer collapse, as no governing body is formally responsible for maintaining the Blockchain. To date, technology firm R3CEV has lead a sizable consortium of financial institutions for distributed ledger standards, procedures and safety measures. Regulatory bodies may find it highly beneficial to work with such consortiums to form common Blockchain disaster response standards.

Distributed Ledger Technology (DLT) is here to stay, and it bodes well for U.S. industry to steadily adopt the technology in supply chain logistics, transactions and payments, while considering a combination of more traditional transaction methods to ensure diversity and safety in commerce. We are heartened to see such bipartisan support for the development of Blockchain technology for U.S. innovation, and encourage U.S. regulatory bodies to work with private sector institutions to properly formulate Blockchain standards.

SOURCES:

Kakavand et al. “The Blockchain Revolution: An Analysis of Regulation and Technology Related to Distributed Ledger Technologies.” SSRN Online. 2017.

Lanz, Jose Antonio. “U.S. Congressman Tom Emmer to Lead Pro-Blockchain and Crypto Legislation.” Ethereum World News Online. 2018.

Lisk Academy. “Blockchain Basics.” Lisk Academy Online. 2019.

Suberg, William. “Two US Bills Focus on Cryptocurrency Market Manipulation and Improving Regulations.” Cointelegraph Online.

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The Systemic FinTech Revolution

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Fiscal 2018 has been a momentous year for US financial technology (FinTech) organizations. On July 31, 2018, the Office of the Comptroller of the Currency (OCC) began the process of accepting applications from non-depository FinTech companies for a special purpose national bank charter. Such action has been spurred by the Trump administration’s call for a regulatory climate that supports financial technology and innovation, mandated by the US Treasury Department under Executive Order 13772. The OCC’s special purpose charter allows FinTech Companies to have nationwide operations as opposed to needing state-by-state licensing per transactions. FinTech companies that qualify cannot obtain FDIC deposit insurance, as the most glaring requirement revolves around the non depository nature of all FinTech banking transactions.

All FinTech companies under this umbrella may participate in lending services and facilitating payments without any need to partner with traditional banks. Financial policy under the National Bank Act will now govern FinTech companies that fall under his new banking status. Specifically, reporting requirements which pertain to the Dodd-Frank Act, “CAMELS” supervision and all legal lending limits now count for FinTech companies. Such inclusion of FinTech into mainstream banking compliance marks an important turning point in our financial system, one where we finally recognize FinTech as a systemically important financial entity that is rapidly changing the fabric of both microeconomic lending and macroeconomic advancement.

Professor Saule T. Omarova of Cornell Law School (CLS) has delineated concrete insight into impacts of FinTech’s systemic importance. Financial experts, governments and policymakers have only recognized the longevity of financial technology in the last five years. For most, early FinTech was considered purely disruptive in a democratizing fashion: providing unorthodox financial solutions to outlier demographics such as lending to less wealthy demographics, or providing currency alternatives to speculative renegade traders. However, the advent of Blockchain technology’s wide reach into countless industries has propelled FinTech as innovative, stabilizing and fostering of long term growth. Policymakers are now realizing that disruptive does not mean destabilizing!

Omarova’s CLS whitepaper “New Tech v. New Deal: Fintech As A Systemic Phenomenon” makes the point to not trivialize the impact which FinTech has on the financial system. As stated, FinTech’s systemic and vastly growing influence on the structure and velocity of global payments cannot be ignored. According to Omarova, global financial policymakers have thus far treated the issues that challenge FinTech – cybersecurity, regulatory governance, legal obscurity, transactional accountability – as natural glitches to be naturally worked out in the private market. However, as Omarova so rightly says “money and power are two sides of the same coin…Finance is, and always will be, a matter of utmost and direct public policy significance.” FinTech commands systemic power, and it is best to include FinTech players in the wider audience of finance. Long standing behemoths such as Goldman Sachs have been savvy in the adoption of financial technologies such as bitcoin derivatives trading. Institutions such as the OCC must recognize the same.

