If you have wondered how the ultra-rich manage their money, welcome to the world of Family offices!
Family offices are private advisory firms that serve ultra-rich clients. When a client has a large amount of money to be managed and needs a full fledged infrastructure to do that – a banker, a Chartered Accountant to look after taxation, a wealth manager, a clerical set up, a depository account, an analyst, etc. they set up a “Family office”
These family offices do all the steps that are necessary in managing finances and investments – including budgeting, insurance, dealing with the family owned business, making and monitoring charities, and wealth transfer and tax services. It is fairly obvious that when Mr. Azim Premji makes private investments (not a good example, but like the one in Subhiksha) he does it through his “family office”. Establishing a family office ensures that there is no conflict of interest in the final decision making process. When you are seriously rich, you do not want to trust just your “relationship-manager” to make all your investments, do you?
However, is it possible for an outside firm (which can actually bring in all these expertise far more efficiently) is used by people who are not exactly in the same class as a Premji, Narayanamurthy, or an Ambani?
Typically a firm can be set up with all these above-mentioned expertise to service lesser mortals like Sachin Tendulkar, Sharukh Khan, Katrina Kaif, Priyanka Chopra, Saif Ali Khan, Kareena, Dhoni, etc. and such services can be offered for a fee.
Although they may vary in their level of service, they must invest very heavily in good quality consultants, technology, lawyers, Chartered Accountants, travel, vendors, databases, brand building and analytical tools that help them conduct due diligence on money managers, products, vendors, and optimize a portfolio of investments for tax purposes.
Family Office Facts
There are two types of family offices: single-family offices (SFOs) and multifamily offices (MFOs). Single family offices serve one wealthy family, while multifamily offices operate more like traditional private wealth management practices with multiple clients. Multifamily offices are likely to be much more common because they can spread heavy investments in technology and consultants among several high-net-worth (I like to define this as liquid investible assets in excess of Rs. 50 crores – but not sure how each service provider defines) clients instead of a single individual or family.
These families can run into many issues – largely ego conflicts – and other issues that the professional needs to deal with. There are three trends in particular that may change the way you do business with these individuals. The challenge for the professional is to remove his own middle class shoes before he can tackle ‘high society’ issues. It reminds me of an architect who said it was difficult not to flinch (we are talking 1992 prices) when a ‘socialite’ wanted to spend Rs. 3 crores (Rs. 30 million) to furnish a 3000 sq. ft house. Shilpa Shetty’s sari cost Rs. 50 lakhs and her jewelry cost Rs. 30 million in 2009. Difficult numbers for a middle class advisor to fathom these numbers!
Handling the changing patterns
Frankly demand for such services will increase because of some major changes in the world:
1. Increasing number of HNI customers – especially in Emerging Markets
Clearly thanks to the power of compounding, the rich get richer and fast. The wealthy will always accumulate assets more rapidly than the less privileged ones. The emerging markets will create many more billionaires in the next 5 years than in the past 25. China, Japan and India will soon have a big number of millionaires – maybe even billionaires, thanks to the dollar’s weakness. By 2020, China’s ‘rich’ will be larger than America’s middle class. Growth in countries such as China, Brazil, India and Russia will ensure that the family office format of wealth management services continues to grow in need over the next decade. Clearly somebody wanting to enter this market will need to be aware of international trends. Most investors of this size will need some serious currency protection.
2. Economical and Profitable wealth management is challenging
As more people amass greater wealth, large branded firms are competing on a cost basis and moving a larger portion of their core services online. Family wealth managers may have to tie up with the real large brands and use some of their services. It is unlikely that clients of this size will want to get into the nitty gritty of execution, but they will want 24×7 access. While the average person might find it useful to use online services to save money, these clients are more likely use online services to get knowledge and do comparisons. These people are likely to pay well for advising – and kill the conflict between advising and selling. The wealth manager clearly has to be on the side of the customer. I know of one promoter of a general insurance company continuing his 20 year old medical insurance policy from a PSU! However the wealth manager from a top school cannot be living on salary alone – his personal needs / desires will have to be considered too.
Many of these individuals run businesses, are brand ambassadors for conflicting products, have complex personal lives – marriage, divorce, children from other marriages, or have complex wealth management or tax-related needs – across borders! Obviously only a team of experts can handle all the accounting, tax, investing requirements can help manage their finances. Family offices will become the common answer to that demand – while remaining highly profitable while also serving the unique needs of the super HNI.
3. Very demanding client list – international benchmarking will be a must
There can be no set rules on what services a family office can or cannot offer.(I know relationship managers in banks who have helped customers select gifts for their 21 year old grand- daughters!). However all common investment and finance-related services that most of them provide for their clients should include choosing a good portfolio manager, private equity funds, co-ordinating tax needs with C A firms, co-ordinating with lawyers, drafting pre-nuptials, etc. Most of these services are outside the scope of banks and brokerage firms for sure.
Typically some of these typical services should include:
• Active Investment portfolio management – with international implications
• Tax management and advisory
• Cash flow management
• Educating the less knowledgeable family members – wealth education
• Multigenerational wealth transfers
• Personal wealth creation and Corporate conflicts management
• Ownership, Control and generational transfer of power – undercurrents
• Family business and financial advisory
• Donations – to outsiders
• Donations – setting up own trusts, and managing them
• Political donations
Family offices will also have to develop superior expertise on constructing alternative investment portfolios and products. They will have to see whether a product endorsement – say for a life insurance company (remember Rahul Dravid in Max New York Life or Sachin Tendulkar in Aviva) stops him from buying a competing product? Is there a media implication if this news leaks to the press?
Managers will have to invest heavily in systems, people and reporting consultants to help select the most appropriate alternative investment managers and products for their high-net-worth clients. The advisors themselves will need legal protection – very few fund managers can afford to fight their clients anyway!
A full alternative investment platform at a family office is almost a must even to start with. However, as competition increases among multifamily offices these platforms will be more global, but with local touch. They will have to be good in multi currency, multi-locational advisory, be transparent and diverse in their offerings.
Using experts and accepting responsibility for currency movement, commodity price movements, economic changes around the world, family financial fights – it is difficult for one person to be an expert across all this! The team will have to handle all this!
Will it be profitable as a business? You bet it is.
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