Asiamoney: the rise of the family office

Asiamoney, July 2011

So you’ve made your first million; then thirty times that. Your business has expanded and involved generations of your family. You’ve grown from what you know, the business that made you rich, into a host of investments to preserve and increase your wealth – and you realize you can no longer keep track of where the money is or what it’s doing. It is time to set up a family office.

The family office has no strict definition, but in essence it refers to families who have imposed a systematic structure around their wealth. Some think a family needs $100 million before it makes sense to develop one, others set the mark around $30 million. “For me, it’s a strategic way of managing family assets,” says Henry Hirzel, head of UBS Family Advisory, a global function, in Zurich. “It’s not only a group of professionals sitting together and doing investments. It goes beyond the pure financial investments and looks at the overall family business, the philanthropic ventures of the family, and the development of human capital – the next generation who can take over to run the family business.”

And that constituency, in Asia, is growing fast. It has long been an established, discrete group of capital in Europe, and for many years in the Middle East too, but it’s in Asia that the demographics are most clearly pointing towards the family office trend. Here, many private clients are the first generation in their family to have made significant money; in many cases, that generation is reaching the point where decisions need to be made about the next step – whether it stays in the family, who takes over, and what it will do next. That’s a natural time to consider formalizing structures and helping to create the right environment for a transfer of wealth.

“From what I understand, 80% of businesses in Asia are controlled, one way or another, by a family,” says Terry Farris, head of family office at DBS in Singapore. “The first generation entrepreneurs have been building their businesses for the last 30 to 40 years and might have only begun to bring the next generation into management in just the last five years. Over the next ten years we will see the largest transfer of wealth from one generation to another here in Asia. This transfer could have a significant impact on Asian business. “

Moreover, Asia is clearly where the wealth generation is. The Capgemini report, produced each year in association with Bank of America Merrill Lynch, keeps track of the growth in ultra-high net worth individual wealth around the world. (Capgemini sets the bar for this level at $30 million of assets, as do many private banks.) Its survey for 2010 said that the ultra-HNWI population grew 36.7% through the previous year alone, reaching 19,600 people. Although Capgemini doesn’t put a figure to their combined wealth, it is likely to be over US$2 trillion. Alongside has come an emerging sophistication of the people with the money. “What we usually see in Asia is that the starting point of a family office is within the finance division of the company, or one of the companies of the owners,” says Hirzel. “Slowly but surely, the functions get separated and become a standalone business.”

Seeing this, more and more institutions have been building dedicated family office divisions within their private banking arms, or bolstering existing commitments. In December Credit Suisse launched its first family office hub in Singapore. In January UBS launched a regional family services unit, also based in Singapore, and a few weeks later Citi launched a new business, called Global Family Office and Institutional, centred on family office clients.

Cynics say that this is little more than window dressing. “It’s more a marketing pitch than anything else really,” says one banker.

So why launch these businesses? Hirzel speaks of “a professionalization of the marketplace. Families are getting their act together, hiring investment professionals; and that calls on the other side, the banks and investment advisors, to be on the same level of knowledge at least.” UBS has been focusing on family offices for more than 10 years.

When Credit Suisse set up its Singapore platform, it hired Bernard Fung to run it, starting on January 3 this year. Fung had spent five years as the CEO of Innotech Advisers, the family office and investment vehicle of Lord Sainsbury of the famous British supermarket chain, considered one of the bigger and more sophisticated such operations in the country. What does family office, and a family office business, mean to him?

“I’ll say what it does not mean,” he begins. “We are not seeking to become the family office for our clients. We seek to help clients to create their own ability within themselves, rather than for us to take it in-house. We prefer to interact with smart money, and the only way to do that is to help families to thrive by formalizing what they’re trying to do for themselves.”

