Many have heard of the old proverb “Shirtsleeves to shirtsleeves in three generations.” In Japan, the expression goes, “Rice paddies to rice paddies in three generations.” In China, “Wealth does not last beyond three generations.” These depict the challenges wealthy families face in sustaining and passing on their wealth.
It is no wonder that given the ongoing massive intergenerational wealth transfer in Asia that we see a proliferation of family offices. These are companies that manage families’ wealth, investments and legacy continuity, whose aims are to rewrite the old tales that wealth does not go beyond three generations.
Shifting Expectations
Following the global financial crisis in 2008, we found that families’ expectations towards wealth management have changed. Having attained a level of wealth, which requires careful and proper management, families are recognising the need for a more professional approach with independent advisors, as opposed to relying on their bankers who have inherent conflicts of interest.
These UHNW individuals and families were also looking to diversify out of the traditional banking products, consolidate their worldwide financial affairs, and establish an overall investment strategy to minimise risk while having an integrated management with clear reporting.
On the Client’s Side
Golden Equator Wealth was founded as an independent multi-family office with a clear purpose to be on the clients’ side. We want to be able to always represent their interests in numerous situations while being the single entity they can go to for all their investments and legacy preservation needs. Families will also have access to professionals such as lawyers, tax advisors, trustees and accountants to support their needs.
Managing a family’s needs – from growing their wealth to creating a legacy, to preparing their next generation to take over the family businesses and assets – requires utmost sensibility and strong business acumen, enabled by an ecosystem of complementary businesses, industry partners, and advisors.
Golden Equator Wealth has all the above synergistic elements that underpin our ability to serve up investments and legacy advice to families and businesses.
Financial and Family Capital
A true family office cares about the long-term preservation of both the family’s financial and family capital. This means it understands that a succession plan goes beyond just the transfer of financial wealth, but more holistically includes the family’s social and intellectual capital. It also provides coordination and clarity in complex financial affairs, underpinned by a network of professional experts across multiple disciplines to help the family execute all aspects of wealth management and legacy planning activities. With an independent family office setup, families also no longer have to deal with disparate private banks and professional advisors.
While the reasons may differ between families, there are some common rationales why families build their own family offices or create a “personalised family office” setup within a MFO platform like ours.
1. Command centre of family’s investments
A key role of a MFO is that we help families centralise all their investment data in one place which could include the family’s assets across jurisdictions and relationships with various private banks. As we work with numerous business families, we also recognise the importance of understanding a family’s business interests for diversification purposes.
Leveraging this comprehensive overview of the family’s wealth and business interests, we can ensure a more effective investment planning. We then deep dive to understand the family’s investment objectives, alongside the constraints and preferences, with a view to create the best customised portfolio.
This is one of the factors that sets FOs apart from private banks. Often, banks don’t have visibility beyond their direct relationships with a client, while clients often have more than one banking relationship. In fact, this is frequently the root cause of an overlap of investment strategies by different advisors, which can lead to suboptimal results of a family’s portfolio.
2. Professionalisation with a multigenerational mindset
When creating a personalised family office structure within our platform, we always consider what is the legacy or values that the families want to become known for? And how can their approach to investing align with that? Family members may also have different expectations for the family wealth: while some may want the preservation of money for the family business, or income flows, others might want more aggressive growth-oriented portfolios. For Asian families, we have also observed that many have the desire to set aside money to invest in and build businesses of their own.
Family offices can help to reconcile these different goals, thanks to the comprehensive overview on a family’s business and investment affairs as well as our position as an objective third party who are able to tell families what they need to hear.
Creating a personalised family office structure within a MFO like ours introduces professionalism into the management of their wealth. With a team of expert advisors and clear institutionalisation mindset, we can work with a family across generations and ensure that best practices, standard operating procedures, and controls are incorporated into their legacy management. With a team and succession plans in place, we are then able to carry on safeguarding the family’s interests long after the founders are no longer around, thereby reducing the risk and disruption from losing a key family member who’s been handling the management of the family wealth, often a common risk associated with a SFO.
3. Alignment of interest with families
The misalignment of interests between managers / advisors and families can jeopardise the long-term objectives of the family.
How to spot if there’s a conflict of interest? A key element is to understand the managers / advisors’ compensation structures and the degree to which this may conflict with the family’s investment interests. In many cases – often typically the case with private banks – an advisor is only paid commission when transacting. While families may falsely believe that there is alignment of interest since fees are only paid when something is done, what often are not disclosed are two things: revenue targets and commissions. What families may not realise is that they’re often encouraged to transact so that their advisors can meet the revenue targets (from transaction fees) and that they were recommended a certain product because of the commissions and incentives the advisors receive.
Family offices are different in that we are not rewarded for the number of transactions we make on the family’s behalf, tending to look at longer time horizons, with fewer tactical allocation changes. Depending on family’s objectives, we have the patience to wait for assets to grow significantly and are comfortable sitting on cash when the market conditions require more caution.
4. Grooming the Next Generation
A vital element in ensuring a multigenerational legacy sustainability is in grooming the next generation to become the custodian for the family business and wealth. Yet, in Asia, this need is still not being addressed effectively.
Preparing the next generation of business families has traditionally been the preserve of the older generations; but with the changing business and wealth management landscape, that may not be the most efficient and effective solution anymore. This is due to several reasons – the older generation may not have sufficient time, there could be a lack of structure in how knowledge is passed on, and the patriarchs/matriarchs may not have enough expertise across different areas. In short, the best business owners may not be the best teachers especially when the fields of knowledge and skills that need to be passed down are so diverse.
This was why we pioneered the Golden Equator NextGen Programme that helps families groom their next generation in a structured manner. Focused on both soft and hard skills, it is an intensive programme that combines both classroom learning and hands-on practice in diverse areas including investing across various asset classes, evaluating alternative and direct investment deals, leadership, among other things. Additionally, opportunities to establish their own networks through curated exposure to entrepreneurs, investors, senior executives, and other NextGens, are also important elements in preparing the next generation.
As the number of family members increase from one generation to the next, the legacy transfer would become an increasingly complex process. Hence, it is also important to determine the core values and objectives of the family to build the foundation of how family assets and businesses will grow and keep pace for the future generations. This process can also be formalised through family governance structures that can also be aided by a family office that understands the family and can facilitate open conversations between the different generations, while being an objective third party to mediate discussions
5. Economies of scale
Serving multiple families means that we can combine the buying power of multiple families that help us attain economies of scale. This can apply to investment management fees, custody charges, research and professional fees, operational and compliance costs, as well as access to investment managers and other experts.
In the increasingly regulated landscape that family offices and investment houses operate in, operational and compliance fees are also becoming more expensive. Hence, it may not make sense for families with liquid assets below USD100m to establish their own SFO. This is partly the reason why we have also observed the increasing number of SFOs becoming MFOs to share the high costs of operating a family office among more families.
However, there are often downsides for families that join this sort of setups, which will be explained in our next article.
While there could be differing motivations why UHNW families create their family offices, the common thread is never far from creating a legacy that endures for generations. Undoubtedly, family wealth came from strong business and commercial acumen, however, safeguarding a legacy requires expertise in diverse fields including investments, leadership, family governance, education, among other things.
Ensuring that the wealth and legacy created are preserved within the family for generations to come, takes much more deliberate effort. Having a dedicated outfit that serves to integrate and coordinate all these services will help maximise opportunities for legacy creation and preservation.
