Welcome to the Money Machine, Mundo’s latest section on the way the top family offices in the world make money. In this section, we focus on the wealth generation strategies of some of the world’s wealthiest family offices and work from the simplest to the more complex strategies. 

The Money Machine column is designed to cover the algorithm for establishing a perpetual financial master plan for your family office. 

We begin this section by talking about one of the first things that a family office must do: establish an offshore brokerage account.

What is this? An international brokerage account is simply a bank account with a firm licensed to trade in various securities such as bonds, shares, crypto assets, funds, and even Forex. 

Today more than ever there are many brokerage firms to choose from but not all are the same as we will discuss below. But first, let’s examine the reasons why brokerage accounts are an essential element of family office wealth planning.

Why a Brokerage Account?

Today, more than ever, the importance of proper wealth planning and structuring in times of Coronavirus is essential for financial survival. The importance of having an investment account for your company or business is essential for the following reasons:

Reason 1: Safety.

A bank is in the business of using your money to lend to other people, usually at high leverage. This means that as soon as you place your money in a bank account it is no longer yours or your company’s money. In fact, if the bank goes bankrupt (something likely to happen to numerous banks in the next five years. Remember the US crash in 2008, the Cyprus and Greek Crisis, the perpetual Argentinian crisis, etc.), you cannot ask for your money because, by law, you are simply a creditor of the bank. In a best-case scenario, you can receive a small percentage of your money. This is not the case of a brokerage account.

The money in the fintech brokerage account does not belong to the broker but is held in trust for you. This means that in the case of liquidation, the liquidator cannot touch it. There is a further safety mechanism: if the money is in bonds, shares, or investments then these investments are held in your name and are even harder to get at. 

Reason 2: Diversification.

Holding your company’s or personal money in a bank account puts all your eggs in one basket because you are usually holding it in one currency, one jurisdiction, one account, and in cash. You need a diversified investment strategy. If the currency drops, the country goes through some turmoil, or your account gets frozen for whatever reason, you can lose a large part of your wealth overnight.

In a brokerage account, especially with a reliable broker, you can invest in multiple products to diversify risk. For example, buying bonds in multiple countries, buying shares across multiple jurisdictions, hold multi-currency and Forex positions, buying equities, and even trading crypto funds. A properly structured portfolio can hedge your hard-earned money against multiple risks. 

Reason 3: Income. 

Family offices and their advisers have known for a long time that holding your money in a bank is the worst thing you can do because it does not even beat inflation. Many banks offer interests that are far below the inflation rate so your savings are actually eaten away.

A brokerage account allows you to access literally an entire world of investments. This means you can access bond markets where you can gain above bank returns, crypto funds which have given investors skyrocketing income, and even share markets such as tech ETFs which are set to give double-digit growth in the upcoming recession. 

And the most important of all: The brokerage account, in fact, can be used as a hedge fund to insure against ordinary business risks surrounding the usual business of a family office. Let us say, for example, that you are a family office that is a developer investing in large-scale land developments in Panama. Your brokerage account would likely hold a collection of precious metals, hi-tech and biotech equities, and possible crypto funds to hedge against the risk of a falling real estate market. This way, liquidity can be effectively managed and created via hedging and diversification. 

Which broker to use?

Although opinions differ in the choice of a broker, what we have identified is a general consensus as to what family offices are increasingly looking for when they choose a brokerage. Here are the major ones:

1) Fees: The global pandemic has seen family office and brokers themselves leaving the expensive high maintenance brokerage houses who spend a lot on large offices and marketing. This is because large, well-located brokerage houses charge large fees for something that can be done from home. The trend now seems to be more and more to use Fintech brokers (brokerage houses optimizing the latest online technology without high-cost office space) and their own family office advisers working from home.

Large transaction fees eat away all profit.

The trend therefore is to engage a family office wealth advisor to work through a fintech brokerage so that the family’s strategy can be implemented. This strategy has the best of both worlds with a pool of professional teams as needed and low-cost transaction fees. 

