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Having your own wealth manager

Individuals and families are seeing the need to create a family office to address the demands that come with significant wealth

Photo: iStockphoto
Photo: iStockphoto

As wealth increases, the burden of managing the family business, finances, investments, taxes and other assets requires more time than many families can reasonably devote. Increasingly, individuals and families are seeing the need to create a family office to address the demands that come with significant wealth. Each family office is as unique as the family it serves, often reflecting their values, interests, needs and characteristics.

Family offices are often defined by three key factors: size, complexity and autonomy. Today, a range of family office models are in use—key differences exist between single-family offices and multi-family offices that serve unrelated families, providing them the flexibility to best suit their needs. The optimal family office architecture depends on each family’s needs and how these might evolve. This is important from a continuity point of view as the next generation takes on the responsibility of both preserving and expanding the family’s wealth.

In general, the older generation of entrepreneurs is keen to invest in financial instruments and keep the focus on managing wealth, whereas the younger generation has thoughts about diversification into start-ups, private equity and social investments. All Indian entrepreneurs, however, are extremely careful. The younger generation, well-educated, has a deep understanding of how their fathers or grandfathers have grown their wealth, so, for them, protection is as important as growth.

In one example, the son of a promoter who concluded a stake sale was managing his family office and focused on investing in venture capital funds, start-ups and a fledgling non-banking financial company. In this case, the goal of the family office was not merely to manage or grow wealth, but to help the next generation take an active management role in key investments.

Before setting up a family office, clients seek advice on the costs, benefits and operational steps. Families consider broad guidelines—a) qualitative factors leading to the decision of the appropriateness of creating a family office; b) quantitative factors involving the size, costs and benefits; c) operational and governance factors, including understanding the responsibilities and management; and d) personnel factors, such as determining the skills needed to run the family office.

While many families begin with a trusted employee from the family business, the quality of the staff at family offices is evolving, with senior staff from private or investment banks, investment advisory firms or partners at law or accounting firms.

In one case, a promoter family consulted us ahead of a stake sale in their company, on how best to support their wealth after the sale. Their focus was on creating an asset-allocation model before creating an investment plan to deploy the money. While the older generation made the decision to sell the stake, it was the promoter’s eldest son who was responsible, along with a team of financial professionals, for studying the investment landscape, talking with advisers and seeking investment recommendations before creating the family office. The promoter relied on the son who had just returned from the US, given his understanding of finance owing to his education and experience. The son’s role was focused on how the money should be deployed, how risk should be managed, and judge risk-adjusted returns, choose investments and asset allocation, and gauge on- and off-shore opportunities.

In another case, post the promoter’s sale of a local company to a multinational company, the family needed advice on asset allocation, and how the money should be deployed. The family office was set up with one individual dedicated to public markets, one to private markets, and another to support direct investments. With this structure in place, the son of the promoter is now evaluating opportunities for new businesses while managing this wealth.

In such cases, it is important to keep it simple, with a competitive base salary and discretionary bonus. This rings fewer alarm bells within the family and the focus is then on healthy risk-taking and long-term portfolios.

Affluent families choose to create a family office for privacy. A family office allows for the management of family matters in a structure of near-complete confidentiality. Personal information can be limited to trusted employees who, in turn, can serve as the liaison with external service providers. High fees, poor performance, irresponsible tax advice and misrepresentation are often cited as reasons why clients want dedicated staff. Trust is also increasingly a motivation to incur the cost and overheads of a family office.

Sameer Kaul, head, Citi Private Bank, India

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