Is the family office only for the rich? Five questions on family office answered.

Family Offices are, in simple terms, entities that have been set up to cater to some financial & some non-financial needs of ultra-high-net-worth individuals. These individuals can be family business owners, entrepreneurs, or even some very high-paid professionals. 

These offices provide services in the areas of investment management, expense management, tax planning, and other non-financial functions like wealth holding structures, travel management, global citizenship planning, etc. 

Munish Randev of Cervin Family Office answered five questions on the family office and how it functions in India.

1. What are the types of family offices?

There are primarily three types of Family Offices – 

Single Family Offices (SFO) — These offices are dedicated to just one family. The family office teams are internally hired by the UHNWIs and have an almost corporate-like structure with a CEO/Head, CIO, Finance and operations professionals, etc. The SFO entails costs (such as salaries and offices), challenges around retaining quality talent, etc. 

The best example of such a structure is the Premji Family Offices, which manages over USD 10 billion in family assets. 

Multi-Family Office (MFO) – An MFO is a family office that caters to the needs of many UHNWIs. These specialized teams use their expertise to provide solutions catering to the individual needs of each client’s family. Since the MFOs are not dedicated to just one family, the cost of working with an MFO is much lower than having a dedicated SFO, as the cost of the team is shared. 

The MFO has a similar talent structure as an SFO, with a CEO, CIO, operations and service professionals, etc. Ideally, the MFOs need to be registered advisors with SEBI, with a strong focus on customized advisory across all family needs. 

Virtual Family Office (VFO) – A relatively newer type, this structure entails outsourcing all primary functions to different external entities. 

Unlike an MFO or an SFO, which provides all services like investment planning, wealth holding structure strategy, investment execution, tax planning, operations and finance support, etc., a VFO outsources these functions. In simple terms, a VFO is an SFO where all major employees are replaced by external entities. This is not a very common structure for a family office.

2. What are the services typically offered by a family office? 

Family office services can primarily be bucketed in the following way- 

Investment Management – a major function of a Family Office includes asset allocation planning, structuring, product selection, investment execution, risk management, and reporting. 

Wealth Structuring & Succession – creating and managing wealth holdings structures for the family. This includes creating optimum vehicles where the wealth will be held, like trusts, LLPs, offshore structures, etc. It also includes planning how wealth will be transferred to the next generation, considering the taxation implications. 

Family Governance – is usually applicable to large families. It includes helping the family establish certain do’s and do n’ts regarding how family members interact, how family disputes should be handled, and how to disseminate family values across generations via documents like the family constitution, etc. 

Philanthropy – includes helping the family plan for their ‘giving, charitable, or social impact’ endeavors. It also facilitates the identification of causes to support, the best way to support them, and how to keep a tab on the progress made in each initiative. 

3. How are the services offered by a family office different from those offered by other wealth managers or investment advisors?

Firstly, wealth managers (including banks) usually are sales & distribution entities that earn money by selling financial products to their target clients. They earn commissions or brokerages from the product manufacturers. With these entities, there is a risk that the commissions decide which product is sold more. 

SEBI bars all such distribution entities from providing holistic investment advice to their clients. SEBI has only allowed Registered Investment Advisors (RIAs) to provide this type of advice and earn an advisory fee. Hence, RIAs are more appropriate in providing investment planning advice to UHNW families. 

However, RIAs only provide investment planning services and not necessarily the whole gamut of family office services. While investment forms a major part of the family office activities, the dedicated family offices (SFO, MFO) also provide other services like expense management, next-gen training, lifestyle management, long-term wealth success planning, etc. Some MFOs even become sounding boards for most big family decisions. Senior MFO professionals also sometimes act as coaches for their clients at key junctures in their lives. 

Hence, family offices (SFOs, MFOs) provide a much wider range of services. 

4. Does family offices indeed invest in interesting asset classes like start-ups, art etc? 

The primary reason why Family Offices are seen to invest a bit more in exotic asset classes like startups, art, collectibles, etc, is when they have internal or external expertise to assess such deals and opportunities or the risk-taking ability of investors allows them to be a bit more adventurous in their investment planning. 

While art has been a very old asset class for some family offices, startup investing has been a growing allocation over the last 10 years or so. With the growth in the Indian startup ecosystem, Family Offices are becoming large investors in this space. While most investors are looking for higher returns, some family offices also view it as an initiative to support the entrepreneurial mindset in the Indian economy.

Having said that, it is also true that many Family Offices have zero or very little allocation to the above asset classes. The sheer size of the family office portfolio is not a barometer for their interest in these alternate asset classes. In fact, a few investors desire to keep their portfolios simple and uncomplicated and thus stick to just equities and debt investing.

Each Family Office has different needs, risk-taking abilities, and family structures, which require customized portfolio allocations and product choices. 

5. Is the family office only for the rich? What should be my net worth to get services from a family office? 

While there is no science behind the minimum net worth that may be needed for an individual to require a Family Office, we have seen that a Family Office is needed if the wealth size exceeds the Rs 100 crore mark. Such wealth requires a deeper understanding of the investment domain and dedicated advisors to support the family. 

The only factor to consider is the cost of setting up a Family Office structure. An SFO cost can only be afforded by larger portfolios, possibly upwards of Rs 1000 crore, and an MFO cost would ideally be effective for Rs 100 crore and above portfolios. 

Sometimes, the complexity of family wealth demands a Family Office. A family with multiple individuals and entities who have wealth, maybe across geographic locations, and also require wealth structuring services like trusts, etc., may also need a Family Office even though the portfolio may be below Rs 100 crore.

The questions are answered by Munish Randev, founder and CEO of Cervin Family Office.