At a broad level, wealthy families across the world face
surprisingly similar issues when managing their wealth.
Generational transfer and succession planning is at the top of the
agenda and family offices are now springing up across the world to
cater for families’ needs. Will Cain reports.
Go deeper with GlobalData
The US has been a
financial services innovator for generations – and now best
practice in the family office segment is increasingly being
transporting across the world. With an estimated 1,000 family
office enterprises, the US boasts a thriving market.
Industry practitioners attribute
much of the recent development of family offices in emerging
markets to the children of wealthy families who are educated in the
US and bringing the family office concept back.
This transfer of family office
expertise is likely to become more formal in coming years,
according to Anna Nichols, managing director of content at Family
Office Exchange (FOX).
“I do think we’ll see more of
that,” Nichols says.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData“The US has a lot to offer in
family office experience and best practice is already exchanged
through organisations like ours with families in countries
including Australia, Singapore and Israel.
“As family offices begin to become
more popular, particularly in regions like Asia, it is likely we’ll
see more interest in and exchange of best practice.”
Family office best practice
spreads
FOX, through its
role as a resource for best practice among families in countries
all over the world, is already active in this area and Nichols
expects activity to be stepped up in the coming years.
Nichols believes US family offices,
as they become more global in outlook, will also help speed up this
process.
GenSpring Family Offices, as one of
the US’s largest and most internationally active multi family
offices, is likely to be an important part of this process.
“One of the things we see in Asia
is a great interest in the education side of things,” says Santiago
Ulloa, president of GenSpring International.
“In areas like family governance
and family dynamics solutions, wealthy Asians are coming to the US
and looking for solutions for that.”
There is also an interest in the
more resource intensive family office operations, where using a
shared multi-family office platform like GenSpring can reduce
costs. Typically, these are due diligence, asset allocation,
accounting and report consolidation purposes.
Asia-Pacific family offices
flourish
Terry Farris,
head of family office advisory at Singapore-based DBS Private Bank,
estimates there are between 25 and 30 true family offices in
Asia.
He expects this number to grow
significantly in the years ahead as first generation entrepreneurs
begin to plan the transfer of wealth to the next generation.
“We are at that evolutionary phase
where we have got a lot of generations who have been passing on
their businesses to the second generation,” says Farris.
“As that process continues, the
concept of the family office will start to take hold.”
This internationalisation of the US
version of the family office concept is also evident in Europe.
Consultancy Celent estimates 18% of
ultra high net worth individuals (UHNWIs) on the continent use
family offices. It says there are 750 single family offices with a
further 3,700 wealthy families using multi family offices.
Succession planning still
challenging
Whatever their location, the broad
issues facing wealth families are surprisingly similar across the
world. The core function of a family office is to manage
generational change but this can be a complicated process with many
pitfalls.
Success rates for wealthy families,
in which wealth is transferred and sustained across generations,
are as low as 30% according to research by GenSpring – and only 3%
of these failures are a result of poor estate planning or
investment returns.
The research highlights the
importance of generational planning not just at an investment
level, but on a much holistic basis – and this is the niche where
family offices are best able to operate.
Of 25 best practice initiatives for
multi-generational families highlighted in the report, none refer
to the investment process (see table on facing page).
They are based instead around ideas
of family cohesiveness, governance, strategic planning,
philanthropy, mentoring and trusts and estates. There is a strong
emphasis on the transfer not just of a family’s wealth, but also of
its culture and history.
James Hughes, a lawyer and family
wealth specialist quoted in Celent’s report, turns the wealth
management argument around by saying that “the assets of a family
are its individual members”, emphasising that good family offices
are more about managing people than managing money.
Family office vs family
business
Generational planning takes on particular importance when
wealth is tied up in or managed within a family business. This is
especially common in emerging markets, where many wealthy
individuals are first generation entrepreneurs, but also remains
true to a certain extent in the US.
According to Nichols at FOX, many
families recognise the legal, personal and business risks of
leaving wealth within their family businesses but all too often
leave the issue on the back burner.
Nichols says separation between
personal and business wealth is best practice for wealthy families
and FOX goes as far as saying that it is essential for effective
management and planning for the management of wealth over
subsequent generations (see page 10 box-out).
