Danai Pathomvanich
Sep 22, 2014
Danai Pathomvanich looks at the advent of Asian family offices
Three decades of unprecedented Asia economic growth have resulted in the development of family offices.
Wealthy families use them to mitigate substantial risks that may occur when they make the critical transition from building family wealth to sustaining it.
Family offices
Family offices are entities established by single families or groups of families to manage their financial affairs.
Their primary focus is managing, building and sustaining wealth for current and future generations.
At the same, the families’ core businesses continue normal operations without being required to continuously fund essential basic family needs such as education, health care and housing.
An additional key objective is ensuring family-office assets continue growing to meet future generation’s often expanding needs.
By helping families build more diversified portfolios away from traditional single company holdings, family offices also provide major risk mitigation roles,
Risk mitigation
Many wealthy second and third generation Asia families place a significant portion of their family wealth into family offices to mitigate four inherent risks.
1. Concentration risk
Although most Asian families amassed great wealth by concentrating their investments in single companies or single industries, future generations realize diversification is a more prudent way to preserve their wealth.
The most important task is knowing how and when to convert single, concentrate assets into more diversified asset pools, to mitigate risks associated with having everything in one basket.
In Asia, many family fortunes were built in oligopolistic environments. Unforeseen political changes or natural disaster have often suddenly reduced values.
The 1997 Asia financial crisis also taught many Asian families that diversification was critical to preserving family wealth.
2. Management risk
Many Asian wealth holders have not clearly articulated specific strategic alternatives for liquid assets that have been carved out of primary holdings.
Family offices can help these families identify and articulate clear-defined integrated strategies that ensure their financial wealth is effectively managed.
Moreover, many new wealth holders are often unprepared for the different skills and resources needed to manage their “new” form of wealth. Family offices can provide professional help in key areas such as tax, legal, investment, cash flow planning and philanthropy.
3. Balance sheet risk
An often ignored family-wealth risk is balance sheet risk. In many cases, short-term assets must be available to fund current liabilities such as this term’s school fees.
Longer-term assets may also be required to meet long-term liabilities such as planned age-determined payouts to descendants.
Portfolios should be carefully built with assets that meet specific strategic needs and acquired to address specific balance requirements.
Appropriate risk-adjusted assets and liabilities must also be carefully selected so that periodic cash requirements can be met comfortably while family wealth is grown optimally for future generations.
4. Succession risk
Preparing family wealth holders for effective succession is a critical family wealth plan component.
Two specific succession elements should be considered,
Families should pro-actively prepare the next generations on how to live with the wealth they are given. They should be educated on how to handle essential elements such as stewardship and wealth management.
Secondly, family offices can help wealth holders specifically determine how their wealth is effectively passed through successive generations.
A key but not simple goal is sustaining and growing the wealth so that it continues funding the family’s future needs. In most cases, normal investment returns grow linearly while successive family generations grow exponentially.
Family legacy elements such as core values, philanthropy and human capital should also be clearly articulated so that they can be preserved, nurtured and developed for future generations.
