Asia’s family office industry is still in its infancy, but it’s about to undergo growing pains.
Rising costs—partly driven by more complex regulatory and compliance requirements—and profitability concerns are set to dramatically alter the expectations wealthy families places upon these regional investment operations.
These changes look set to take place at a time of great opportunity. A 2017 Bloomberg report titled ‘The Future of Family Offices’, estimates there are 3,000 family offices in the US and 1,000 in Europe, while the number of family offices in Asia is estimated at a few hundred. The region houses less than 5% of the world’s family offices, despite the fact Asia is home to one-third of the world’s ultra-high-net-worth individuals (HNWIs)—commonly defined as those with net assets of more than $30 million.
Overall, the potential for growth for the broader segment of independent asset managers (IAMs) is undeniable. Industry observers estimate about 5% to 6% of Asia’s assets under management are handled by IAMs (of which family offices are one type), versus more than 30% in Europe.
“As wealth matures in Asia, coupled with strong growth in the region, we expect the number of IAMs to increase and gain a larger share of Asia’s AUM in line with the trajectory that European countries have taken in the last two decades,” said Jason Lai, chief executive officer of Thirdrock Group, an IAM which began as a multi-family office (MFO) in Singapore in 2010.
But to grow their assets, family offices need to convince families they are worth the time, cost and effort. The trouble is investment returns have not been that compelling, while costs are rising. That, combined with the advent of new financial technology and the difficulty of finding good personnel, is causing wealthy families to weigh their options when it comes to putting their money into existing family office outfits.
Organisations that can convince families they can combine fiduciary responsibility and cutting edge investment capabilities stand to prosper. Those that cannot could well fall by the wayside.
Cost vs. benefit
In the US and Europe, the concept of the family office dates back to the late 1800s. But in Asia, where so much family wealth remains in the hands of the first generation, it’s still a relatively new concept.
As a result, there is no archetypical family office structure. Some family offices operate as independent entities with fully-fledged operations, while others are embedded in the family business, with senior executives performing ‘family office’ functions. Others still operate on behalf of multiple families, and are typically called MFOs or IAMs.
The concept has strong growth potential. IAMs say many rich families have lost confidence in private banks since the global financial crisis, in large part because banks often seem to prioritise profit margins over the client’s portfolio needs.
“Many wealthy families believe their needs can be served better by building a bespoke team; they might continue to use banks for some services but for the most part, they can pick and choose the best service provider for each need and not rely on a single service provider,” said Jessica Cutrera, founding partner of The Capital Company (TCC), an IAM, and a committee member of the Association of Independent Asset Managers Hong Kong.
But building a bespoke wealth services team isn’t cheap. “You need five people at the very least to set up a family office—a chief investment officer, a research expert, a couple of asset specialists and someone who can act as the interface between the office and the family,” said Pathik Gupta, head of wealth management for Asia Pacific, at Scorpio Partnership.
He estimates a family needs at least $1 billion in investable assets to justify setting up a dedicated office team. In addition, annual operating costs can be up to 15 basis points, or $1.5 million a year for a family with this minimum level of wealth.
What’s more, Cutrera says many families lack the time to manage a bespoke team. “There is also limited talent in this space; families want people whom they know and trust, which could mean engaging another family, instead of going to the market and simply hiring a group of people,” she added.
MFOs or IAMs offer an elegant solution. These institutions already have professional employees, while they combine assets from several families to help meet the costs.
They offer another advantage: they can better meet an increasingly onerous regulatory burden.
Recent international regulatory initiatives such as the Foreign Account Tax Compliance Act (Fatca) of the US and the Organisation for Economic Cooperation and Development (OECD) Common Reporting Standards have ratcheted up compliance costs for wealth managers, even as they inject more complexity to the role of client advisers. Increasingly, family offices need to possess adequate KYC (know your customer) and asset and liability management processes when onboarding clients and making offshore investments.
“The cost of these risks is especially high for HNWI businesses because of the breadth of their product offerings and the sensitive nature of their client base,” Thirdrock’s Lai said.
“We expect to see a growing regulatory focus on issues around consumer protection, conflict of interest, outsourcing and cybersecurity. While the full regulatory impact is still not clear, what is certain is that the regulatory burden on wealth management firms is getting even more complex.”
This article is adapted from a feature in the August/September print edition of AsianInvestor. In the second part, we look at some barriers to MFO growth and the potential role of fintech.