Does your family need a CFO?

90 per cent of HNI families lose their wealth by the third generation, so it's wise to get someone to manage it

What’s common to Mukesh Ambani, Azim Premji, Narayana Murthy and Mohit Burman? All these members of India’s business elite manage their personal wealth through a Family Office — a one-stop entity that handles all the money matters of these high-end clients. A Family Office is like the personal CFO of an ultra-rich family. But then, it goes much beyond that.

Holistic wealth management

Customised investing across asset classes, liaising with third parties such as fund houses and bankers, ensuring proper documentation, vetting transactions for tax and legal compliance, estate and succession planning, philanthropy services — a Family Office takes over all these chores for an HNI (high net worth investor). Some even offer concierge services.

By providing a comprehensive service, a Family Office, in effect, manages the personal balance sheets of a family and its members and provides a consolidated view of the family’s wealth. This can make life a lot easier for an ultra-rich family which holds its assets through complex legal structures, investment arms or cross-holdings.

Then, there is the key issue of ensuring that the family silver is handed down to descendants without a glitch. Wealth has a well-earned reputation of being fickle. Indeed, the ‘shirtsleeves to shirtsleeves in three generations’ adage about family wealth being frittered away by successors is borne out by studies which show that 90 per cent of HNI families lose their wealth by the third generation and that 60 per cent lose it by the end of the second generation itself.

That’s a gnawing concern for everyone, the ultra-rich in particular, who would like their considerable wealth to be preserved, grown and passed down many generations. Family Offices can step in here too by organising family meetings, mediating disputes and giving unbiased advice. They can also facilitate dispute settlement, and provide relevant education to younger family members to align them to the values that helped generate the wealth in the first place.

All this can be quite useful to the rich who have made their money or are busy making it but have many constraints to deal with — lack of knowledge to handle with wealth matters, the risk of receiving biased advice, and paucity of time to take charge of the family’s finances.

It is the comprehensive and customised nature of services offered by a Family Office that distinguishes it from a Wealth Management service.

A Family Office may not suffer the disadvantage of having to push products to its clientele as they don’t look to product vendors for commissions.

Most Family Offices adopt an ‘open architecture’ investment systems which help them offer unbiased advice and select products that are in the best interests of the family’s wealth.

Family Offices have been around in India for some time but the market is still in a nascent stage. Family Office providers estimate that 200 to 350 families in the country use the services of such offices. But the idea is likely to pick up pace, thanks to the sharp rise in the wealth of many families. This has been aided by a growing economy and soaring stock market capitalisations. A report by WealthInsight, which tracks the world’s rich, says that India’s dollar-millionaire numbers have risen from 1,93,000 in 2009 to 2,48,000, and it is expected to increase to 3,58,000 in 2018. This will include around 80 dollar-billionaires, up from around 60 today. It is fair to expect that some of both the old money and new rich will consider Family Offices in the coming years.

Two types

Broadly, Family Offices are of two types — Single Family Office and Multi Family Office.

The former is essentially an in-house entity set up by the ultra-rich family and hires skilled investment, finance, accounting and tax professionals.

This is generally the choice of the very wealthy whose significant corpus makes it worth the time and money to start a Single Family Office. For instance, Azim Premji has set up PremjiInvest and Narayana Murthy has set up Catamaran Ventures.

Says Rajmohan Krishnan of Entrust Family Office, “Setting up a single family office is an expensive proposition. In our view, the total investible assets need to be a minimum of ₹500 crore to make it viable.”

A Multi Family Office, on the other hand, caters to many families by using their pool of experts and tapping into various other service providers. This makes it more cost-effective. Boutique firms such as ASK Wealth Managers, Entrust Family Office, Metis, Altamount Capital, and Waterfield Advisors offer Multi Family Office services. So do some bank-related entities such as Kotak Wealth Management and Barclays Wealth. While most Multi Family Offices offer a wide range of services, some restrict themselves to pure advisory services.

You can pick and choose from the services offered by Multi Office Offices. But at what point in your wealth accumulation should you consider going in for one?

Says Rajesh Iyer, Head - Investment Advisory Services and Family Office, Kotak Wealth Management, “From a commercial point of view, any family with more than ₹25 crore of assets should consider empanelling professional family office service providers.”

Checkboxes

The stakes are high; so, evaluate Multi Family Office providers carefully before selecting one. Critical aspects to consider are trust, confidentiality, and whether the advice to be offered will be independent and free from conflict of interest such as commission-based payments.

Also, check the thoroughness of the entity’s investment research process, its long-term track record and sustainability; there should be assurance of stability in the team that manages your wealth.

Also, the provider’s in-house expertise, non-investment related services and experience of working with other families should figure in your evaluation matrix.

What about costs? A Single Family Office, being an in-house set-up, has the usual high establishment and running costs.

Multi Family Offices, on the other hand, usually charge their clients fees as a percentage of the assets managed. According to Nishant Agarwal, Senior Director, ASK Wealth Advisors, the annual cost could be between 0.5 per cent and 0.75 per cent of the assets under management, depending on the complexity and nature of work undertaken. Besides, for non-investment related services, Multi Family Offices may select external experts and negotiate prices with them. This cost is charged to clients as actuals.

All said, when it comes to Family Offices, while costs are no doubt important, they should not be the overriding factor. Place more premium on the quality of advice and service.

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