By Chirag Nanavati
Both Credit Suisse and Ernst and Young report that family offices are the fastest-growing investment vehicles in the world today.
24% of the world’s UHNW families are in the Asia-Pacific region. But India has less than 100 single family offices, indicating that the bulk of family wealth is still being managed by family patriarchs using multiple advisors and fragmented services.
Change is coming, and in India it is driven by technology entrepreneurs, Gen-Y and UHNW individuals educated abroad. They are choosing to set up professionally-managed family offices to facilitate wealth preservation, growth and seamless intergenerational transfer.
The benefits of family offices far exceed unstructured wealth management for a variety of reasons.
Family interests at the forefront
According to Deep Chatterjee, CIO, Rasiklal Maneklal Trust, “Advisors and banks should be used for the purpose originally envisaged for them of custody, execution and as a sourcing mechanism.” Advisors’ interests lie with the bank or institution they work for, whereas a family office provides unbiased opinions and objectively evaluates products proposed by financial advisors, based on the family’s investment goals.
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Managing family wealth like a business
Business families have limited time to take a granular view of investments, rebalance asset allocation or reinvest surplus. In sharp contrast, the job of a family office is to manage family assets like a business, to stay alert and navigate volatile markets. Consolidation and professional asset management help mitigate risk and increase returns.
Separation of family wealth and business wealth
A family office helps create a distinction between personal and business wealth. This eliminates conflict between corporate treasury and personal finances, allowing optimal management of both and also maintains desired privacy of family assets.
Consolidated services and specialization
A single family office provides several services including insurance, taxation, legal affairs, business succession, inheritance and philanthropy. Centralizing wealth management under one roof enables better tax planning and reduces tax liability. Unifying insurance and legal requirements give a holistic picture and better bargaining power to purchase these services. Families can bring in specialists for audits, to formulate new strategies, to restructure holdings or suggest tactical moves.
Greater transparency while maintaining confidentiality
Business families have wealth spread across multiple entities including trusts and private investment companies. Once all family assets are managed by a single entity, confidentiality can be maintained, while consolidated reporting ensures greater transparency within the family. This helps avoid future conflict and facilitates succession and inheritance.
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With so many direct and indirect benefits why isn’t every UHNW family jumping on the family office bandwagon?
Globally, the concern is about the cost of staffing and running a family office vis-a-vis the quantum of funds to be managed. Software for back-office automation and consolidation reduces operating costs and mitigates the risk of human error. Most people think of technology as an enabler for consolidation and performance comparison. But the objective of technology for a family office goes beyond this to encompass efficient reporting, portfolio management, accounting and document storage, while ensuring confidentiality and data security.
(The author is an Executive Director, Asset Vantage)