Nichols recommends wealthy business
owners begin a gradual shift of control away from the operating
company to make the process less onerous and overwhelming. The FOX
report outlines a three-step process to the independent management
of family wealth.
It starts with an entirely
business-managed scenario, moves to an intermediate step where a
formal department within the business manages the family’s wealth
and eventually leads to full separation.
As Nichols admits, “old habits die
hard” for wealthy families – and for many it needs a major catalyst
to kick-start the migration process: a privacy breach, sale of the
business, an IPO or leadership transition.
Many are happy to have their wealth
managed by trusted individuals they have worked with for years.
They also see their business’s finance department as a more
efficient and less costly alternative to setting up another entity
with an extra layer of overheads, for example a single family
office.
Wealth separation barriers
in Asia
These
habits die even harder for wealthy business owners in the
Asia-Pacific region, where wealth managers regularly lament the
inability of wealth owners to separate personal and business wealth
and the complications it can create.
The vast majority of Asia’s HNWIs
are first generation wealth creators, benefiting from the current
economic exuberance within the region.
Rohit Sarin, co-founder and
managing partner at Mumbai, India-based multi-family office Client
Associates, says there are plenty of reasons for business owners to
keep wealth within their businesses in Asia. These go beyond cost
considerations and habit.
Sarin argues than in Asia it is
often difficult for business owners to get a better return on their
capital than redeploying it into their own fast-growing
organisations.
“Of course, the thinking is that
you keep ploughing back major parts of your wealth back into your
family business,” he says.
“That also stems from the
socio-economic values of Indian families. A lot of business
families have large family structures and the businesses are
usually jointly owned. The business continues to be an overall
holding platform for their wealth.
“Wealth holders are starting to
understand the value of other avenues and asset classes but while
this understanding is growing it is still not very deep.
“From that point of view, it makes
sense that business wealth holders are still allocating more of
their assets to the asset class that they understand the most – and
in most cases that remains their own business.”
The one-bank model
solution?
Farris at DBS Private Bank, says
the best way to solve this problem is to offer a so-called one-bank
solution which can serve a client’s corporate and personal wealth
needs, also offered by wealth big hitters including Credit Suisse,
UBS and HSBC.
The model is able to cater for both
sides of family wealth when the business is growing. It can also
offer risk diversification through a family’s personal portfolio
from heavily concentrated positions in a family business, for
example businesses heavily influenced by changes in the price of
commodities.
The one-bank model is then well
positioned to advise on the migration of family wealth to
independent management when generational transfer is on the
horizon.
“I would say there are 25-30 true
family offices here in Asia and they are multi-generational
families,” Farris adds.
“My team is working with these
multi-generational families and helping them to look at moving into
family offices,” says Ferris.
“If they want to do that, what kind
of structures do they need? We can bring in our trust people and
look at putting those structures in place. We also look at what
governance.”
Latin American UHNWIs seek
greater asset diversification
For wealthy families in the
emerging markets of Latin America there is a slightly different
emphasis, according to Ulloa at GenSpring.
Political instability in some of
the region’s economies has at various points in history caused
confiscation of assets from wealthy individuals – notably in Cuba,
Nicaragua and Venezuela.
It means UHNWIs in these countries
want a greater degree of geographical diversification of their
funds.
“Latin American UHNWIs usually have
a very big operating business but they also try to reserve some of
their funds in other countries,” Ulloa says.
Another driver behind this
diversification trend is the rocketing asset valuations across the
continent, notably in Argentina and Brazil.
Ulloa says wealthy individuals are
on one hand exercising their increased buying power by investing in
assets in markets like the US and on the other attempting to
protect themselves from possible corrections in domestic currencies
and real estate prices.
“One of the big trends we have seen
in the last year is that many people in Brazil are trying to
diversify from the Brazilian market,” he says.
“They have been moving money out of
Brazil – totally legally, officially and fully declared – but they
want to reduce their exposure to the local market.”
Innovation in family offices must continue to match the rapid
pace being set by the world’s growing ranks of UHNWIs.
See also – Family
offices: best practice
VRL Report –
The Multi-family Office: A Solution for the Ultra High Net Worth
Client
