Family offices in India are witnessing a boom due to a boom in mergers and acquisitions and initial public offerings. Many business owners and entrepreneurs are running out of money, and they need to structure family offices to preserve and build wealth. Perhaps the biggest decision that family business owners will have to make is what type of family office they want to build.
There are many options available and they all come with their own advantages and disadvantages. 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 advantage of this structure is that the family continues to work with individuals they know well and does not require expensive resources to manage the office.
However, the biggest concern in this structure is that if the family’s assets are large enough, the internal team may not be able to adequately focus on all aspects of investing and risk management. In addition, the internal team may not specialize in all asset classes and may miss out on practical portfolio management experience in a complex investment universe.
Single Family Office: The most common structure for managing family assets is the Single Family Office (SFO). This involves the family hiring an independent team of experts to plan, structure and manage the family estate. Typically, the team primarily focuses on investment management, but in some cases the team also provides services towards philanthropy management. In some cases seen in India, this internal team also has a family governance mandate.
The primary advantage of this structure is that the family has a separate team to fully focus on family matters and provide adequate privacy.
The biggest challenge for this structure is its ability to attract the “right” professionals who have relevant experience in money management and retain them for a period. Although talent is limited in this space, many families hire anyone with a remote link. for the investment industry. This creates a quality and expertise challenge in the office. Also, if the family gets good talent, the biggest challenge is to retain them and thus ensure the much-needed continuity.
multi family office Closely related to an SFO, the multi-family office (MFO) structure came into demand when households did not want to set up their own SFO with the added cost and talent management challenges, but still the same level of expertise, confidentiality and unrelated mentorship. were expecting. . An MFO manages multiple families and provides similar functions to an SFO, but at a lower cost.
MFOs bring some huge advantages such as expert team, experience in families and most importantly, low cost. They also offer a bouquet of services such as investment management, wealth structure and wealth planning, philanthropy and social impact investing, and family governance, which can be customized for a family. In addition, since MFOs work with multiple families, they bring industry learnings to their client ecosystem. The MFO investment platform generally works with all asset managers without any bias.
The biggest challenge with this proposal is the ability to find an “authentic” MFO. The team requires a practical experience in managing large portfolios and key members of the team (especially the investment team) need to be the owners so that there is continuity in the advisory relationship. Very importantly, the MFO should not have any conflict of interest such as internal products (equity broking, PMS, AIF, fund-of-funds, etc.) or any commercial or referral arrangement with any product. or service provider.
Virtual Family Office: Virtual Family Office (VFO) is a new age mixed model. In this format, the family chooses to outsource each function of the family office to a separate external consultant. The biggest advantage is that the family gets the best mentor for a specific need and ensures the best solution for each need. For example, if an advisor is very good at investing, but doesn’t provide (or isn’t good at) tax advice, he or she may still be selected for their investment expertise and tax and asset management over another advisor. can go.
On the downside, the family still needs to piece together all the pieces and also exchange information between the various counselors working for the family.
Munish Randev is the Founder and Chief Executive Officer of Servin Family Office & Advisors Pvt Ltd. Ltd.
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