Debevoise & Plimpton LLP via the Columbia Law School Blue Sky Blog examined further changes to the US regulatory framework, recommended by the US Department of Treasury, which will aid further financial technology innovation in the mainstream financial system. These are as follows:

  • The creation of a FinTech Industry Advisory Panel comprising both state and federal agencies to pilot regulatory sandboxes for early stage FinTech companies. Regulatory sandboxes are common in the United Kingdom, and allows regulators practical insight into growing financial technology.
  • Marketplace Lending, where banks will be fully identified as the official lender of loans originated, even if these loans are sold to multiple third parties. In this manner, financial accountability is easily identified.
  • Clarity in regards to the Federal Reserve Board’s definition of “control” within the Bank Holding Company (BHC) Act. Specifically, the definition must clarify and support BHC permissible investment activities in financial technology.
  • Third-Party Oversight, where compliance checks along the bank supply chain has led to an over abundance of costs. There needs to be blanket standardization of such costs.
  • Regulators need to provide more consistent and facilitating rules pertaining to credit modeling and data without impeding accuracy and privacy.
  • The standardization and flexibility of payments and transmitter requirements are uppermost to ensure systemic flow within the financial system under FinTech, as financial technology continues to capture a huge bulk of the payments sector.

These recommendations from the US Department of Treasury come under the auspices of Executive Order 13772, and support US financial system growth and innovation. State and Federal policymakers must continue to harmonize regulatory framework to harness the systemic power of US financial technology.

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Emerging Markets Infrastructure Project Investment: Issues and Opportunities

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Global investment in real estate and infrastructure projects are on the rise. Preqin’s 2018 Infrastructure Fund Manager Outlook notes that institutional investors have heavily invested in the infrastructure asset class for solid diversification and stable returns. Indeed, the report ascertains aggregate asset under management (AUM) quadrupled from US$99bn to US$418bn over the past decade. The industry is expected to increase exponentially over the next decade. Globally, North America and Europe present the most viable of real estate and infrastructure opportunities. However, a bundle of emerging markets economies follow a close third. Global emerging markets infrastructure investments are currently fueled by Asia Pacific’s growth as opposed to other developing regions. Total deal value for the Asia Pacific amounted to roughly US$50bn over the past five years, with more dry powder allocated to projects within Asia.

Feasible emerging market infrastructure projects usually have a Public Private Partnership (PPP) structure, especially for risk mitigation. As we had examined in US Infrastructure: A Case for Public Private Partnerships, PPPs are beneficial as the private entity internalizes life-cycle costs during the majority building phase of new projects, while the project is listed as public investments on the government balance sheet. Purely public sector projects tend to be inefficient, and have full political risk, while purely private projects may have higher returns, but would not have the accountability of check and balance which sovereign involvement brings. Even so, there are many challenges which investors, financiers, and infrastructure fund managers must take into consideration primarily for emerging markets.

Challenges Faced:

The Macquarie Group is one of the global leaders in asset management with US$356bn AUM, and is considered to be the top global infrastructure finance advisor as at 2017. The Group has dispensed significant pain points and mitigating factors with regards to project investment in emerging markets. Most issues stem from long standing bureaucracy, lack of transparency, corruption, geopolitical and cross border risks. Highlights are follows:

Bid and Post-Bid Processes:

In short, red tape from every conceivable side of the project is challenging at best. Emerging markets tend to have delays in bid preparation, unclear bid guidelines, erratic time to submit request for proposals, and restrictive bid processes which place heavy tariffs on the build-operators of the project. In addition, project ‘hand-holding’ requires higher cost of bid bonds and of additional advisors, planners, quantity surveyors and numerous government officers. In addition, deciding on the best commercial funding structure for the PPP would most likely not be as clear or timely as with developed country projects. For instance, financing default from the private side of the PPP may lead to immediate freezing of project assets, as opposed to debt coverage negotiation.

