EFTA00595833.pdf

Family office diagnostic Family Office Advisory Services March 2016 EY EFTA00595833 Family office risk diagnostic Family office risk management ,A. A primary goal of most family offices is to protect the family liquow, Family from damage and loss, whether that is financial, physical or reputational. Risks arise from a variety of sources, including office II risk the business, investments or from operations. In our work with families around the globe, we have identified seven categories of risk faced by most family offices. Risk diagnostic Vision and Management EY Family Office Advisory Services (FOAS) can assist you legacy with a risk review to help identify current risks, following this process: Operations Technology 1. Gather and review existing procedures and documents (from a detailed data request) 2. Customize our risk interview guide to the unique needs Succession Investments of your family 3. Interview key family office staff, family members and Tax and advisors regulatory 4. Meet with key staff (such as operations, investment and technology) to observe and understand their processes Page 2 EY EFTA00595834 Objectives and stated concerns The objectives and stated concerns are customized to each family office, describing their specific goals and interests for the engagement. Objectives Stated concerns ► Review the existing family office: ► TBD ► Identify risks to the family ► Find process improvement opportunities ► Review Risk Index Score ► Compare key processes to leading practices of family offices, making recommendations to help the family Pi * Page 3 EY EFTA00595835 Project approach Phase 1: 1. Meet with project sponsor to launch engagement Date Assess & 2. Review documents (broad request of procedures, ranges diagnose policies, governance documents, etc.) 3. Interview key staff and advisors 4. Observe key processes 5. Populate the risk score 6. Identify key challenges and issues in the current environment 7. Compare current services and processes to leading practices of global family offices 8. Document recommendations 9. Review findings and recommendations with project sponsor Phase 2: TBD, based on findings above TBD Design Phase 3: TBD TBD Implementation Page 4 EY EFTA00595836 Contents from the assessment Sample table of contents Project overview Executive summary Current environment Vision and purpose of the office Services performed by the office High-level wealth diagram Chart of staff and advisors Technology diagram Findings and recommendations Risk Index Score Recommendations Prioritization of the recommendation Appendices Page 5 EY EFTA00595837 Risk Index Score Page 6 EFTA00595838 Risk Index Score defined EY leverages our proprietary Family Office Metrics Risk Index tool that evaluates risk in two ways: a financial view leveraging the COSO1 framework, and a functional view leveraging seven key categories of risk. COSO' framework WS Functional framework COSO' segments Description Category Description Control Environment The tone at the top, organizational Vision and legacy Family governance, communication, attitude, awareness, action education, and strategic planning. Risk Assessment Identify objectives, risks, and Management Overseeing family businesses, running measures to deal with risks the family office, physical security, disaster recover, and reputational Control Activities The work flows, policies and impacts of actions by the family or the procedures used business. Information and Reporting and communication up, Operations Accounting, recordkeeping, and Communication down, across the organization transaction processing. Monitoring Both ongoing internal review and Technology Various types of technology, technical periodic external review support, and security for the family and family office. Succession Planning for family, family office, and business leadership, as well as estate planning, and trustee and beneficiary roles. Investments Investment governance and operations, including oversight committees, policy statements, and reporting. 1 The Committee of Sponsoring Organizations (COSO) of the Treadway Commission was organized in 1985 by the AICPA, the FEI, the Big Tax & regulatory Tax planning and compliance, and Five accounting firms and other industry organizations to promote compliance with other laws, such as thought leadership dealing with three interrelated subjects: enterprise risk management, internal control and fraud deterrence. www.coso.org Dodd-Frank. Page 7 EY EFTA00595839 Risk Index Scoring system EY evaluates 128 characteristics to determine risk scores, with each characteristic mapped to both a COSO and functional category. Each question is rated on a scale of 1 to 5. Each question has the same weight in the overall score. Rating Description 1 There are no defined controls 2 Some controls are defined, but more controls are needed 3 Sufficient controls are defined, but they are not working as intended 4 Controls are defined and working 5 Controls are defined and working, and the item is regularly reviewed and updated Pagc 8 EY EFTA00595840 Family office Risk Index Score The resulting scores assist the team in identifying areas that require additional analysis. Control environment Risk assessment co Control activities 0 Information & Communication Monitoring