The most common structure to manage family wealth is single family office
India is witnessing a boom in family offices due to the jump in mergers and acquisitions and initial public offerings. Many business owners and entrepreneurs are cashing out, and they need to structure family offices to preserve and create wealth. Perhaps the biggest decision that family business owners will have to make is what kind of family office they want to structure.
There are many options available and they all come with their own benefits and shortcomings. Let’s take a look at some of these options.
Embedded family office: An embedded family office (EFO) is a very common structure seen in India. The biggest advantages of this structure is that the family continues to work with individuals they know well and they need not hire expensive resources to manage the office.
The biggest concern in this structure, though, is that if the family wealth is significantly large, the internal team may not be able to focus adequately on all aspects of investing and risk management. Also, the internal team may not be an expert in all asset classes and may miss experience in hands-on portfolio management across a complex investment universe.
Single family office: The most common structure for managing family wealth is the single family office (SFO). This involves the family hiring an independent team of experts to plan, structure and manage family wealth. Usually, the team is primarily focused on investment management, but in some cases this team also provides services towards philanthropy management. In a few cases witnessed in India, this internal team has a family governance mandate as well.
The primary benefit for this structure is that the family has a separate team to fully focus on family matters and provide enough privacy.
The biggest challenge to this structure is the ability to attract the “right” professionals who have relevant experience in managing money and also retain them for a period. While the talent is limited in this space, many families end up hiring anybody with any remote link to the investing industry. This creates a quality and expertise challenge in the office. Also, even if the family does get good talent, the biggest challenge then is to retain them and thereby ensure much-needed continuity.
Multi family office: Closely related to an SFO, the multi family office (MFO) structure came into demand when families did not wish to set up their own SFOs with the added costs and talent management challenges, but still expected the same level of expertise, privacy and unconflicted advice. An MFO manages multiple families and provides the same functions as an SFO, but at a lower cost.
MFOs bring in some big advantages such as a specialist team, experience across families and, most important, lower cost. They also provide a bouquet of services such as investment management, wealth structuring and estate planning, philanthropy and social impact investing, and family governance, which can be customized for a family. Also, since the MFO works with multiple families, they bring in industry learnings across their client ecosystem. The MFO investment platform usually works with all asset managers without bias.
The biggest challenge with this proposition is the ability to find an “authentic” MFO. The team needs to have a hands-on experience in managing large portfolios and the key members of the team (especially the investment team) need to be owners so that there is continuity in the advisory relationship. Very importantly, the MFO should not have any conflict of interest like having internal products (equity broking, PMS, AIFs, fund-of-funds, etc.) or any commercial or referral arrangements with any product or service provider.
Virtual family office: A new-age blended model is the virtual family office (VFO). In this format, the family chooses to outsource every function of the family office to a different external adviser. The biggest advantage is that the family gets the best adviser for a specific need and ensures the best solution for each requirement. For e.g., if an adviser is very good at investing but does not provide (or is not good at) tax advice, then it can still be chosen for its investment expertise and another adviser chosen for tax and estate management.
On the downside, the family still needs to stitch all the pieces together and also become the information exchange among the various advisers working for the family.