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Keeping it all in the family

Pegged as the first extensive survey on the family office landscape in the Asia-Pacific region, a recently released UBS/Campden Research study found that little more than 100 family offices have been established in the region, half of which in either Japan or Australia.

The figure represents a small fraction of the estimated 2,500-plus family offices established around the world despite rapid wealth creation in recent decades. Of the 35 family offices based in the region and participating in the study, 43% have been established since the turn of the century.

“As wealth continues to grow in the region and faces more multi-generational pressures, there is likely to be a great demand for the services of family offices,” predicts David Bain, co-author of the report and head of research at Campden Wealth.

“We expect to see an increasing number of Asian families wanting to professionalize the way in which they manage their wealth” says Kathryn Shih (施許怡敏), CEO of UBS Wealth Management Asia-Pacific.

Favourable economic, social and tax conditions are “pull factors” cited for most family offices in the region being set up in Hong Kong, Singapore and Australia, along with “push factors” identified as local cultural factors and customs, along with regulatory environments. “While family offices are well established in financial centres such as Hong Kong and Singapore” says Shih, “We see a growing interest from entrepreneurial families in India, China and Taiwan, as well as in Southeast Asia”.

The study found that almost all (94%) family offices surveyed provide financial accounting/reporting and traditional (cash, equities and fixed-income) investment advisory services. The most important objectives for family offices were found to be confidentiality, consolidated reporting and risk analysis/management and investment performance/access to investment instruments.

Nevertheless, there is less than complete agreement on what constitutes a family office. Independent financial consultant Wong Ming – a participant in a panel discussion for the launch of the report – suggests a definition as a separate entity with “a full-time staff, not just an accountant [tasked with] making investment decisions”. Campden Institute of Private Investment (IPI) managing director Dominic Samuelson believes “no one solution fits all” since “every family is unique in terms of size, ambition and aspiration – the first task is to get the goals right”.

Disparate goals

Asian family offices tend to be conservative. The study found the main investment objective of 73% of family offices surveyed to be a “balanced approach”, while 7% selected “preserve wealth very conservatively” as their response. Only 7% aim for “aggressive growth” in assets under management (AUM) while 13% aim for “growth”. “One difference we did see between family offices in Asia, the US and Europe was a more active engagement with hedge funds and private equity in the West,” remarks Samuelson. “Aggressive growth is the norm in the US and Europe” where investors “try to regain wealth”.

The Asia-Pacific study found that survey respondents’ believe that a 6.1% rate of return on AUM will enable them to sustain their wealth. Another panellist, Roger King (金樂琦), adjunct professor of finance at the Hong Kong University of Science and Technology (HKUST), comments that over time, “families grow by more than 6%” a year in size. He names the “three pillars of importance for families” as (i) wealth preservation and growth, in order to maintain expected lifestyles; (ii) value and legacy preservation and (iii) family harmony.

One complication is that family offices are often tasked with providing services to the family operating businesses as well as managing family wealth. The survey found that 53% of family offices in the region provide services relating to family operating businesses while four-fifths of family offices are connected to the original wealth-generating primary business. Only 40% of total wealth is in liquid assets, with the rest held in illiquid assets and core family business holdings.

King, a former chairman of Pacific Coffee and president and CEO of Sa Sa International Holdings, states that, “the notion of a family office is new. In reality, many have the notion of a structure that does investment but there is no segregation of family wealth from business wealth”. He observes that, “businesses go through cyclical issues” adding to the value in separating family and business wealth.

Making lives easier

“A well run family office can make future generations’ lives a lot easier,” argues Wong. However, such structures are not for everyone. The survey found that the average cost of running a family office is 65bp of AUM, excluding asset management fees paid to external managers. The cost is similar to the average for Europe (63bp) and the US (71bp). At this cost, Wong calculates, US$100 million of AUM would give an annual budget of US$650,000 – which he considers too small to run a family office. “US$500 million is a good size” he says.

Samuelson notes that factors behind the 65bp average include: actual AUM, the number of staff employed and physical locations of the family office; and complexity of the family office offering.

A larger AUM can provide economies of scale, adding to the motivation to form a multi-family office (MFO), which combine family assets together, rather than a single family office (SFO). Over a quarter (26%) of family offices surveyed serve one household, while 43% serve between two and six households, with 31% serving over six households.

Choosing your type
 
Samuelson adds that while “cost control is always top of mind” it is not the “primary driver” when it comes to choosing between an SFO and MFO. “Other issues include the ability [of an SFO] to identify and retain good staff”. Further, “the responsibility of a single family office may be too great” resulting in the setting up of an MFO.

King distinguishes between two types of MFO. “One starts as an MFO and offers services to those without sufficient assets and is run like a business; the other starts as a single family office and becomes a multi-family office.”

Co-moderator Eric Landolt, head of family services, North Asia, with UBS Wealth Management sees three types of family office: one, set up by the patriarch of the family as a legacy platform to “get better organized”, run as a cost centre to bring the family together. Another, “even more investment-driven”, run by a sophisticated investor with the goal of maximizing investment returns, also viewed as a cost centre but with more emphasis on cost control. A third type of family office is run as a business by an entrepreneur and tends to be more institutionalized.

“Before deciding between whether to set up an SFO or MFO, you need to ask why you are setting up a family office,” Wong suggests. “‘Because it is the fashionable thing to do’ is usually the wrong answer.” He considers himself to fortunate to work with forward-thinking family offices.

The big C

Communication is seen as key to enunciating family office goals – as well as underpinning the purpose of such structures. Landolt believes that family offices can be viewed as “a communication platform” while Samuelson agrees that some talk of the big C as representing ‘culture’, he himself considers it to stand for ‘communication’, adding that “family offices can help structure communication”.

Relatively few of the family offices surveyed (38%) have written risk policies and guidelines.

When asked which areas of risk family offices formally manage, responses were: banking/custody risk (100%), investment-related risk (93%), family data and confidentiality (86%) and family reputation (67%).

“Most of the work to date has been helping on asset allocation”, King points out. “Issues more relevant to contemplating the establishment of a family office cover softer issues – if the family is not in harmony, then problems will follow; if [realistic] expectations are in place, then the family office will have a firm foundation”.

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