Terms of Concession Agreements:

Land Acquisition is one of the most troublesome components of the project process in emerging markets. The land surveying, land release, ground approvals and resource rights processes, especially in real estate type transactions, take an inordinate amount of time. The best PPP investment projects that may circumvent this onerous component would be public works and transport type projects, where the government already has clear ownership of the sites in question, with full government use of site resources. Also, there is a huge communication gap in terms of the types of environmental and regulatory requirements needed for all emerging markets projects. As the Macquarie Group states, most delays in their infrastructure portfolio stems from having to backtrack and fulfill regulations that were not mentioned from pre-bid inception onwards.

FOREX Challenges:

Forex issues come in second only to land acquisition challenges in emerging market PPP project fulfillment. This is by no means theoretical as I am currently battling this challenge. In many parts of LATAM & the Caribbean multi-million infrastructure developments are offered a mere US$200.00 a day by Central Banks due to paucity in supply and treasury mismanagement. From an investment perspective, Forex volatility for projects denominated in local currencies may create lower yields due to cross border risks, and hedging for many emerging markets currencies is not available.

Macroeconomic Inefficiencies:

In addition to the Macquarie Group’s points supported above, project developers and financiers know that labor supply, labor quality, labor laws, as well as tariffs on materials, material supplies and weather factors are extremely dictating of successful project fulfillment. Most emerging markets may seem to have a dearth of labor supply. However, educated construction labor may be hard to find, and to keep. Many viable emerging market infrastructure projects that have been fully funded have stalled indefinitely due to a lack of both construction and management labor. Unfortunately with PPPs government policy would require local labor to be sourced, creating a chicken and egg situation.

Solutions Presented:

Emerging market project development, financing and investment fit in with high risk, high reward appetite. Yet as we mentioned before prudent infrastructure investments give solid returns and add practical diversification to portfolios. Therefore emerging markets project financing and investments are not to be avoided, but to be mitigated. Successful project investment takes a great deal of sovereign and macroeconomic research, whether per project or via an infrastructure fund. The Macquarie Group pinpoints several requirements needed for investor comfort when it comes to infrastructure investing, and especially for emerging market conditions.

  1. Stable Political Environment:

    Note that a stable political environment will not mitigate red tape. However, mitigated political risk allows PPP projects to be safeguarded against event risks such as coups, and freezing of foreign investments.

  2. Stable Economy with Growth Potential:

    Overall a stable economy with high credit rating gives comfort of low default risk. However, it is necessary to delve further into macroeconomic variables such as labor and capital intensive predilections. Does the country have stringent union interests? Does the country’s labor have the educative capacity to cost effectively get PPP projects done? Are there punitive tariffs on capital intensive projects? It is necessary to ensure the emerging market country accounted for PPP infrastructure projects in its annual budget, broken down by sectors such as transport, seaports, utilities etc.

  3. Open and Transparent and PPP Bid Process:

    Is the country’s public procurement and bid processes in line with international standards and policy frameworks? What is the track record of successful PPP projects in terms of pre-bid to completion timeline? It is necessary to be in close contact with the country’s department of public works, transport and infrastructure to get a detailed log of such a track record before investing in any project, or in any fund.

  4. Stable Financial Market:

    This one is tricky for actual returns, especially as most emerging market projects are structured in local currencies. If investing in an infrastructure fund, the risk is mitigated. If there is direct investment in the PPP project, the risk is heightened, no matter how stable the financial market is. And don’t be fooled by oil-based emerging market countries. One would believe that such countries would have strong cross border Forex capabilities. However, if the projects are non-energy infrastructure, FX paucity and volatility can still be an issue. It’s necessary to examine the country’s central bank and its monetary policy beforehand.

