EFTA00595833.pdf

Family office diagnostic Family Office Advisory Services March 2016 EY EFTA00595833 Family office risk diagnostic ,A. II liquow, Family office risk Vision and legacy Operations Succession Management Technology Investments Tax and regulatory Family office risk management A primary goal of most family offices is to protect the family from damage and loss, whether that is financial, physical or reputational. Risks arise from a variety of sources, including 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 EY Family Office Advisory Services (FOAS) can assist you with a risk review to help identify current risks, following this process: 1. Gather and review existing procedures and documents (from a detailed data request) 2. Customize our risk interview guide to the unique needs of your family 3. Interview key family office staff, family members and advisors 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 ► Review the existing family office: ► 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 Stated concerns ► TBD Page 3 EY EFTA00595835 Project approach Phase 1: Assess & diagnose Phase 2: Design Phase 3: Implementation 1. Meet with project sponsor to launch engagement 2. Review documents (broad request of procedures, 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 Date ranges TBD, based on findings above TBD TBD TBD 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 COSO' segments Control Environment Description The tone at the top, organizational attitude, awareness, action Risk Assessment Identify objectives, risks, and measures to deal with risks Control Activities The work flows, policies and procedures used Information and Communication Reporting and communication up, down, across the organization Monitoring Both ongoing internal review and periodic external review 1 The Committee of Sponsoring Organizations (COSO) of the Treadway Commission was organized in 1985 by the AICPA, the FEI, the Big Five accounting firms and other industry organizations to promote thought leadership dealing with three interrelated subjects: enterprise risk management, internal control and fraud deterrence. www.coso.org WS Functional framework Category Description Vision and legacy Family governance, communication, education, and strategic planning. Management Overseeing family businesses, running the family office, physical security, disaster recover, and reputational impacts of actions by the family or the business. Operations Accounting, recordkeeping, and transaction processing. Technology Various types of technology, technical 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. Tax & regulatory Tax planning and compliance, and compliance with other laws, such as 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 1 Description 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% c 0 O c = u_ Vision & legacy Management Operations Technology Succession Investments Tax & regulatory 51% 0% 20% 40% 60% 80% Sample results from fictitious family Page 9 EY EFTA00595841 Family office Risk Index Score Sample strengths and weaknesses by category for a fictitious family Key strengths FO regulatory consideration Accurate and timely compliance Key weaknesses Prenuptial agreements Written tax policies Key strengths Written family charter Family meetings Key weaknesses Education plans Family council not meeting consistently Key strengths HR policies Social media policies Key weaknesses Contracts for outsourced vendors Credit policy statements Vision & legacy Management Key strengths Buy/sell discipline Diversification Key weaknesses Investment committee is only family members Assets sit on brokerage platform Investments risk Categories Operations Succession Technology Key strengths Written procedures Separation of duties Key weaknesses Budgeting for family Staff background checks Key strengths Diagram of members and entities Communication among co- trustees Key weaknesses Trust distribution guidance No estate plans for younger generations Key strengths Backup and restore process Shared document storage Key weaknesses No technology inventory Network monitoring Vulnerability assessments 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. Detailed recommendations often include: Adding controls to reduce or eliminate risks Building governance mechanisms to better manage some risks Creating strategic plans or activities to reduce future risks Working with advisors to transfer or insure some risks Developing reporting processes to monitor ongoing risks Category # Recommendation Details Vision & strategy 1 Strategic planning Page 22 2 Family charter Page 23 Technology 3 Technology network Page 24 4 IT support Page 25 Operations 5 Operational process redesign Page 26 6 Accounting/general ledger tools Page 27 Investments 7 Investment governance Page 28 Tax & regulatory 8 Tax planning Page 29 Succession 9 Trustees/beneficiaries Page 30 Management 10 HR policies Page 31 11 Business operations Page 32 12 Insurance Page 33 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 Insure High impact risks with little ability to control are generally transferred to an insurance policy. Examples: Natural Hazards, Liability Manage Those risks with a high impact and ability to control should be addressed at an executive level and through well-designed governance processes. Example: Succession Planning 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 .c 0' 4-+ U ra E 0 Impact vs. difficulty 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. 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