September 20, 2024
SINGAPORE – Asia’s super rich families prefer single-family offices for tighter control over their wealth, compared with their Western peers who are more open to multi-family offices that serve more than one family and offer services at a lower cost.
“The core difference is the professionalisation of the family office governance model, which is well established in the West,” a McKinsey & Co study said, adding that family offices in Asia tend to have a heavier influence from the family on investment strategies.
Family offices can be either multi-family offices (MFOs), which manage assets of more than one family, or single-family offices (SFOs) that manage assets belonging to only one family.
Professionalised SFOs have in-house chief investment officers and have higher than average assets under management. They follow a clear portfolio strategy, aiming for wealth preservation with conservative returns of 5 per cent to 6 per cent or growth-oriented strategies seeking higher returns of about 15 per cent.
Family offices have been slower to catch on in Asia than in Europe and North America, where wealth has been inherited for many generations, the study said.
About 5 per cent of the region’s super rich, or individuals with more than US$50 million (S$65 million) in personal financial assets, have SFOs. In Europe and North America, the share is greater than 15 per cent.
Hong Kong and Singapore together are home to 15 per cent of the world’s SFOs, each city managing roughly US$1.3 trillion in offshore assets, the study said. The figure is poised to climb, with both cities actively wooing the rich.
An estimated US$5.8 trillion is expected to be transferred in Asia from one generation to the next between 2023 and 2030.
The super rich are expected to account for about 60 per cent of the total wealth transfer, and many are setting up family offices to facilitate the process, it said.
As at the end of August 2024, Singapore had 1,650 SFOs that were receiving tax incentives, according to the Monetary Authority of Singapore.
As for Hong Kong, there are no published statistics on the number of SFOs, but the city is estimated to have had around 2,700 SFOs at the end of 2023, according to a Deloitte study.
Wealth flowing into Hong Kong and Singapore is primarily from within Asia, led by mainland China, India and Indonesia, followed by other countries in South-east Asia, the study showed.
Higher wealth flows from Europe and North America are expected, as global investors see Asia as a “third safe haven” for portfolio diversification away from their home countries or regions, it said.
While Asia’s rich prefer SFOs for greater control over their wealth, some consolidation is expected among smaller SFOs as they get together to build MFO structures to lower their operating costs, Mr Vishal Kaushik, associate partner at McKinsey, told The Straits Times.
Personnel costs are the largest expense, accounting for about 45 per cent to 65 per cent of operating costs for an SFO with US$15 million to US$500 million in assets under management.
In the Asia-Pacific, the costs of running an SFO office tend to be a bit higher than in the West due to the complexities of operating across multiple jurisdictions and the resulting need for highly skilled professionals and sophisticated compliance frameworks, Mr Kaushik said.
These costs can range from 1 per cent to 3 per cent for family offices with assets under management of US$100 million or more. Below this threshold, operating cost ratios tend to be 4 per cent to 6 per cent.
SFOs in Asia require at least US$100 million in assets under management to be viable, considering their expense, Mr Kaushik said.
Unlike SFOs, MFOs offer highly customised investment strategies, often charging performance-based fees to ensure solutions are tailored to each family’s needs.
Governance is a key challenge faced by many family offices, especially those that have not professionalised their set-up and operational model, said Ms Lee Wong, former head of family services, Asia, at Swiss private bank Lombard Odier.
Setting up family offices with the proper structures ensures transparency and efficient decision-making, she said.
Mr Chi-man Kwan, group chief executive officer of Raffles Family Office, said managing family interests goes beyond preserving wealth.
“It’s about fostering unity and communication. A well-crafted family constitution can mitigate conflicts, ensuring that even in financial losses, the family remains happier together,” he said.
Wealthy Asian families show a rising interest in alternative investments, although the allocation is lower than in the West.
About 30 per cent of family office investments in Asia are allocated to alternatives, compared with 50 per cent in Europe.
The growth of family offices presents plenty of opportunities not only for banks, MFOs and asset managers, but also for insurers and technology-enabled wealth fintechs, all of which can offer differentiated services, the study said.