Family Office - its basics

Family office is a term used very loosely in corporate circles. The below is a brief note to keep the basic concepts clear.

Family Offices are primarily wealth management advisory firms that serve Ultra-high net worth investors. They provide complete wealth management and investment oriented services. Because the families’ wealth structures are worth more than the privately operated businesses, they need to be managed with professional skill and care for its preservation and growth.

Family Offices provide tailor made services to meet the needs of the High-net-worth individuals. The dedicated team of professionals understand the family wealth in terms of assets and investments and perform succession planning, setting up of trusts, lifestyle planning and management, entity formation and maintenance and several such financial and non-financial functions.

Types of Family Offices

Embedded Family Office: Families work with individuals they already know and do not hire other persons to manage their wealth. This works as an internal team which formed from a business venture. Hence, they might not have the expertise and resources to assess the risk and manage the complex investments.

Single Family Office: Families hiring an independent team of experts working exclusively towards planning, structuring and managing their wealth. These teams usually work across various domains including charity, education of future generation and family governance. Hiring and retaining the right experts is a challenge.

Multi Family Offices: They build their businesses around serving many clients. This brings individuals with expertise and experience which allows cost-sharing among the clients. The services are customized as per the family requirements. MFO should not have conflict of interest like internal products or commercial referral arrangements with any product or service provider.

Increased growth in Family Offices

The returns are increasing as compared to the capital and labour creating a multigenerational income across industries. The significant wealth generation has created a need for it to be managed professionally.

Operating at lower cost by eliminating traditional methods and opting for the advancement in technology while not compromising on the output has created increased returns. Institutional investment funds which charge significant management fees while maintaining a family office costs lesser and works specifically for the client’s benefit and needs.

Having a family office retains a significant level of control with the principal making it comfortable and accessible. The industry expertise can be exploited to create value in the domain by the non-financial services centered around valuable relationships and general thought leadership created by the family office.

Family offices think long-term spanning generations unlike the traditional institutions which look at a 10 year horizon. Hence, holding period is longer and generates cash flow from assets which is remitted to the principal.

Functions of Family Office

·??????Wealth Planning: Family wealth is a summation of the wealth of different generations. Family Office deals with this total wealth by structuring a plan suitable to their goals. They look for specific opportunities which cater to the family’s ideas, beliefs, growth and their social contribution. The process of transfer of legacy is planned by close association and interaction with the individuals as the businesses need to sustain and accelerate through second, third and subsequent generations. Intellectual property rights are protected as there is a risk of such rights ceasing to exist.

·??????Entity Formation and Maintenance: Trusts are usually formed to maintain the family wealth and these are managed by Family office. The trusts’ activities, members and activities are centered around the family’s interests and the planning and structuring is under the family office’s functionality.

·??????Real Estate Investment and Management: The family property is not easy to manage as they come with the management and usage of the property for running their own business or investment. Lease, rent, license are a few aspects that come into play while managing Real Estate which can easily be structured and the external players can be managed by the Family Office.

·??????General Litigation and Dispute Resolution: As family office works closely with the family, their team of lawyers could help represent in personal and commercial litigation. Family office negotiates for their client in disputes to be settled outside the court as well. The interests of the family are well known to a family office and hence are efficient as compared to hiring an external representative.

·??????Charitable Planning/ Philanthropy: High Net Worth individuals usually try to make contributions to the welfare and development of society. The family’s area of charity contribution could be Hunger, Education, Research, Sports, Poor upliftment, Climate change, Health, Religion, Spirituality, etc. These are usually the aspects which help them strike a conversation or help stand out in a networking space. Their charity does help run great projects while the family maintains its social status.

·??????Travel Planning: Family office also arranges for the family’s travel. Similar to other functions of family office, this is also centered around the family’s lifestyle. The team picks the places, arranges for travel tickets and stays. It’s a hassle-free option for the family to spend some vacation time or take care of their business deals.

The Family office centralizes focus and control over family finances, legal matters, tax and administration issues. It is an outsourced solution to manage the financial and investment affairs of individuals or families. It works to provide the best solution for building, preserving and transferring family wealth.

Setting up a Family Office

There are various factors to be taken into consideration before setting up a family office. The family’s complex financial affairs are the primary reason for setting up of a family office. The goals and desired outcomes of the family should have clarity. This can by understanding the skills and competencies and drawing up the priorities. Creating documents such as vision, objectives, goals, values, mission and history of the family provides a direction to the family office set up to function smoothly and efficiently. The investment decisions and interests of successive generations will be kept in mind while management of the family wealth.

While selecting a team of professionals to constitute a family office, having access to specialist resources and global practices is as important as setting strong parameters relating to values, governance and goals which help a sustainable survival of the family’s wealth.

The different generations in a family have varied interests, educational and social exposure which contribute to the dynamic family environment. A family office hence acts as an intermediary to help deal with the dynamics and intergenerational issues. Understanding the level of intrusion and setting boundaries is necessary to make the best out of the services a family office has to offer.

Benefits of a Family Office

With Multi Family office structures, the firm has a lot more capital to work with and brings in huge investments. These allow for the family office to explore options with higher risk and diversify the industries as well hence, contributing to their experience and exposure.

Family offices are fast and flexible and cater specifically to the family’s needs and requirements unlike institutional investment consultants. They come up with unique structures to deploy which benefit the family wealth across generations for the long term.

They make investments based on metrics which provide an overall utility to the principal. This could mean rejection of attractive opportunities but achievement of directing investment towards passions.

Family Offices have an open architecture philosophy with best in class solutions across the market. Since, they work for the family’s benefit and do not promote any products of their own, there is absence of bias.

The office replaces professionals and offers more as and when a requirement arises. They can be held accountable and work for a longer term and for the continuity of the family’s wealth. Sufficient checks and balances can be structured to keep the principal involved in all the affairs.

Family Offices run for longer period and their flexibility in functionality with reduced costs of management is an all round benefit for high net worth individuals or families.