It is a private advisory firm which caters primarily to the financial management needs of ultra-high net worth individuals (ultra HNIs) and families. There is no universally applicable definition for either ultra HNI or a family office. However, globally, the family offices have been open to include families or individual with net worth of at least US$50 million in their clientele base. Likewise, what functions do the family offices perform varies with family offices and the needs of their clients.
Typically, there are two types of family offices- single family offices and multi-family offices.
They may also be classified on the basis of the range of services they provide as- administrative family office, hybrid family office, and fully integrated family office.
Family offices are primarily to serve the investment management needs of their clients. But besides that, they perform myriad of other activities based upon and in agreement with the specific needs of the clients. Here is a comprehensive, but not exhaustive, list of the functions performed by them.
Needless to say, all the services enlisted above are not necessarily provided by the all the family offices. That depends upon the needs of the client, cost structure of the services provided, the level of competition among the family offices at the place, and extant regulatory framework.
Single family offices are unique to the families that set them up. So, the cost of running such institutions would depend on the size and level of competence of the employees they hire. Size may vary from 1-50, and the competence required would depend upon the complexity of the needs of the family. So, there can’t be an average cost level applicable to all the single family offices. Multi-family offices have their costs of services comparatively lower than those of single family offices. This is due to common employees, better networking with various service providers, and advantage of economies of scale.
Given the available evidence globally, a full-service family office would cost a minimum of US$1 million annually to run, and even more in many cases. So, for a family office to be viable, a family should be worth between US$100 million and US$500 million. Although, a family office may be set up with less than US$100 million in assets, though the services provided would be limited to administration, control of assets, consolidation, and risk management.
It has been found that they typically have operating costs between 30 basis points and 120 basis points of assets under advisement based upon the services provided by them. As per a study conducted by Capgemini in 2012, the overhead cost of maintaining a family office varied depending upon the assets under advisement and the type of family offices, i.e. the range of services they were providing. The following table shows the findings of that study.
A research from consultancy Family Office Exchange has found that more than 60% of total cost of a family office is allocated to staff compensation and benefits. The total break-up of cost of a typical US family office is shown below.
In India, traditionally family offices were the single family offices managing the private wealth of the big business families. After the liberalization of economy in early 1990s, the private wealth of many industrialists jumped many times, and thus increased the need for their prudent management. Many of them started their own single family offices to manage their family wealth. The prominent examples are Premji Invest of Mr. Azim Premji, Khimji family office of Mr. Ajit Khimji, Catamaran of Mr. N R Narayan Murthy, and the Ambani family. Besides these big names, many more ultra-affluent families arose out of the growth story of post-liberalization Indian economy with significant investable surplus. Responding to the needs of these families, many financial firms like private banks, non-banking financial institutions, asset management companies, brokerage firms etc. started their family office divisions to work as multi-family offices.
Like global scenario, In India also, there is no universally applicable definition of ultra-HNI and family offices. Also, they work in absolute confidentiality with their clients. So, the number of family offices can only be estimated. As per one estimate, the number of family offices in India in March, 2014 was around 200, and is expected to grow to around 500 over next 5 years. As per another estimate, the number of family offices in India is expected to reach 940 till 2015.
As per the latest World Ultra Wealth Report by Wealth-X, India is home to 7850 ultra-high net worth individuals who have more than US$30 million investable income each and a combined wealth of US$935 billion. The low penetration of family offices at just 20% and huge amount of inter-generational wealth transfers of about INR5.78 lakh crore i.e. about US$128 billion to take place in coming decade is providing the family offices opportunity to grow by leaps and bounds in India.
Many domestic private banks and foreign banks are into family office business in India. Prominent among them are BNY Mellon, BNP Paribas, Credit Suisse, DSP Merrill Lynch, Kotak Mahindra Bank, etc. However, there are a large number of boutique firms also with a market share of around 47%, like Altamount Capital, Client Associates, Waterfield Advisors, Credence etc. to name a few.
Family offices have their roots in the sixth century, when a king’s steward was responsible for managing royal wealth. Later on, the aristocracy also called on this service from the steward, creating the concept of stewardship that still exists today. However, the modern concept of family office developed in the 19th century when the family of financier and art collector J P Morgan founded the House of Morgan to manage the family assets. In 1882, John D Rockefeller established an office of professionals to organize his complex business and financial operations and to manage his family’s growing investment needs.
The family office business is a secretive kind of business like hedge funds. The family offices typically do not reveal the assets under advisement and other details of their clients. So, it is difficult to estimate the exact figure of global assets under advisement of the family offices. Also, estimate of the number of the family offices vary due to different parameters being used to define family offices by different firms.
By one estimate of Family Offices Group, there are more than 3000 family offices in US with another 1000 in Europe and even more in Asia, Latin America and other areas of world. As per another estimate, in US alone, there are estimated 4000 family offices, with over UD$1 trillion in assets under advisement. As per a Cap Gemini report, the number of family offices in US has grown to about 3000 single family offices with asset under management between US$1.0-1.2 trillion. Also, there are about 150 multi-family offices having assets under management between US$400-450 billion.
In June, 2014, Bloomberg published a ranking of top 50 multi-family offices based on the assets under advisement as of December 31st, 2012 from among the 118 firms globally which responded to its request for information. The top 5 of them with their country and assets under advisement are given below.
Conclusion
Growing economic prosperity, huge investable surplus and need for intergenerational transfer of wealth will further boost the demand for family offices. However, increasing competition, regulatory intervention, cost inefficiency, complexity of operations, shortage of talents etc. are the immediate challenges which they are facing currently. In this situation, they need to re-visit their operational structure and wealth management processes, and either weed out the inefficient ones or re-structure them.
Possible solutions could be: partnership of single family offices with multi-family ones, upgradation of risk analytics and portfolio management tools, out-sourcing non-core functions, searching for new investment asset classes etc. A self-regulatory body comprising all family offices and mandated with setting uniform standards and practices consistent with the various regulatory requirements would be of great help to bring transparency and credibility to them.
Disclaimer:
This communication is only meant for qualified and certified Financial Advisors. This document should not be construed as an invitation/recommendation to purchase or sell a security or take any position in the market. While Pulse Labs has taken every care to ensure that the information/data is accurate and complete, we do not take any responsibility for any errors and omissions.Aug 29, 2019
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