Future-proofing your family office

AGAINST the backdrop of significant wealth creation, Single Family Offices (SFO) have become a hot topic among ultra-high-net-worth (UHNW) individuals in Asia in recent years. As this enthusiasm cascades down the ecosystem, service providers catering to family office set-ups have made progressive refinements to their products by focusing on efficiency and incentives.

Setting up a family office structure is probably the easiest step. Knowing how to run a family office optimally and sustainably is vital to realising the long-term objectives of an SFO. More importantly, it supports the goal of wealth preservation.

There are some common challenges that can get in the way of achieving an SFO's goals, but through a structured approach, potential issues can be mitigated. In our experience, there are 4 main pillars of focus families need to consider - governance, talent development, strategic planning and investment process.

Against the backdrop of a favourable tax and legal environment for SFOs around the region, family offices have every opportunity to thrive. This is visible across Asia's biggest financial hubs. For example, Hong Kong recently launched its InvestHK Family Office team, while closer to home, Singapore's Wealth Management Institute has introduced the Global-Asia Family Office Circle network to support the growth of family offices in Singapore. This complements the Republic's revitalised regulatory framework, including its Section 13 tax incentives and Variable Capital Company schemes.

Good governance

A strong foundation determines the successful execution of future strategies. This begins with good governance - the implementation of strong practices to ensure competent management of the family's financial assets and investments.

Trust is built on familiarity. This makes it important to ensure a diverse mix of family and non-family members on the board of directors of the SFO or in its investment committee in order to reap the unique perspectives offered by both groups respectively.

Given the highly personal nature of this industry, it is common for family members or family-related advisers to serve on this committee so that they can represent the family's interests and share their point of view.

Conversely, independent non-family members can often add value by offering unbiased advice and drawing insight from their experiences. This can be particularly effective in situations where there are conflicting interests among family members. Incorporating a neutral and objective perspective thus enhances, strengthens, and diversifies investments and operations for the benefit of the family as a whole.

Understandably, incorporating independent non-family members remains a big step for certain families. To overcome this hurdle, families can start by establishing an independent advisory team instead, before creating a fully functional and more diverse board in the future.

While recruiting, developing and incentivising staff are critical for success, the tasks of identifying, attracting and retaining top talent are often major challenges for family offices. Having the right talent is key. SFOs with a small team and simple set-up in mind should aim to professionalise key operational areas by hiring non-family members for its executive or management team.

Recruitment is a complicated puzzle at every stage of the process. This is amplified for SFOs, given that recruitment is often managed by the wealth owners or trusted advisers who are less likely to possess professional hiring expertise.

However, by leveraging the flexibility and dynamic work environment offered, SFOs can tip the hiring scale in their favour.

A hiring committee may comprise multiple family members to assess and establish principle alignment between candidates and the family's core values.

To attract talent, SFOs can design compensation structures with consistency to offer employees a sense of security. Additionally, they have the advantage of customising their compensation packages by including incentives that are relevant to the industry behind the family's wealth. Examples include phantom stock, co-investment opportunities, and in some instances, business partnerships.

By hiring based on capability and in alignment with the family's mission and vision, SFOs can create a culture of transparency and openness where employees can give and receive honest feedback, in turn encouraging psychological safety in the workplace.

To maximise operational stability, SFOs should aim to operate for the long-term and provide multi-generational support. Five- or 10-year strategic plans can serve as the building blocks for realising a family's long-term vision.

These plans typically revolve around achieving major family goals that require a significant amount of time. This could include constructing a succession plan and preparing the various elements for execution; constructing and formalising a plan for wealth preservation; or deciding on the desired societal impact; and building a structure that can create that impact.

In the short term, conducting annual evaluations and planning across all key areas of the SFO operations can also create opportunities for reflection and improvement. These steps serve as checkpoints towards achieving the long-term goals of the SFO.

Our 2021 Single Family Office Survey found that 91 per cent of family offices keep the strategic asset allocation and investment guidelines in-house. This is testament to the sensitivities and importance placed on driving solid investment processes for family offices, making this factor an essential component to optimise operations.

SFOs can start by establishing clear investment objectives and risk profiles before identifying a common understanding of the purpose of the family wealth.

To this end, the chief investment officer (CIO), the next generation or the wealth creator can develop questionnaires and scenario testing to spur discussions among family members. Answers to these questions are rarely binary, and are often a combination of the multiple needs of the family.

SFOs can also define an investment time horizon.

Longer-term outlook

As we start to see a shift towards endowment-style investing, a portfolio strategy inspired by the endowments of prestigious US institutions, there has been a corresponding increase in desire to adopt a longer-term outlook with a multi-generational perspective and long investment timeframe. This strategy suggests that a significant part of the portfolio is allocated to less liquid alternative investments such as private equity, private debt, and hedge funds.

Moreover, 55 per cent of respondents in our Single Family Office survey also say that access to private investment opportunities, including club deals or co-investments, is very important or important when choosing a banking partner.

These shifts come as families increasingly prioritise wealth preservation to support future generations.

Finally, the SFO should choose a performance benchmark and establish risk mitigation measures.

The above framework will better inform the eventual investment process, where investment committees can proceed to identify suitable investments and structure a portfolio accordingly. This process should ideally integrate capital market assumptions, strategic asset allocations, tactical asset allocations, currency allocations, and tax considerations.

Every family has its own specific needs, wants and preferences. Significant time and thought must be invested into the development of the operations of the family office so that it can support the family in the best way possible. It is, after all, the family's office.

• The writer is head of Wealth Planning Services, Private Banking Asia Pacific, Credit Suisse