THE WEALTH MANAGEMENT OF FAMILY BUSINESSES AND THE FAMILY BUSINESS ACT BY MARIA FARRUGIA A dissertation submitted in partial fulfilment of the requirements for the award of the Master in Accountancy degree in the Department of Accountancy at the Faculty of Economics, Management and Accountancy at the University of Malta May 2016 16MACC037 University of Malta Library – Electronic Theses & Dissertations (ETD) Repository The copyright of this thesis/dissertation belongs to the author. The author’s rights in respect of this work are as defined by the Copyright Act (Chapter 415) of the Laws of Malta or as modified by any successive legislation. Users may access this full-text thesis/dissertation and can make use of the information contained in accordance with the Copyright Act provided that the author must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the prior permission of the copyright holder. UNIVERSITY OF MALTA FACULTY OF ECONOMICS, MANAGEMENT AND ACCOUNTANCY DECLARATION OF AUTHENTICITY FOR MASTER’S STUDENTS Student’s I.D.: 321893M Student’s Name & Surname: MARIA FARRUGIA Course: MASTER IN ACCOUNTANCY Title of Dissertation: THE WEALTH MANAGEMENT OF FAMILY BUSINESSES AND THE FAMILY BUSINESS ACT I hereby declare that I am the legitimate author of this Dissertation and that it is my original work. No portion of this work has been submitted in support of an application for another degree or qualification of this or any other university or institution of higher education. I hold the University of Malta harmless against any third party claims with regard to copyright violation, breach of confidentiality, defamation and any other third party right infringement. As a Master’s student, as per Regulation 58 of the General Regulations for University Postgraduate Awards, I accept that should my dissertation be awarded a Grade A, it will be made publicly available on the University of Malta Institutional Repository. _________________________ 9th May 2016___________ Signature of Student Date i Abstract The Wealth Management of Family Businesses and the Family Business Act By Maria Farrugia Purpose: This study analyses the implications of the proposed Family Business Act on Maltese family businesses, with special attention being given to the ways in which the proposed legislation intends on supporting family businesses in safeguarding their continuity and preserving family wealth. It identifies the wealth management practices of local family businesses and assesses the accountant’s role in family wealth management. Design: A mixed methodology approach is adopted to address the said objectives. A total of twenty-one interviewees were held with professionals and family business owners. The qualitative data gathered from this research phase facilitated the formulation of a questionnaire which was later distributed amongst family business owners. Findings: The proposed legislation is expected to promote preservation of family wealth by encouraging enhanced business organisation and early planning for business transfer. Results show that micro family businesses are more likely to have all their wealth locked in one business and that family businesses grow in size as they advance from one generation to the next. Although the use of family office services is limited, family businesses are willing to use such structures for wealth management in the future. Furthermore, the study indicates that accountants can contribute towards family wealth management by combining their accounting knowledge with people management skills. Conclusions: Although most family businesses have diversified investments and seek professional advice for wealth management, there are still several which fail to do so. Additionally, the use of formal governance structures, family trusts and family offices is very limited, jeopardising the businesses’ long term survival. Nonetheless, the proposed legislation is expected to promote better practices. Value: This study identifies the initial comments of potential users and professional advisors on the proposed Family Business Act, whilst highlighting ways in which family wealth can be preserved and how accountants can contribute to this process. Keywords: Family wealth management, Maltese family businesses, Family offices, Accountants’ role in family businesses Library Reference: 16MACC037 ii To my parents, Victoria and Manuel, and Kenneth. iii Acknowledgements I would like to show my sincere gratitude towards my supervisor, Dr Nadine Lia B.A., LL.M(Kent)., LL.D – Advocate (Malta), Barrister at Law (England & Wales) for her guidance and support throughout this study. I would also like to acknowledge Prof. Liberato Camilleri B.Ed.(Hons), M.Sc., Ph.D.(Lanc.) for his assistance with the statistical analysis of this study. Special thanks go to all participants for the time and knowledge which they so kindly shared with me, as well as the organisations which helped distribute the questionnaires. Their contribution was fundamental to the completion of this dissertation. I would like to thank my parents, my brothers, David and Alex, and my sisters-in- law, Cristina and Vanessa, for their endless support and patience throughout my years of study, as well as their assistance. I would also like to thank my close friends for their encouragement and support. Lastly, I would like to thank Kenneth for his encouragement and for always believing in me. iv TABLE OF CONTENTS Abstract ......................................................................................................................................................................ii Acknowledgements ........................................................................................................................................... iv List of Figures .....................................................................................................................................................xiii List of Tables ........................................................................................................................................................ xv List of Abbreviations ......................................................................................................................................xvi Chapter 1: Introduction................................................................................................................................. 1 1.1 Introduction ............................................................................................................................................. 2 1.2 Background Information.................................................................................................................. 2 1.2.1 Family Businesses (FBs) ......................................................................................................... 2 1.2.2 The FBA (White Paper) ........................................................................................................... 4 1.2.3 Malta as a Jurisdiction for Wealth Management............................................................. 5 1.2.4 FOs in Malta .................................................................................................................................... 6 1.3 Need for the Study................................................................................................................................ 6 1.4 Objectives .................................................................................................................................................. 8 1.5 Limitations ................................................................................................................................................ 8 1.6 Dissertation Overview ....................................................................................................................... 8 Chapter 2: Literature Review ................................................................................................................. 10 2.1 Introduction .......................................................................................................................................... 