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Family office growth and governance

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Family offices are powerful, a financial force to contend with. Even many in the financial world have yet to understand the family office’s sheer influence, especially when retail investing, private equity and venture capitalism have the limelight. The family office has deliberately preferred to remain relatively incognito when it comes to announcing investment and wealth management strategies.

The family office serves as wealth and trust management of high net worth families. Families can be defined as multi-generation family businesses, as well as high net worth individuals who may have come into inheritance or independent net worth. The family office can comprise an individual, department or separate firm whose sole objective is wealth management and legacy planning for the family. The single family offices (SFO) serves the investment needs of one family while the multifamily office (MFO) is structured much like an asset management firm, providing customized wealth management and planning to a larger number of families and high net worth individuals. This explanation may sound simple; rest assured, the family office structure is one of the most complex in the entire investing sphere.

Family offices are on the rise, and institutional investors are feeling the effects. U.S. Bank’s Ascent Private Capital Management has coined the term “insti-viduals” to describe the marked increase in family office dealflow usually presented to traditional institutionals such as pension funds. And why should the finance industry be surprised? We have had constant challenges with U.S. public pension funds and alternative investors such as hedge funds metting out disappointing returns. While traditional institutionals and hedge funds are very regulated, family offices do not have to register with regulators once investment advice is kept within ten generations of ancestry.

According to Campden Research’s most recent family office report, family offices hold more than US$4 trillion of assets, and the global average for assets under management (AUM) comprises US$921 million. Family offices are fast approaching the alternative investment cumulative AUM of US$5.7 trillion, albeit with much less sensastionalism. Indeed, The Wall Street Journal reports that since 2011 three dozen hedge funds have converted into family offices. The symbiosis between family offices and private equity is also strong and growing, where family offices are taking higher stakes in private equity deals.

Such astounding growth demands a inherent need for continuity. We are confident that the family office is stepping in to fill investment gaps left by failing institutionals and alternative investors. Upon exclusive study of the Family Office Exchange’s FOX Guide to the Family Office, The Family Office Club’s Family Office Report and Trusts & Estates’ expert panel discussion of The Famiy Advancement Sustainability Trust (FAST), we suggest beneficial processes for family offices. In this regard, measures of internal policy ensure family office longevity and legacy.

The Family Office Exchange (FOX) stipulates critical management issues faced by family offices:

  • Goals for the Family and Roles for the Family Office: Ultimately, family investment, philanthropic and legacy objectives dictate the family office’s focus. Issues are further subdivided by:
    • Ownership and Governance;
    • Scope of Services and Delivery Process;
    • Cost of Offices and Allocation of Fees;
    • Operating Structure and Management Talent;
    • Network of Internal and External Advisors;
    • Communications and Client Reporting;
    • Back Office Systems and Procedures.

FOX Family Office Benchmarking™ provided surveyed data from its family office membership concerning family office risk perception. Most families are initially worried about financial and operational challenges. Business risks such as talent acquisition, operating structure, and investment advisory comprise a hefty 37% of the families’ risk perception. Economic and financial risks comprise 26% of risk concern. However, when it came to actual family challenges such as legacy continuity, the family risk perception measured a mere 7%. Via Trusts & Estates’ Family Advancement Sustainability Trust (FAST) analysis, the risk reality shows quite the opposite.

On examining the quantitative and qualitative data of family business challenges affecting the family office, roughly 60% of disruptions and failure stemmed from family communications and generational problems, while only 3% of issues arose from financial and investment advisory challenges. Talent and advisory acquisition in the financial industry does not pose a threat to the family office in our current workforce environment. The Institutional Investor reports a marked increase in hedge fund managers either leaving lagging funds to manage family offices, or converting hedge funds into family offices for streamlined clientele. Private banking divisions at Citigroup, Morgan Stanley and J.P. Morgan have dedicated top senior bankers to be primarily responsible for multifamily office dictates. Family offices have a wealth of investment and estate talent to choose from. Given the flexible regulatory nature of a family office, top talent once constrained in the institutional arena may find room to expand expertise for the family office. In short, it is truly the “Ownership and Governance” issue that needs prioritized attention.

