Wealth management 360

It is not enough to create wealth. It is also necessary to preserve it and make it grow. This task becomes even more complex when the wealth does not belong to one individual but to an entire family, and is earned over many generations.

Ultra high net worth families, with a net worth of more than ₹100 crore, hold assets through intricate legal structures, investment companies or cross holdings across businesses. Managing all this gets more complicated as decisions have to be made by different family members and groups.

It is for such families that Family Offices can prove useful. Tasks of a family include consolidation of investment and financial assets, getting the documentation related to them in place, especially real-estate, establishment of investment strategies and selection and supervision of wealth/fund managers, bankers and accountants. Family Office services appeal mostly to business owners who have a large amount of wealth outside their core business, but do not have the time or the expertise to efficiently manage it.

Wealth-related woes

Currently, investments of most wealthy families are managed by wealth management or private banking firms, independent advisers or trusted CAs/CFOs of the family. Investment decisions are adhoc and based on specific investment proposals that are presented by such advisers. Given the low level of in-house expertise or time to conduct an extensive due diligence of each investment proposal, most families tend to take investment decisions based on the comfort level with their adviser or the institution that they represent.

This often results in wealth destruction due to the selection of a wrong product, high cost of transaction, over-diversification, inappropriate asset allocation and tax inefficiency. Secondly, issues such as taxation, risk management, protection of capital and transfer of money to the next generation become very important. After a while, for any wealthy family, managing family members becomes a larger issue than managing their business. Issues related to succession planning and protection of wealth become paramount.

A Family Office is a 360 degree financial management firm that works as a personal CFO in managing the personal balance-sheet of the family and its members. It works as a mid-office between the family and all its relevant service providers such as wealth managers, private banks, brokers, CAs and lawyers. It gets compensated by the family and does not earn any other fee / commission from product distribution. It manages the investment portfolio of the client across all asset classes and offers advisory services on tax, risk management and succession planning. It is responsible for consolidating all investments under one roof, product due diligence, creation of investment framework, investment decisions, performance monitoring, measurement and reporting.

Objectives of a Family Office

A family office has to execute all tasks related to managing the wealth of the super-rich family. To start with, all relevant financial information must be consolidated and stored at one place. Only the ability to look at a consolidated financial statement will allow the family or investor to understand the consequences of investments and assess the risk taken. Based on these findings, a long-term investment strategy that is in line with the families’ long-term goals is drawn up. This integration of various financial tasks and information management produces the overall picture for sound decisions.

In its next step, the Family Office will help the client formulate and implement the investment strategy and family philosophy. Very often, estate planning, tax and legal advice may add more value than chasing incremental returns.

As necessities vary in each case, one of the critical tasks of a Family Office is to identify and coordinate the outside experts to achieve the best possible solution for the family’s issues. Therefore, family office clients will always benefit from valuable knowhow, network and expertise.

Financially independent

Service providers in the financial industry, especially private banks and wealth management firms, are increasingly forced to standardise their products to optimise profits. These are then sold aggressively across all client segments and frequently retail products end up in large portfolios. However, the adviser’s compensation is linked to his/her sales commission. This is a conflict of interest that most firms cannot resolve if family office services are offered along with proprietary products.

The buyer requires sound advice of an independent specialist to achieve the best value. Since there are thousands of products and managers to select from, it is highly unlikely that the one offered to the client is also the best. Very often, these products simply do not make sense in the portfolio as there may be overlaps, lack of diversification or the cost structure could be unfavourable to the client.

At the same time, the framework of the family and its environment may alter quickly and, therefore, needs timely adjustment. It is widely recognised that an adviser working with an open architecture will be better-equipped to offer the flexibility needed in today’s fast-changing environment.

A multi-client Family Office will outsource some of the functions that are clearly better-served by external specialists. In its role of ‘general contractor’, it has to ensure that the overall strategy is followed and executed as agreed with the client. Outsourcing may also eliminate obvious conflicts of interest. Unbiased and independent advice is critically important, but scarce and hard to get.

(The writer is MD&CEO, ASK Wealth Advisors Pvt Ltd.)

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