Timing the Leap into Family Office
There are signs and guidelines that can help a UHNI decide when to set up a Family Office.
With great wealth and success come great responsibilities. In the olden days, the Maharajas had a Diwan to collate and disburse funds as needed. Zamindars had munims to do the same. These finance professionals acted as an extension of the family, and their loyalty to their chosen household spanned across generations.
Institutionalization of capital markets has made such unflinching commitment a rarity. That’s why the only model that offers a similar client-centric approach is the Family Office model. A Family Office professional shares many characteristics with the Dewan and munim – these include loyalty, discretion and in-depth knowledge of the financial needs of every member of the family. So a person who has “arrived” needs an FO setup at the earliest – the moment they have a comfortable cushion of capital.
Usually, the triggers for setting up a Family Office are as follows:
1. When there is a windfall
Two brothers, let’s call them the Naidus, ran a company for 25 years before deep conflicts emerged between them and other partners of the company. So they sold their stake to a Private Equity fund and approached us with their substantial corpus of funds. As a first step, we helped them minimize their capital gains tax. After that, we held discussions with all family members and understood their ethos, liquidity needs and future plans. This information helped us create an investment philosophy for the family. That done, it was time to allocate assets, work with suitable wealth managers and create a portfolio that served the medium-term and long-term capital needs of all family members.
2. When it becomes too complex
Similar to the Naidus, Mr Mathur (name changed) sold his business more than a decade ago. Those days, the Family Office model was not an option. So he made do with wealth managers. He did well for himself. As his wealth grew, so did the complexities. So when he heard about our Family Office model, he was enthusiastic. We proved our mettle by helping him in his real estate needs. We found him his dream home, helped him relocate and them found a tenant for his existing property. Meanwhile, our staff streamlined his investments, and 18 months later, we were satisfied that his portfolio was both optimized and customized.
In Mr Mathur’s case, complexity was the result of a windfall and growth. For others, complexities can be the result of:
- The necessity of nurturing a family business across generations
- Multiple family members pursuing divergent interests
- Multiple family members being geographically distributed. For instance, if the family is buying a piece of real-estate, the Family Office professional will immediately determine the taxation impact of this decision upon the family member residing in the US
- The glaring fact that the next generation doesn’t appreciate the assets accumulated by the previous one. Therefore, decisions need to be made to maintain these assets (be they art, jewellery, real estate etc) and then bequeath them in a satisfactory and wholesome manner
When the going gets complex, the Family Office model needs to get going.
3. When wise disbursement of wealth becomes a priority
Many successful wealth creators want to be involved in heartfelt social initiatives.The philanthropy services intrinsic to our Family Office model help such clients. We not only identify authentic grassroots organizations that deserve funding, but also monitor the progress of projects and report back to the UHNI.
4. When the wealth creator has other priorities
Some UHNIs are hardly interested in planning their finances while some others are at the peak of their careers and can therefore spare no time for financial planning. Is it realistic to expect such people to perform mundane tasks such as monitoring their dividend payments, renewing their insurance and paying their property tax? Is it not better for such people to embrace the Family Office model, especially considering that Family Office professionals have a much larger picture about market conditions and emerging socio-cultural contexts?
In the final reckoning, it’s important to remember that the Family Office model not only grows wealth, but also protects it from all possible worst-case scenarios. So the worst time to set up a Family Office is during a crisis, when the family is on survival mode. The best time for the UHNI to set up an Family Office is any other time.