Advising this wealth is already a crowded field, and there is a notable focus on the emerging wealth rather than those who have already achieved it. “There is a well-banked segment of well-established family offices in Asia. My unit operates in the less-well established areas: families beginning to think about generational wealth,” says Fung. Similarly, Farris at DBS says clients will often look to the bank as “their first step into understanding how to begin establishing their family office. These families traditionally might not have shown up on the radar screen of other European private banks.”  Farris notes that some of the first family offices in Asia came as a consequence of the Asian financial crisis in the 90s, particularly families from Indonesia; it is largely a fairly recent development.

Consequently many banks talk about education – for an existing client base or a future one – as a key part of their offering. “Firstly, we want to educate people, the up and coming rich and famous, on how to set up a family office,” Tee says. “That is where we first thought of the idea of a hub, for what you might call a learning or incubation process. If you don’t have a family office, maybe you should try one: we’ll give you the hardware.”

Family office structures clearly involve investment advice, but are more frequently around areas like governance, risk and estate planning. Tee says that Fung told him: “Don’t talk to them about products. Get the governance right first, and if they see value in what you can bring to them in terms of education, then you can slowly talk to them about asset allocation and products.”

“We help them build their family offices from the point of view of the less interesting aspects like risk management, or simple reporting systems,” says Fung. “Reporting and managing $10 million of assets is very different from reporting and managing $100 million of assets, given that it is probably globally invested and with multiple banking relationships.”

Still, the people controlling the wealth in Asia are not always natural candidates for the rigour of a family office structure. “The entrepreneurs who have become very wealthy in the last 10 to 15 years generally haven’t become so wealthy by following any rulebook,” Fung says. “To talk about governance, and processes, to the wealth creator who is probably 60 or 70 years old, is a tough discussion.” They tend to need the right circumstances in order to see the merit of it. “The situations where I’ve actually had good progress are where the entrepreneur realizes that times are changing; children are coming back into the business and have been exposed to other parts of the world, and they are talking about the time when dad isn’t around and the need for the family to think about their investments collectively.”

“This generation [the older, entrepreneurial one] created its wealth by unfettered instinct: the newer generation realizes things are getting more complex.”

Farris has a similar experience. “There has to be good communication. You can have the best structures in the world, but if the family is unable to communicate together, the structures will fail,” he says. “Traditionally, the patriarch will keep things very close and not enlighten any of the family of his wishes, causing discontent and distrust throughout the whole family.”

A large part of the challenge for a private banker has nothing to do with investment, but encouraging families to overcome those natural barriers. “I share with families that they have got to create trust today. The foundation they set today will have a direct impact for generations to come.” Farris tries to combine this trust with good governance, suggesting a family charter that can provide guidelines for the interaction of the family, outlining how the next two, three or even four generations should work together.

Once convinced of the merits of communication and governance, one of the first challenges a family may look for help on is the sheer complexity of their operation. Fung recalls his time with the Sainsbury trust. “The office I took responsibility for had been in existence since the mid-80s. And what had happened was that it had become bigger and more complex as time went on, organically. These things take on a life of their own.” That’s a lesson he has retained as an advisor. “A billionaire, or a person worth a lot in Asia, may not know where everything is. Just knowing that, and being fully aware of the performance, and risks you are taking, can stand a family office in good stead. You can prepare for a nuclear winter in the markets if you know where you are, and you can move quickly.”

He recalls many clients in Asia who have said: “We have reporting systems. It’s our Excel spreadsheet.”

It’s perhaps for these reasons of patriarchal independence that change can come slowly to clients. In governance, there is a disconnect between realizing that it’s important, and following through in practice. UBS surveyed 120 families about wealth protection; 75% said they were very concerned about it, but only 25% had structured wealth protection plans in place. “75% think it’s important. 25% are doing something about it,” says Hirzel.

One way that banks have sought to differentiate is by pulling in the resources from other parts of the overall parent. Tee Fong Seng, vice chairman and head of ultra high net worth for private banking Asia Pacific at Credit Suisse, makes part of his pitch the premise of what he calls an “integrated one-bank proposition”, bringing the various abilities of the overall bank from investment banking and asset management to private banking clients (groups like Citi, UBS and Deutsche take a similar approach).

