Many of you reading this magazine are proud owners of a beautiful Isprava home, as I am. These homes capture a sense of purpose and legacy, not unlike the modern day outcomes that clients seek for their wealth creation and preservation goals. At the heart of ensuring a seamless succession of wealth across generations and a lasting legacy is the idea of the Family Office.
So what is a Family Office?
A Family Office is a private wealth management advisory firm that serves Ultra-High Net-worth clients. They are different from traditional wealth management firms in that they offer an outsourced solution to managing the financial and investment side of an affluent individual or family. The operative words are “advisory” (the business model does not have a conflict of interest) and “outsourced” (a group of professionals manage the family office). Typical services include investment management, tax and estate planning, orderly succession for family owned businesses and charitable giving.
Family Offices are either defined as Single Family Offices or Multi-Family Offices. A Single Family Office caters to just one family. Multi-family offices, on the other hand, provide the same services as a Single Family Office, but instead serve multiple families. Not every wealthy family seeks to set up their own Single Family Office and Multi-Family Offices or MFOs help families to avail of similar services without having to worry about the administrative issues related to running a Family Office. The key benefits of a Multi-Family Office is the ability of families to work with the best-in-class professionals, whose interests are aligned with the family, yet at the same time the families benefit from the economies of scale and a sharing of costs. The company I founded, Waterfield Advisors, is today India’s largest, independent Multi-Family Office where we manage assets of approximately INR 25,000 crores across 60 client groups.
The roots of Family Offices can be traced to as early as the sixth century and they involved managing wealth for princely families. The modern day concept of the Family Office emerged in the 19th century. In 1838, the family of financier and art collector John Pierpont Morgan founded the House of Morgan to manage the family assets. This has subsequently morphed, through multiple mergers and acquisitions, to what we know today as JP Morgan & Chase, the sixth largest bank in the world and the largest bank in the United States, managing assets of approx. US$2.75 trillion. In 1882, the Rockefellers founded their family office which is also still in existence today. The firm manages over $16 bn in assets globally for a wide range of families, individuals and institutions.
Over the past 20 years there has been a global proliferation of Family Offices, with a significant rise in the numbers over the past 10 years subsequent to the 2008 financial crisis. This was driven primarily because several wealthy families incurred substantial losses on their investment portfolios that were being managed by banks and larger financial institutions. It is important to understand that most wealth management firms earn their revenues through the commissions they receive from the manufacturers of financial products. There is therefore an inherent conflict of interest between the wealth management firms and clients, whereas the fundamental premise on which a Family Office works is to represent the family’s best interests. Over the past ten years, this has led to wealthy families setting up their own Single Family Offices, if they had the means to do so, or integrating into larger Multi-Family Offices. It is estimated that there are approx. 7300 Family Offices worldwide that manage US$6 trillion. This is larger than the global hedge fund industry. India has less than 1% of this with only 45 known Family Offices.
Family Offices are today arguably the fastest growing investment vehicles in the world, as families with substantial wealth are increasingly seeing the virtue of setting up Family Offices. The Family Office space therefore needs a much greater understanding from both the practitioners and clients of wealth management firms.
WHY ARE FAMILY OFFICES IMPORTANT?
Unprecedented growth in liquid wealth India accounts for US$12.6 trillion or 3.3% of Global Wealth. Over the next 5 years, the wealth of High-Networth Individuals is expected to grow at a CAGR of 27%. It is estimated that by 2023, only 3 countries in the world – the United States, China and Russia will have more billionaires than India. This is unprecedented growth. Between now and 2025, the wealth of Ultra-High Networth families will increase 3 fold from the present US$2 trillion to US$6 trillion. At the same time, there is a noticeable trend in household savings moving towards financial assets, different from earlier years when physical assets were preferred by Wealth Creators. Investment allocations and strategies are also changing, with more promoters creating separate pools of capital for their legacies as opposed to ploughing back all their wealth into their operating businesses.