FAMILY OFFICE GOVERNANCE

As with any enterprise, family office governance policies need to be formulated long before execution of any financial and operational implementation. Family offices are in need of much more qualitative guidelines for business and wealth continuity. The Family Office Club based out of Key Biscayne, Florida gives specific insight into structuring family office ownership and governance guidelines via The Family Office Report. Remember, unlike standardized business or investment firms, each family office would have highly tailored objectives, so customization of certain objectives and criteria would be necessary. However, this framework helps with organizational structure across the board. Key components are as follows:

  1. Mission, Vision, & Goals:

    The mission is the starting point for what The Family Office Club coins “The Family Compass.” Family businesses may already have commercial mission and vision statements. However, the family office is responsible for management of the actual family’s qualitative mission, vision and goals. These are high level objectives for wealth creation, succession, philanthropy and legacy.

  2. Ethics & Values Policy:

    The ethics and values policy defines what is acceptable to the family’s core values when it comes to external talent, vendor transactions, business acquisitions, paths of philanthropy, and internal code of conduct. The ethics and values policy covers all issues of compliance such as money laundering, insider trading and bribery concerns. This policy should be reviewed consistently in strategy sessions with both family and external professionals within the family office.

  3. Investment Mandate:

    As expected, this mandate delineates family office investment governance. The investment mandate sets the investment criteria and asset class composition of investments for the family office. All taxation, income growth, wealth creation strategies, liquidity concerns and payout requirements must be detailed in this mandate. According to the Family Office Club, the Chief Investment Officer is responsible for the creation of this mandate, along with input from the CEO and vested family members. The mandate can be revised on a monthly basis. Quantitative social capital investments and philanthropic endowment strategies should be included in this mandate, if applicable. This mandate also aids the family office in shareholder activist campaigns when the need arises.

  4. Key Performance Indicators:

    Key Performance Indicators (KPIs) are highly detailed and action specific dictates per each member of the family office. Measurable outcomes are expected for involved family members and external hires. We would suggest broad KPIs be set for all external vendors, businesses and asset managers who deal with the family office. The Family Office Club suggests creation of at least three KPIs per member, as well as three “smart numbers” comprised of various KPIs for the entire family office.

  5. Systems & Processes:

    Systems & Processes here covers the details needed for organizational continuity within the family office. Where the ethics and values policy or strategic plan may deal with broad succession planning, systems and processes deal with the documenting of detailed processes carried out per member, so that in the case of natural causes or termination, talent or legacy replacement can occur without severe disruption to actual procedures. According to the Family Office Club, each member may add to a mini-process book, which then should be reviewed by selected family office executives.

In addition to the governance policies stated above, the family office will greatly benefit from the creation of a Family Advancement Sustainability Trust (FAST). The FAST is a brainchild of Marvin E. Blum, JD, Thomas C. Rogerson, Gary V. Post, JD of the Blum Firm. The FAST has the structure of a directed trust, but encompasses more than the typical mandate for disbursement of funds to heirs or philanthropic beneficiaries. In the authors’ own words, the FAST is “A pool of funds to invest in the family members—in the family relations, development, and advancement—rather than just distribute to the family members.” The FAST comprises four committees: the Trust Protector Committee, the Investment Committee, the Distribution Committee and the overall Administrative Trustee. Both family members and outside professionals within the family office comprise these bodies. The FAST is primarily for continued family education, family cohesiveness and legacy in both qualitative and quantitative concerns.

The family office has existed across geographies and dynasties, quietly providing funding and making investments long before our global banking system came into play. Modern day family offices are now formalized, and are stepping in to fill investment gaps that are fast being created by lagging institutional and alternative investors. Thus, it is of utmost importance that existing and newly created family offices implement solid governance practices to ensure financial, operational and legacy continuity.

REFERENCES

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