Overall score: 64% Vision & legacy Management c Operations 0 O Technology c = Succession 51% u_ Investments Tax & regulatory 0% 20% 40% 60% 80% Sample results from fictitious family Page 9 EY EFTA00595841  Family office Risk Index Score Key strengths Sample strengths Key strengths Buy/sell discipline and weaknesses FO regulatory consideration Diversification Accurate and timely compliance by category for a Key weaknesses Key weaknesses Investment committee is fictitious family Prenuptial agreements only family members Written tax policies Assets sit on brokerage platform Investments Key strengths Key strengths Written family charter Diagram of members and Family meetings entities Key weaknesses Communication among co- Education plans Vision & trustees Family council not legacy Succession Key weaknesses meeting consistently risk Trust distribution guidance Categories No estate plans for younger generations Key strengths Management Technology HR policies Social media policies Key strengths Key weaknesses Backup and restore process Contracts for outsourced Operations Shared document storage vendors Key weaknesses Credit policy statements No technology inventory Key strengths Network monitoring Written procedures Vulnerability assessments Separation of duties Key weaknesses Budgeting for family Staff background checks Page 10 EY EFTA00595842 Recommendations Recommendations from the review are identified in summary fashion below, with subsequent pages providing detail on findings and the recommendations. There often are 3 or 4 parts to each recommendation. Category # Recommendation Details Vision & 1 Strategic planning Page 22 Detailed recommendations strategy 2 Family charter Page 23 often include: 3 Technology network Page 24 Adding controls to reduce Technology or eliminate risks 4 IT support Page 25 Building governance 5 Operational process redesign Page 26 mechanisms to better Operations manage some risks 6 Accounting/general ledger tools Page 27 Creating strategic plans or Investments 7 Investment governance Page 28 activities to reduce future risks Tax & regulatory 8 Tax planning Page 29 Working with advisors to Succession 9 Trustees/beneficiaries Page 30 transfer or insure some 10 HR policies Page 31 risks Developing reporting 11 Business operations Page 32 processes to monitor Management 12 Insurance Page 33 ongoing risks 13 Disaster recovery Page 34 Page 11 EY EFTA00595843 Recommendations Recommendations are mapped in two ways: by type of risk/recommendation, and by the impact of the recommendation and it's ease or difficulty of implementation. Mapping is done jointly between the project team and project sponsor or family office leadership. Type of risk/recommendation .c Impact vs. difficulty 0' Insure Manage High impact risks with little Those risks with a high ability to control are impact and ability to control generally transferred to an should be addressed at an insurance policy. executive level and through well-designed governance Examples: Natural processes. Hazards, Liability Example: Succession 4-+ U Planning ra E Monitor Process Lower impact risks that Higher impact risks that are should be watched. readily controlled are staffed and subject to Example: External policy and procedure. Regulations Example: Wire Transfer Policy 0 Hard Easy Ease of Implementation Page 12 EY EFTA00595844 EY I Assurance I Tax I Transactions I Advisory About EY EY is a global leader in assurance. tax. transaction and acNisory services. The insights and quality services we deliver he build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in bilking a better working world for our people. for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited. a UK company limited by guarantee. does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP is a client.serving member firm of Ernst & Young Global Limited operating in the US. EY is a leader in serving the global financial services marketplace Nearly 35.000 EY financial services professionals around the world provide integrated assurance. tax. transaction and advisory services to our asset management, banking. capital markets and insurance clients. In the Americas.. EY is the only public accounting organization with a separate business unit dedicated to the financial services marketplace. Created in 2000. the Americas Financial Services Office today includes more than 6.500 professionals at member firms in over 50 locations throughout the US. the Cariobean and Latin America. EY professionals in our financial services practices worldwide align with key global industry groups. including EY's Global Asset Management Center. Global Banking & Capital Markets Center. Global Insurance Center and Global Private Equity Center. which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients address key issues. Our practitioners span many disciplines and provide a well•rounded understanting of business issues and chalenges. as well as integrated services to our clients. With a global presence and industry-focused advice. EYs financial services professionals provide highquafity assurance. tax transaction and advisory services. including operations. process improvement. risk and technology, to financial services companies worldwide. ©2016 Emst & Young LLP. All Rights Reserved. EFTA00595845