Succession and Exits, which create liquidity events for Families
Family Businesses typically go through three phases. The “Initial stage” or the “Founders Stage” wherein all dimensions of the family, ownership and business are concentrated in one family or groups of families or the individual founder. The second stage is where the company grows and transitions ownership to the next generation which is also called “Siblings Partnership”. In this stage, there is now a distinction between the family, ownership and business. In the third stage, the business has matured and you have the “Cousin’s Confederation”. Stage Two and Stage Three is where families feel the need to set up a Family Office that provides the necessary governance framework to manage family dynamics and to trigger the conversations on exits and liquidity events. An unfortunate drawback of wealth creation that we have seen is its ability to cause conflict – and in the context of succession – family conflict. By some accounts, India has the highest incidence of family feuds. 40% of the global wealthy have direct experience of their family fortune leading to disputes, while in India an estimated 60% of the rich have seen relationships deteriorate because of feuds over money. Family Office structures can therefore be an effective tool to manage inter-generational wealth.
A FAMILY OFFICE IS A PRIVATE WEALTH MANAGEMENT ADVISORY FIRM THAT SERVE ULTRA-HIGH NET-WORTH CLIENTS. THEY ARE DIFFERENT FROM TRADITIONAL WEALTH MANAGEMENT FIRMS IN THAT THEY OFFER AN OUTSOURCED SOLUTION TO MANAGING THE FINANCIAL AND INVESTMENT SIDE OF AN AFFLUENT INDIVIDUAL OR FAMILY. THE OPERATIVE WORDS ARE “ADVISORY” (THE BUSINESS MODEL DOES NOT HAVE A CONFLICT OF INTEREST) AND “OUTSOURCED” (A GROUP OF PROFESSIONALS MANAGE THE FAMILY OFFICE).
Family Offices are an important source of new capital
The Venture Capital and Private Equity ecosystem in India is maturing and generating liquidity events for promoters and entrepreneurs. Over the past five years, research has indicated that family offices represent increasingly appealing sources of capital for hedge funds, private equity funds and investment banks. There are three critical forces driving this emerging trend – family offices typically represent significant pools of wealth seeking investment return; secondly, as demand for integrated wealth management services has increased, the rapid proliferation of the family office model has deepened the sector’s resources; and finally, family offices tend to have long-term investment horizons that make their assets “sticky,” helping to promote fund stability. With many aspects of their long-term planning tied to their investment portfolios, more families are finding that family offices represent the ideal structure for implementing a cohesive wealth management strategy. Family offices also share many characteristics with pension fund investors, and these similarities are actually serving to reinforce the trend toward the institutionalization of the industry. Philanthropy and Socially Responsible Investing Globally, families with wealth face unique challenges. At Waterfield, we have seen that philanthropy provides a great bridge to discuss a family’s values, goals and ultimate legacy. Parents are often hesitant to discuss inheritance and money with their children, because they are worried that the knowledge of the family’s wealth at too young an age may demotivate their children or inhibit them from leading productive lives. Most Family Offices will have a Philanthropy arm. This is often the first place where the next-gen also learns about the basic principles of investment management and asset allocation, because children see their parents manage the foundation’s investment corpus for doing social good. It should be said that a nascent but growing trend amongst family offices is also the interest in socially responsible investing with programs developed around customized restrictions as well as preferred responsible investment options. Next generation family members have a growing interest to align investment interests with their philanthropic values. The lines between growing wealth and doing good deeds with that wealth are no longer two separate agendas and through both philanthropic giving and impact investing, families can contribute back to society Globalisation of Assets We are also seeing a greater trend in the globalisation of assets. While there continue to be restrictions and capital controls, India has a 17.5 million strong NRI diaspora. Most HNI families have at least one family member residing overseas. Family Offices are being set-up in multiple jurisdictions to access the larger global markets.
DO YOU NEED A FAMILY OFFICE?
Having a Family Office or working with a Family Office is a deeply personal requirement. It can provide tremendous peace of mind and support to all family members. Where a family’s financial needs are complicated, a Family Office provides an integrated service model that accounts for everything financial in one place. Very often when families choose to work with multiple professionals, important items can fall through the proverbial “cracks.” The oversight that a Family Office can provide greatly reduces omissions created by individual financial silos. A Family Office is not for every family, but for those with significant assets, complicated financial lives and a desire to make the mundane, as well as the complex, a bit smoother, a Family Office can be an ideal solution.