2) Licenses: The regulation of the brokerage house is very important. If the brokerage is established in jurisdictions of low reputation or which have no oversight the risks of your money being lost or wasted or, worse, stolen rises exponentially. A reputable licensing regime ensures that the broker has passed many of the necessary hurdles required by a good regulator. Such hurdles include segregation of risks, competent staff, correct banking practices, insurance, etc.

3) Custodian bank: The reliability of the bank that holds the brokerage houses accounts, often referred to as the custodian bank, is a key element in the choice of the banking relationship. Ideally, the bank should be large and stable and should be in a politically-neutral and stable jurisdiction. This is why many American and European houses are actually risky. 

4) Offshore: The ideal choice is an offshore brokerage. That is one whose services and assets are located primarily offshore and can open accounts for offshore entities in low tax jurisdictions. This is key as most family offices are located in offshore jurisdictions that do not tax profits made on offshore brokerage. Having your brokerage house offshore also mitigates political, economic, and other risks. Thus, the offshore brokerage has its banking and its licensing predominantly offshore, and preferably in several jurisdictions.

5) Capitalization: The sheer financial volume of funds held by the brokerage house is very important. The larger the house, the smaller the risk that individual mistakes or errors can affect your investment. For example, if you hold your money in a small brokerage house, partners can simply take it with little chance of a return. However, the chances of a brokerage house that has hundreds of millions or billions invested of stealing your money is next to zero. 

A brokerage account in Hong Kong

This is one of the world’s top trading platforms and offers the following advantages:

A. The brokerage house is licensed in Hong Kong, Cyprus, the UK, and regulated in several other top jurisdictions. It is a global investment company. They provide DMA and OTC access to over 60 markets all over the world through their one-stop trading platform. They build infrastructure and trading solutions from scratch, meaning they are flexible to change on demand. 

B. The flexibility and options are ideal for HNW individuals, family offices, wealth managers, brokerage houses, and institutional investors. For professional investors, they use ING and HSBC for client cash management. They practice asset segregation according to MiFID II.

C. The house holds over a billion dollars in client funds. Support is given 24/7 by dedicated account staff.

D. Your funds are managed with HSBC and ING bank as custodians which are two of the world’s top banks. Access to banks in China is also possible.

E. The brokerage allows you access to all traditional instruments in multiple jurisdictions and currencies including funds, bonds, equities, futures, options, and even investing in crypto assets. It is one of the first brokerages in the world that provided access to Bitcoin spot and futures from a single account

This brokerage platform and house is, therefore, ideal for family offices and individuals who wish to establish themselves as a family office.

Why choose this option?

1) They are licensed in Hong Kong, the UK, Malta, and Cyprus (which have passporting rights in the EU, meaning they are licensed in all the EU).

2) They have a solid financial standing with an equity of over $60 million and total assets over $1.5 billion.

3) They have a global customer base of over 7,000 clients of more than 100 countries. They provide 24/7 customer service in English, Spanish, Mandarin, Russian, Portuguese, and many other languages.

4) They have a proven track record of over 10 years in the market.

5) Locals in Europe and Asia: they run local representation in 10 global financial hubs, including London, Amsterdam, Malta, Cyprus, Hong Kong, Moscow, and others.

6) They have top talent on board with over 300 employees ranging from traders and marketing specialists to tech support engineers.

7) They offer an all-in-one trading platform that will allow you to trade all kinds of securities with access to:

• More than 150,000 financial instruments.

• Over 60 markets.

• Around 400 servers around the world collecting real-time data.

Disclaimer: The information contained in this article is for informational purposes only and does not constitute financial advice or recommendations. Investing in financial products or cryptocurrencies involves risks, and you should be aware of the potential risks involved before investing. The content on this website is not intended to be a solicitation or offer to buy or sell any financial products or services. The information provided does not take into account your specific investment objectives, financial situation, or needs, and should not be relied upon as a substitute for professional financial advice. You should seek independent advice from a financial advisor or other professionals before making any investment decisions. Please be aware that the legal status of cryptocurrencies and other financial products may vary in different jurisdictions and may be subject to regulation. It is your responsibility to ensure compliance with any relevant laws and regulations governing the sale and marketing of financial products and services in your jurisdiction.