Family Offices have been in the news lately for the role they are playing in the startup ecosystem – investing in, helping nurture and finally realizing the benefits of such investments.
In this article, we will try and demystify some of the aspects of Family Offices – especially what they are, how they operate, what they do and what benefits they confer.
We hope that this article is going to be an interesting read for both Ultra High Networth Individuals (UHNIs) and High Networth Individuals aspiring to get into the “Ultra” bracket.
And, as always we also hope that this is the start of an engaging journey where you expand your knowledge of this important aspect of wealth management through articles on this and other forums.
What is a Family Office?
▪ To put it simply, a Family Office is a private office for managing the wealth of families with considerable wealth and assets.
▪ Typically, a fully functional family office will engage in managing all or part of the investments, fiduciary, trusts and estate of a family. It may also offer concierge services.
▪ Services offered under the concierge umbrella may include non-financial issues such as private schooling, travel arrangements and miscellaneous household arrangements.
▪ It is also important to note that the term “Family Office” is unregulated in India and hence it’s definition varies depending upon who is using it.
What are the types of Family Offices?
▪ One of the main categorization of Family Offices is as a Single Family Office (SFO) or Multi-Family Offices (MFO).
▪ An SFO helps manage the wealth and financial planning aspects of a single family. This may include multiple generations or even family branches.
▪ A Multi-Family Office is usually a wealth management firm that offers a wide range of services to participating families. MFOs manage the financial affairs of multiple families who are not necessarily connected to each other.
▪ One of the key benefits of a Multi-Family Office is that it provides access to high calibre advice from a team of specialists, whose interests are aligned with the family, yet at the same time the families involved benefit from the economies of scale and a sharing of costs.
▪ A hybrid model where a family uses an MFO for its specialized advice but sensitive areas like accounting and other administrative matters are looked after by in-house staff is also prevalent.
▪ Variants also include private family trust companies that are legally constituted in a form that maximizes tax and estate planning, along with long-term fiduciary oversight. The private trust company may work in concert with a family office, or operate as a standalone entity.
▪ Another model is the family investment company. These entities often undertake investment activities on behalf of the family, but do not offer support services.
What are the benefits of a Family Office?
▪ One of the triggers for the rise of the Family Office phenomenon in India, hitherto largely restricted to Europe and the Americas, seems to have been the global financial crisis of 2008. Many wealthy families incurred substantial losses on their portfolios that were managed by banks or other financial institutions.
Such families sought to have greater control over their investments and a lower cost of investing and managing their wealth.
▪ Moreover, as UHNI families expanded to multiple jurisdictions and started transitioning to subsequent generations; there was a growing realization that managing the many complex aspects of wealth, investments and succession required a robust framework – one that Family Offices could provide.
▪ Philanthropy and integrating ESG investing have also accelerated the trend towards Family Offices.
▪ One of the primary benefits of an SFO-like structure is that the family has a separate team to fully focus on family matters while providing enough privacy.
▪ Also, when families work with multiple professionals, important details can fall through the proverbial “cracks” and the oversight that a family office can provide, greatly reduces omissions created by individual financial silos.
What are some of the challenges in adopting a Family Office structure?
Setting up an SFO involves several challenges –
– Hiring the right professionals with relevant experience and expertise
– Setting the right goals for the SFO management team
– Retaining talent and ensuring continuity
Setting up an SFO is not a decision to be taken only after due consideration, cost-benefit analysis etc.
Using an MFO might seem to have a number of positives – cost benefits, bringing in of learnings from working with multiple clients but it comes with its own set of challenges –
– Finding a reliable/credible MFO, one that is truly capable of managing various aspects of wealth.
– Confidentiality concerns, especially ensuring that one family’s data is not shared, even inadvertently, with other family(ies).
– Conflict of interest concerns especially with proprietary products or commercial/referral arrangements with product/service providers.
A significant amount of research is needed before you settle upon a Family Office structure and provider.
What are some examples of Family Offices in India?
▪ Aarin Capital is a co-owned family office of Manipal Education and Medical Group.
▪ Founded by SK Burman, Burman Family Holdings is the private investment body of Dabur India.
▪ PremjiInvest is the family office of Azim Premji of Wipro.
▪ Ajay Piramal SFO is the privately managed family office of the Piramal Group and Shriram Group.
▪ Catamaran Ventures is the family office of Infosys founder, Narayana Murthy.
▪ Ratan Tata’s RNT Associates and Ronnie Screwala’s Unilazer Ventures are a few more examples.
When a family’s assets and wealth are substantial and financial needs are complicated, a family office provides an integrated service model that accounts for everything financial- and lifestyle-related in one place.