Locally, this is also the approach at DBS. When Farris describes the services DBS offers family office clients, many of them are more about growing the family business that made them wealthy in the first place. “At DBS, we have been providing banking services for entrepreneurs since the late 1960’s,” he says. The family office team will provide advice on succession planning and governance to bring the next generation of the family into the business, but will also seek to advise on the expansion of the business itself through DBS’s capital market, global transaction and M&A teams. He says that one area family businesses often need advice, for example, is private equity, where they can co-invest with other family offices.

Some, such as the pure-play Swiss banks, take a different model in which investment banking services, or the offering of any home-grown products, is not considered appropriate. “I see a number of banks setting up these family office platforms, attempting to represent that they are there to advise a family on how to set up a family office,” says one private banker. “If a family came to me and said: can you advise me how to set up a family office, I’d say you would have to be completely nuts to take my advice. There’s a major conflict of interest in approaching a services platform [which will seek to sell it product] for advice on how to structure a family office.”

Interestingly, some counsel against family office structures for those who don’t need them. “When you are setting up a family office, just be really clear about why you are setting it up,” says Fung. “Do you really need one? And if you do, be clear about what its objectives are, and stick to them as much as you can. Things can grow out of control; don’t create complexity where it should not exist.”

“You would be surprised at the number of wealthy people who set up a family office just to be trendy,” he adds. “In the 1980s it was: talk to my secretary and mine will talk to yours. Today it’s: my family office will talk to your family office. It’s important not to be faddish about these things.” Family offices only make sense, he says, when wealth has grown to a point where it is no longer possible for an entrepreneur and advisor to keep track of it and manage it.

But with wealth growing, the momentum for family office structures, and the people who serve them, is only growing to grow. “There are new billionaires every other week,” says Tee. “Every new coal mine or palm oil agro IPO creates a few more.”

BOX: Family Trusts

While not everyone is well suited to a formal family office, there is a trend towards more formal structures around wealth, and this is nowhere more apparent than in estate planning. Again, this has grown in importance because of the pivotal demographic point upon which so much of Asia sits: consistent wealth generation, with a patriarch typically at the point of passing wealth on. Mark Smallwood, head of wealth management solutions at Deutsche Bank Private Wealth Management Asia Pacific, says it has been estimated that 80% of Asian wealth is due to pass to the next generation in the next 15 years. And Michael Troth, managing director and regional head for Citi Trust Asia Pacific, refers to “that critical stage of this inter-generational wealth transfer.”

The need for proper structures around estate planning has perhaps been amplified by high-profile cases such as Stanley Ho, who earlier this year sued five of his children, two of his wives and his banker over the holding company that controls his wealth. Few families have situations as convoluted as that of the Ho family, but there is a general lack of preparation in Asia. “There is undoubtedly a huge number of families who just haven’t prepared at all,” says Smallwood. “I see some very wealthy families who haven’t even drawn up wills.”

Formal arrangements around wealth transfer can start with something as simple as a well-drafted will. For the wealthy, it’s not considered ideal, though; firstly, when the individual dies, their estate is frozen until a grant of probate is executed by a court, which can take years in some circumstances, and rarely less than three months. Moreover, probate is public: anyone can appeal to a court to see a will, so there is no privacy around the wealth and how it will be divided. Correspondingly, high net worth advisors recommend a family trust structure for liquid and bankable assets; this can also include shares in operating companies, or real estate. “The family’s privacy is maintained and the disposition of the assets to beneficiaries is kept from public scrutiny,” says Smallwood. There’s no probate, and wealth can be protected from other creditors.

In Asia, there is a tendency to build numerous British Virgin Islands firms to hold assets; one lawyer recalls a client who had more than 200 of them. While there’s nothing inherently wrong with BVI structures, some people do tend to fail to account for them when considering estate planning. If some assets lead to BVI or other tax-neutral companies, it’s important to ensure that the transfer of shares in those companies is addressed well in advance. It often is not.