Family offices are a relatively new concept in Asia. How is Credit Suisse gearing up to handle this?
Our family office services help a client family develop and enhance their own family office organisation. We work with family leaders to ensure that their organisations are set up appropriately. We help plan for the long-term success of both family and business. We also advise families where they are interested in understanding how to manage their generational wealth more strategically, rather than just trading tactically.
Although family offices in Asia are still at an earlier stage of development compared to more mature markets, the exceptional wealth creation that Asia has seen in the past few decades will start to undergo a major phase of generational transition in the coming years. Families globally have managed this generational transition by having in place the right principles and processes governing interactions between family business, family and investment governance, succession and legacy planning, and in many cases appropriate professionally-managed family office operations.
The primary focus of our family office team in Singapore is to work with our relationship managers and their ultra-high-net worth clients across the region who recognise the importance of managing transitional or generational issues pro-actively, or who wish to develop their own family office but need help. They could have embryonic ideas about setting up a single family office or they may have an existing set up which the family would like to improve because it no longer fulfils the needs of the family.
We noted this gap in Asia and first started building our family office capabilities in the region in 2009. Last year we expanded our offering and set up our family office hub in Singapore, which we believe is the first such facility in Asia.
How does the fact that Asian wealth is often first-generation affect the development of family offices?
In Asia, where much wealth has been created after World War II through family businesses that are still vibrant and growing, such businesses are still the predominant proportion of the family’s wealth. In many cases the patriarch-entrepreneur who created these businesses are still very much “in control”.
Wealthy families invariably already have arrangements to look after their wealth and personal affairs. We see such arrangements as the start of a family office — a first-stage private office. These are usually an informal grouping of some family members and trusted advisers that operate within the family business management office, often tapping on the infrastructure and systems of the operating business. In terms of governance and how decisions are made, the patriarch is — or is perceived to be — the final decision maker, or in many cases, the only decision maker. Because this form of decision-making has been the case for as long as anyone can remember, there is usually no process that would make the values or reasons that drive a decision transparent to others. In terms of wealth, there may be little segregation of family and business wealth: much of the income or dividends are ploughed back into growing the business.
As the family extends into the next generation, the family may grow disproportionately relative to its wealth increase. By default or design, if the family has to stay together for example because the family assets have not or cannot be distributed, this shared pool of assets has to be managed sustainably through generational transition to meet the individual financial requirements and other needs of the family, and if possible to ensure that wealth enhances rather than damages family unity. We have found that in many cases, as the patriarch-entrepreneur begins to consider the inevitability of transition of authority and stewardship to the next generation, there is a realisation that enhancing and developing their existing private functions is a useful way to manage generational transition.
How are rich families in Asia staffing their family offices? Is this different from the west?
The family offices of first-generation wealth typically comprise a handful of trusted staff with other business responsibilities, functioning more as administrators operating under the instruction of the patriarch-entrepreneur than as professionals entrusted with some form of authority and responsibility over the family’s wealth. There may be advisers who the patriarch-entrepreneur seeks advice from but who are not within the family office per se. The next generation may be involved in the embryonic family office, though more likely they are being groomed for business succession.
Such arrangements are not uncommon of first-generation wealth in many other parts of the world.
However, in the more developed industrialised economies, which have seen the longevity of family business and wealth beyond the patriarch-entrepreneur, the family office typically evolves to deal with the complexities of future generations, becoming more developed in the way it operates; in the way decisions are made; and in the way it manages family wealth.
Such family offices tend to be staffed more independently from the business, with senior professionals entrusted with greater authority over the family’s wealth. Rather than being merely administrators, such professionals work in a close and more synergistic manner with the family’s next generation, complementing responsibilities, interests and competencies.
As the generation tree spreads out over time, decision-making processes become more transparent, with governance being much more explicit both within the entire family (even when the family practices patriarchal lineage, ie authority and stewardship passing from father to eldest son, harmony is still desired among siblings and cousins) and also between family and business (as the businesses by then may have other non-family owners through public or private capital).
Family wealth has grown such that the original business may no longer be the predominant source — there may a range of different asset classes, new businesses to nurture and grow, and legal structures such as trusts to manage. As legacy is built and reputation grows, philanthropic activities also start to feature.
Families whose first stage private offices are starting to evolve should strategically review how this growth in complexity can be managed, just as they would review the development of their family business from time to time.
What are generally the reporting lines of family offices in Asia?
Asia is moving away from the patriarch-entrepreneur decision model, in which a family office staff merely executes instructions with little input into the decision.
In cases where the family is fortunate enough to have its next generation accept primary responsibility for leadership of the business, the fact that the businesses have grown in orders of magnitude from the previous generation means that the next generation realises that they may only have the time and mind share to provide strategic guidance to the management of the family’s non-business wealth, or risk being sub-optimal as they become spread too thinly over all areas.
They assemble a small committee of advisers that begins to interact more formally with the decision-making process of the family office. Professional family office staff is entrusted to seek, assess and recommend the best ways to execute agreed strategy, drawing on solutions both internally and externally. In some cases, the family office advisers are even able to decide on behalf of the family, and inform or consult the family on a pre-agreed basis.
Do you have any other observations on the emergence of family offices in Asia?
The use of a private office to manage the complexity caused by increasing wealth and generational transition is not new, but is becoming more noted as the patriarch-entrepreneurs of Asia are starting to grey. The opportunity for Asian families is to observe and adapt what older families of wealth have done for themselves globally, to infuse their family values and to achieve a balance of tradition and innovation that will sustain and guide their future generations.
For more on family offices, read the feature “Asia’s rich move to create family offices” in the May issue of FinanceAsia magazine.