Wealth cannot pass three generations: Can family offices in Asia defy all an old aphorism?

28 October 2016

In our latest blog, Nadav Lehavy and Andrew White of Sandaire Singapore discuss if family offices in Asia can defy the old Chinese aphorism that wealth does not pass three generations. 

2016 represents a landmark year for Sandaire as we celebrate the 20th anniversary of our establishment, initially as a single family office (SFO), and later as a multi-family office (MFO). Having been one of the pioneers of the MFO model in the UK, we have seen the sector evolve significantly to establish itself as a well-defined niche in the ultra-high net worth (UHNW) space in its own right. We see many parallels between this early UK market of the late 1990’s, where the MFO model was poorly-defined and even less well understood by clients, and the current market in Asia, which remains dominated by private banks, with very few full-scale, independent and institutional-sized MFOs. It is clear that the whole UHNW market in Asia is changing rapidly and it was, for this reason, we decided to establish our first office outside the UK in Singapore in 2012. 

Unlike in Europe and the US, where substantive industrial and economic expansion occurred during the 18th and 19th centuries, bringing with it previously unimagined riches for many, most families in Asia did not begin to accumulate their wealth until the rebuilding period after World War II. As of today, the ‘wealth creators’ (the first and second generations) still control a large proportion of the family capital in the region, meaning relatively fewer families in Asia have begun the process of establishing SFOs (or engaging with MFOs) for the specific purpose of capital preservation and generational succession, (which we believe are the primary objectives of a family office). This is clearly changing, however, and many families are searching for ways to defy the old Chinese aphorism, that “wealth does not pass three generations”. We believe MFOs are uniquely placed to help families in Asia achieve this. The current options for UHNW families can be loosely grouped into three areas: 

• Private banks (and ‘independent’ asset managers, whose fee models can be similar to banks)
• Single family offices 
• Multi-family offices

Private banks are by far the most common solution that wealthy families have sought to manage their assets in Asia, and their success has relied upon several factors - namely, a broad range of proprietary products and services, deep resources and the provision of credit (for speculation or for corporate requirements). However, we believe the current practice for a family to hold accounts with multiple institutions, whether for diversification, secrecy, lack of trust, etc., to be inefficient and generally sub-optimal. 

It is also not difficult to see that the interests of the client and those of the banker (who is incentivised to maximise revenue from the client) are misaligned. We believe our independence and transparent service offering are the crucial differentiators between family offices and private banks. 

For families of sufficient size, it is not uncommon to set up their own SFO, and we have found a greater willingness by families in Asia to direct their own investments in this way, compared to their counterparts in the United States and Europe. While this can ensure ultimate flexibility from an investment perspective, it can also be a very costly approach, amongst other things to ensure capable investment professionals are hired and requisite infrastructure is maintained. 

The economies of scale that come with aligning with the existing infrastructure of an established MFO can be a perfect solution for those families who wish to maintain a fully bespoke investment solution without the operational difficulties associated with managing their own wealth directly. We would note, however, that there exists in Asia, and increasingly elsewhere, a number of self-styled MFOs which have either been ‘wealth managers’ appropriating the ‘family office’ term for branding purposes, while closely resembling private banks in their business model, or groups of families co-investing together in specific deals, rather than with the full investment capabilities one would expect from ‘genuine’ MFOs. 

We believe this is an extremely exciting time for wealthy families in Asia. We expect to see more and more families engaging on issues of generational succession, whilst recognising the need for greater collaboration with independent service providers, who understand the requirements of, and are aligned with, families like themselves. 

Sandaire is on the editorial board of the new Globe Law and Business journal, The International Family Offices Journal.