From managing wealth, tax to succession – the roles family offices play for ultra rich

Family offices are gaining increasing traction among Ultra-High-Net-Worth families that are looking to manage their wealth, diversify their portfolios, and ensure an orderly succession.

family office, Ultra-High-Net-Worth families, UHNW families, wealth creation, portfolio management, tax compliance, investment, Wealth preservation, orderly succession, Planning for contingencies, Building legacies, Conflict avoidance
Ultra-High-Net-Worth (UHNW) families don't hesitate to pay for efficient wealth management and smooth succession planning.

For normal investors, the investment motive is creating a diversified portfolio to fulfill the financial goals by managing the well in a cost effective way. However, for the ultra rich, the goal is how to manage the assets and liabilities well to ensure creating more wealth. Ultra-High-Net-Worth (UHNW) families don’t hesitate to pay for efficient wealth management and smooth succession planning.

Gautam Sehgal, CIO at Patni Family Office, describes the functions and importance of family offices in today’s era.

“As the capital markets become more complex with numerous investment options across every asset class, wealthy families are now increasingly turning to family offices to manage their finances. As a consequence, family offices are gaining increasing traction among Ultra-High-Net-Worth (UHNW) families that are looking to manage their wealth, diversify their portfolios, and ensure an orderly succession,” said Sehgal.

“However, a family office can play a far more important and far-reaching non-financial role in securing the legacy of a wealthy family. As wealth management becomes more and more complex, family offices in the modern era are often tasked with balancing different priorities of the family members, preserving their wealth and succession. They have also, consequently, evolved in recent years to include multi-family offices (MFOs) that offer services of experienced professionals, including fund managers. Many MFOs also offer select services for their clients,” he added.

Functions of family office

According to Sehgal, the functions of a family office today can be wide-ranging, including both financial and non-financial services:

Strategic: One of the complex functions of family offices is to preserve the legacy and wealth of their clients. This requires strategic planning that can balance the different arms of the family businesses. Other than advice on governance and succession planning, it can even include entrepreneurial support through transparent and ethical governance and open communication, especially when a family member is at the helm. One of the key services here is succession or exit planning that ensures timely and orderly transfer of power or assets.

Investment: The management of the family wealth is one of the core functions of a family office and is designed to preserve and grow the family’s investment corpus. It can include setting up investment goals, asset allocation, reviewing investment, and planning for contingencies.

Tax and regulatory compliance: UHNW individuals fall under the highest tax brackets; however, there are multiple means of reducing taxable income, thereby protecting the family’s wealth, under tax laws. Managing taxes and ensuring strict compliances is unsurprising, one of the major functions of family offices.

Philanthropy: Investing their time, energy, and funds in philanthropic ventures are seen as one of the important means followed by UHNW families in securing their legacy and creating a meaningful impact. Family offices can help their clients navigate the various options under which they can carry out charitable contributions, including setting up investment funds, donor funds, welfare organisations, private funds, or direct contributions to charities.

Family-based: The family office can also be tasked with planning and arranging for travelling, property management, or education spending of family members.

Importance of Family offices

With an increasingly dynamic profile, family offices play a multi-faceted role for UHNW families.

Sehgal lists some of the important roles that family offices play:

Wealth preservation

Even wealthy families can see an erosion in their fortunes through financial mismanagement. On the other hand, if applied carefully, financial planning can help families to retain most of their wealth even when their core business goes through a setback. The core function of a family office is, hence, to preserve and further enlarge the family fortunes.

Ensuring orderly succession

Family businesses often have a hierarchical structure with some members holding key positions. Succession planning ensures that there is a clearly defined process for choosing a successor (if one is not already in place) and ensures that there is no power vacuum. The goal is to avoid any conflict from arising.

Aligning succession with personal goals

One of the functions of a family office is to plan for succession and exits of family members. By facilitating exit to other avenues like seeking education or taking up a parallel venture without disrupting succession plans, it can help family members to align their own personal goals with that of continuing the family legacy.

Unifying different interests on one platform

For families with multiple decision-makers in different verticals, family offices play the vital role of bringing them together on one platform with the aim of meeting strategic goals. In the process, it can also unify them on a common platform.

Planning for contingencies

Wealth can be fickle and even UHNW families can see an erosion of wealth as a result of unforeseen and unplanned events. Family offices help in offsetting the losses from such uncertainties through risk management that includes mitigation of threats like legal, technological, or reputational harm. They can also plan for specific contingencies such as losses in business or illness, ensuring minimal impact on the investment corpus.

Building legacies

Most UHNW families aren’t just looking for business succession, they also want to leave a mark on the nation’s development through cultural, social, or economic efforts. Family offices help in planning and discharging these functions, thereby helping in building the family’s legacy.

Conflict avoidance

Indian family businesses record the highest incidences of feuds at an estimated 60 per cent as against the global average of 40 per cent. Conflicts result in the break-up of a business that ultimately impacts the wealth and relationships within the family. Family offices play a critical role in conflict avoidance and resolution by establishing clear and open channels of communication, succession planning, and by anticipating and planning for other disagreements that can crop up. In fact, family offices can also act as an impartial platform where different generations can be brought together for a common goal, thereby reducing the chances of a conflict.

“Family businesses have changed in character from largely single family offices to include professionally-managed multi-family offices, and are one of the major investment vehicles today. Responsible for managing the funds of wealthy families, these wealth management firms are also emerging as a powerful force in capital investment that can ensure the durability of some of the country’s biggest and most important businesses, and in establishing their legacy through philanthropic activities,” said Sehgal.

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