A Mumbai-based businessman with a net worth of Rs 250 crore reached a stalemate when he tried to divide his wealth among two sons. The younger son made it clear that he would not accept an equal division of the business since he was running it while his older brother had moved to philanthropy full time.
A boutique firm managing their wealth came up with a solution to which both siblings readily agreed. The first 25 per cent of the profits from the company would go the younger one. The remaining will be split between the two equally.
The boutique firm was no simple wealth management company selling investment products to the family; instead it was a family office that had recently started taking care of the family’s financial affairs.
Family offices are no longer the prerogative of top industrialists like Premji of Wipro, Rao of GMR or the Godrejs. Families owning mid- and small-cap businesses are now opting for these services thanks to the proliferation of multi-family office (MFO) firms that have recently began operations in the country.
The only difference is the richest of rich start their own exclusive family offices hiring dedicated teams, whereas these firms manage financial affairs of several families.
Simply explained, these firms are like a person who advises the family on which wealth management firm and broker to select and then monitors their performance through proprietary processes and experience. They also offer clients a comprehensive consolidated report of all the assets with various investment companies. They also come with a promise to serve future generations.
Apart from identifying the best managers in each asset class there are host of other services MFOs offer. These include estate planning and forming trusts, succession planning, educating younger family members about family wealth and real estate services. In short, it is a one-stop-shop for all financial needs.
In the past few months five such firms have started family offices. These include boutique firms such as Client Associates and Altamount Capital. Some wealth management companies such as ASK Wealth Advisors, BNP Paribas Wealth Management and Kotak Wealth Management have also diversified into family office business.
What makes MFOs popular is that they earn money on the fee clients pay and ability to work with other financial services companies. This is absent in wealth management companies that earn income from selling in-house products.
MFOs are growing exponentially with the number of high net worth individuals (HNIs). India has been among the countries that has seen the fastest growth in the number of HNIs in the past four years. According to DSP Merrill Lynch India saw the second fastest growth in its HNI population in 2006 and 2008
India currently has close to 84,000 families with net assets of at least $1 million, or around Rs 5 crore.
This growing prosperity has also created a need for dedicated managers to take care of the family wealth. “Ultra-rich families are increasingly thinking that product-driven wealth management companies do not serve purpose,” said Richa Karpe, director, investments at Altamount Capital Management, a multi-family office firm.
“Family office is at the top of the pyramid in wealth management space. It is for people who have liquid financial assets over Rs 50 crore,” said Rajesh Saluja, CEO, ASK Wealth Advisors. For any amount below that, the cost of managing the assets will shoot up. Most of the companies agree with this. Client Associate is the only exception that takes families on board with investible surplus of Rs 10 crore.
The advisory fee is usually fixed. They range from 0.5 to 1 per cent, depending on the client’s corpus. “The higher the assets under management (AUM) lower is the fee,” said Rohit Sarin, co-founder of Client Associates.
Clients who want to pay fees based on performance of investments are also welcomed. All other services, apart from investment related, are charged.
Although MFOs bring stability to family finances, they are also subject to all the risks of financial markets. For instance, the US, where this concept originated, is witnessing a decline in such companies. When markets crashed in the US, HNIs saw their fortunes dwindle. All the talks of strict financial planning and asset allocation could not contain the dramatic wealth erosion.
“Also, MFOs in US had created huge infrastructure to provide services in-house. The fixed costs that they incur now have started hurting them,” Saluja. There’s a lesson in that for Indian MFOs.