11 v 2.2 FBs............................................................................................................................................................... 12 2.2.1 Defining FBs ................................................................................................................................ 12 2.2.1.2 A European Definition ........................................................................................................ 13 2.2.1.3 A Maltese Definition............................................................................................................. 14 2.2.2 Challenges Faced by FBs ...................................................................................................... 18 2.2.2.1 Succession Planning............................................................................................................. 19 2.3 Wealth Management ........................................................................................................................ 21 2.3.1 Defining Wealth Management.......................................................................................... 21 2.3.2 FWM ................................................................................................................................................. 22 2.3.2.1 From Rags to Riches to Rags Over Three Generations ................................... 23 2.3.2.2 The Accountant’s Role in FWM ..................................................................................... 24 2.3.3 FBs’ Investment Decisions.................................................................................................. 24 2.3.4 SEW................................................................................................................................................... 25 2.3.4.1 Generational Stage and SEW .......................................................................................... 26 2.3.5 The FO ............................................................................................................................................. 27 2.3.5.1 SFOs, MFOs and Virtual FOs............................................................................................ 28 2.3.5.2 The Use of FOs ......................................................................................................................... 28 2.3.6 Three Forms of Governance as a way of Facilitating Wealth Transfer and Asset Protection ........................................................................................................................................... 29 2.3.6.1 Family Governance ............................................................................................................... 30 vi 2.3.6.2 FB Governance ........................................................................................................................ 32 2.3.6.3 FO Governance ........................................................................................................................ 34 2.4 The FBA.................................................................................................................................................... 35 2.4.1 The Need for the FBA............................................................................................................. 35 2.4.2 Objectives of the Bill............................................................................................................... 36 2.4.3 The Initial Incentives ............................................................................................................. 37 2.4.4 The Regulator ............................................................................................................................. 39 2.5 Conclusion .............................................................................................................................................. 39 Chapter 3: Research Methodology ...................................................................................................... 40 3.1 Introduction .......................................................................................................................................... 41 3.2 Preliminary Research...................................................................................................................... 42 3.3 Mixed Methodology Research.................................................................................................... 42 3.3.1 Sequential Exploratory Research Strategy ..................................................................... 43 3.4 Qualitative Research ........................................................................................................................ 44 3.4.1 Interviews with Professionals.......................................................................................... 44 3.4.2 Interviews with FB Owners ............................................................................................... 45 3.4.3 Interview Design ...................................................................................................................... 46 3.4.4 Data Collection........................................................................................................................... 46 3.4.4.1 Pilot Study .................................................................................................................................. 47 3.4.5 Data Analysis .............................................................................................................................. 47 vii 3.5 Quantitative Research..................................................................................................................... 47 3.5.1 The Sample................................................................................................................................... 47 3.5.2 Questionnaire Design ............................................................................................................ 48 3.5.3 Data Collection........................................................................................................................... 49 3.5.4 Participant Demographics .................................................................................................. 49 3.5.5 Data Analysis .............................................................................................................................. 50 3.6 Conclusion .................................................................................................................................................... 50 Chapter 4: Research Findings I.............................................................................................................. 51 4.1 Introduction .......................................................................................................................................... 52 4.2 The Proposed Bill and its Implications................................................................................. 53 4.2.1 How the Proposed Bill Addresses and Helps FBs ................................................ 53 4.2.2 Registration with the FBA................................................................................................... 54 4.2.2.1 Increased Stakeholder Confidence ............................................................................. 54 4.2.2.2 Defining the Roles within the FB ................................................................................. 55 4.2.2.3 The Initial Incentives........................................................................................................... 56 4.2.3 Settling a FB through a Family Trust ........................................................................... 57 4.2.4 Attracting Foreign FBs to Malta ...................................................................................... 59 4.2.5 Other Comments....................................................................................................................... 59 4.3 FWM ........................................................................................................................................................... 60 4.3.1 Defining FWM............................................................................................................................. 60 viii