Financial planning: How family offices are becoming essential for first-generation entrepreneurs and CXOs

Family offices are becoming increasingly relevant in India, especially with the growing number of Ultra High Net Worth Individuals (UHNIs). Acting as back offices, they cater to families and individuals with investible corpus over ₹5 crores, either as single-family offices for a specific family or as multi-family offices serving multiple families. First-generation entrepreneurs and top management professionals are now turning to family offices for wealth management.

This article delves into the role and scope of family offices for first-gen entrepreneurs and CXOs.

Background

Vaishali Lale, Executive Vice President of TrustPlutus, said these individuals typically come from humble backgrounds.

"While Family office as a concept is used for large business families with intergenerational wealth, there is a bigger need for family offices among accomplished individuals who have experienced profound shifts in their fortunes through their hard work in successful organisations and entrepreneurial journeys. Today, they have achieved significant wealth, and having someone independent to look at their financial affairs has become a key requirement for these individuals,” said Lale.

Difference Between Family Office and Financial Advisor

As the requirements of these individuals become complex, a family office can offer them services beyond investment advice.

"Family offices are ideal for those with wealth over 100 crores. The transition from standard wealth management to a family office is about seeking personalized, comprehensive financial strategies that align with their complex financial realities, beyond just investment advice. A family office does much more than investment management; it looks after every aspect of a family's financial well-being, from portfolio structuring and execution to risk management, which most advisors overlook. It covers everything, even details like opening international bank accounts, ensuring a comprehensive approach to financial health. To manage all this either they need a single family office or work with an unbiased & focused advisor without any conflict of interest," said Munish Randev, Founder and CEO of CERVIN Family Office.

Major Challenges That a Family Office Can Solve

Managing Money

Ashutosh Bishnoi, Director of Multi-Act, said that the challenges of these individuals vary from those of regular individuals. "These individuals are no longer investing for their financial goals. For example, a successful CXO might suddenly have 50 to 100 crores, a scale they've never managed before. This isn't just about investing for short-term goals like buying a house anymore; it's about securing a legacy for future generations. Such wealth doesn't typically represent an opportunity for consumption, but rather a responsibility to ensure long-term security and prosperity for your family,” said Bishnoi.

Succession Planning

A significant liquidity event such as a successful exit or IPO can have a significant impact on the lives of first-gen entrepreneurs.

After a certain point, many Ultra HNIs have the realisation that their wealth is going to outlive them and span across generations. This is when people start to think seriously about engaging with family offices. These multi-offices act as a custodian of a legacy, ensuring this multigenerational wealth smoothly transitions to the next generation and beyond.

These individuals may have different succession planning or estate planning concerns that can be taken care of by their family offices.

Randev believes that a proper succession plan is essential to prevent future succession-related conflicts.

"When thinking about succession, especially for individuals with young kids, it's vital to plan early. For example, let's say you're considering purchasing a high-end apartment. Instead of buying it in your own name, you could set up a trust for your son or daughter and purchase the apartment in the name of that trust. This way, you're not just investing in property; you're also ensuring a smooth succession process for the future. With this approach, you effectively eliminate potential succession issues down the line,” said Randev.

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Randev adds that dealing with inheritance tax some time in the future is a challenge. "Managing this through trusts and other means is a critical aspect of ensuring a smooth transition of wealth to the next generation, but it's not without its complexities. Navigating these tax implications efficiently is essential to maximize the value of the inheritance and to minimize the tax burden," said Randev.

Bishnoi feels that money is just one part of the succession picture. “This isn't just about the money, but about who will manage the business after I'm gone or decide to retire. Who in my family will take over? If not my family, then who? It's about bringing in professionals, understanding the governance structures that work, and knowing when to step back while still being involved to some extent. These are critical decisions for a first-time entrepreneur, who often starts a business not just to make money but to seize an opportunity. And as the business becomes successful, accumulating wealth and building a reputation, there are other aspects to consider,” said Bishnoi.

Bishnoi goes on to explain the different types of capital that are important to safeguard that most people tend to ignore.

“One such aspect is reputational capital or social capital. This includes the recognition your business has earned, customer appreciation, and relationships with vendors, bankers, and others involved in the business. Your reputation forms a type of capital in their minds.

Then there's human capital, which encompasses the people you've employed and your family, as the business runs and generates wealth because of them. They represent a form of capital that can influence outcomes. Depending on your business type, there may also be technological capital, expertise capital, and other forms. When managing a family business, you need to consider these elements - how will they perpetuate, last, or improve in efficiency and size? Wealth is not the only concern.

For instance, in human capital management, suppose you've become a national player in a consumer product market and have hired professionals to run it. Now, your son or daughter is preparing to step in. How will you address the human capital aspect in this transition?

These are complex issues requiring expertise, especially given the lack of prior experience. Getting it wrong can have severe consequences,” said Bishnoi.

Risk Management

Managing risk is a critical component of what family offices offer.

Randev shared an example with us.

"In equity funds, including passive funds, financial services typically comprise about 35% to 45%. In fixed income, a significant portion of the market bonds come from Non-Banking Financial Companies (NBFCs), not traditional manufacturing firms. For larger families or individuals with substantial startup portfolios, fintech investments can represent 30% to 50% of their holdings. When you add it all up, it becomes clear that exposure to financial services could amount to 40% to 60% of one's portfolio. Imagine the impact of even a small regulatory change on such a portfolio – it could affect up to 50% of your investments. But this is an aspect often overlooked," said Randev.

In addition to portfolio risk, Lale also highlighted another risk to ultra HNIs: financing their children’s ventures.

“If the business venture fails, significant family wealth can be lost even in their lifetime. This risk is particularly acute for first-generation wealth creators, who, unlike intergenerational wealthy families, may not have a financial backup, nor the means and time to earn back the fortune. As they do not have the safety net of generational wealth, the family office becomes crucial as it is about protecting their wealth for them in their and their spouse's lifetime, ensuring longevity for at least the next generation,” said Lale.

She also touched upon the financial complexities of divorce settlements in family office management.

“Divorce can significantly impact finances, especially when large sums and problematic family dynamics are involved. For instance, if an individual passes a large sum to his son, who goes through a challenging divorce/live in etc, then half the wealth could be lost in divorce settlements. Our role extends to safeguard such scenarios through ring-fencing the wealth and ensuring the wealth is preserved and grown at a steady pace. There are many more scenarios. However, the important point is that the family office provides the ring fence to protect and grow the hard-earned wealth through professionals,” said Lale.

Global citizenship

Randev said that global citizenship is a key consideration for many individuals.

"They are looking to build portfolios outside India, acquire properties abroad, and in some cases, even explore investment-based citizenship options in other countries. A critical aspect of this planning is education funding for their children. For instance, if a child, currently ten years old, plans to study in the U.S., the family needs to prepare for significant expenses—like needing around 50 lakhs to 1 crore per year for five years or so. Additionally, there are numerous tertiary considerations. These include deciding which Liberalised Remittance Scheme (LRS) account to use, where to make international investments—be it through a bank, an investment platform, or a brokerage platform—and even choosing the right credit card for use both in India and abroad. It's important to note that under LRS, all domestic credit card expenditures billed in USD are also counted. This level of detail is crucial in financial planning, especially for those looking to extend their financial footprint globally," said Randev.

Conclusion

Family offices in India are holistic partners in managing the wealth and legacy of first-generation entrepreneurs and CXOs. As the number of UHNIs in India continues to rise, the importance and influence of family offices are set to grow. They play an important role in managing the wealth of these individuals and families.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.