The Process Of Establishing A Family Office In India?

This article discusses the concept of a family office, its role and benefits in the Indian context, important considerations for setting up a family office, disclosure obligations in case of succession planning structures set up outside India, and precautions to be taken in the context of general family offices. There are currently between 40-45 formal family office structures in existence in India today, with an average family wealth of USD $645m.

The cost of setting up a family office structure is the only factor to consider, as it can only be afforded by larger portfolios, possibly upwards of Rs 1000 crore, and an MFO cost would ideally be effective for Rs 100 crore and above. Family offices can be categorised into three main types: single family office (SFO), multi-family, and multi-family.

A single family office is dedicated to managing assets and managing corporate and family governance, succession planning, immigration, taxes, legal advisory, travel, immigration, and other services. For $100 million in India, you can set up a very nice family office, which can have a CIO, vice-presidents for investment, analysts, and associates. Many multi-family office firms have also cropped up in tier-2 and 3 cities, such as Cervin Family Office in Pune and Legacy Growth in Ahmedabad.

Family offices are entities that have been set up to cater to some financial and non-financial needs of ultra-high-net-worth individuals. Steps to start a family office include defining your purpose, choosing between an SFO and MFO, setting up systems and technology, building your team, and launching and reviewing.

Waterfield Advisors is India’s leading multi-family office that delivers services such as succession and estate planning, investment advisory, and more. This guide provides leading practices for setting up and running successful family offices, from entity selection and registration to obtaining the necessary approvals and licenses.

Do Family Offices Need To Be Registered In India?

In India, family offices and trusts are governed by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) regulations. To act as anchor investors, family offices must register as investment vehicles. Consequently, many family offices are establishing alternative investment fund structures for startup investments. When pooling funds with unrelated families, family offices may need to register as Venture Capital Firms.

The concept of a family office involves managing significant wealth, and they can be categorized as Single Family Offices (SFOs) catering to a specific family or Multi-Family Offices (MFOs) serving multiple families. Currently, there are over 300 family offices in India, with expectations for growth, especially among first-generation ultra-high-net-worth individuals (UHNI). Recent regulatory relaxations for family offices in the International Financial Services Centre (IFSC) have emerged, allowing registered investment advisors (RIAs) to provide advisory services and earn fees.

Wealth management dynamics are crucial for India's affluent families, as nearly 50% rely on established family offices for wealth management strategies. Family office resources, service providers, and tax information are vital for the ultra-wealthy population, highlighting the need for tailored wealth management solutions.

How Much Does A Family Office Cost In India?

In India, the family office concept has gained traction over the past 8-10 years, with a net worth of around ₹250 crore generally considered necessary to establish one. The annual salary cost for quality analysts in a family office ranges from ₹2-3 crore. Setting up a family office incurs significant costs that vary based on factors like the wealth size and financial complexity of the family. Typically, a Single Family Office (SFO) is feasible for larger portfolios of ₹1, 000 crore and above, while a Multi-Family Office (MFO) can cater to those with ₹100 crore. There are approximately 300 family offices in India, primarily managing assets around USD $100 million, with India ranking third globally in the number of centi-millionaires.

The operational costs of running a family office can represent about 1-2% of the family's total active assets, leading to substantial annual expenses, especially for larger entities. Industry professionals suggest that families with liquid wealth exceeding ₹2000 crore particularly benefit from SFOs due to their privacy, customization, and control, although at higher operational costs. The overall estimated assets managed by family offices in India stand at $30 billion against a global backdrop of far greater assets.

What Are The Tax Benefits Of Family Office In India?

Families operating within Special Economic Zones (SEZs) enjoy significant tax advantages, including a full tax exemption on export income for the first five years, a 50% exemption during the next five years, and the ability to reinvest up to 50% of export profits for an additional five years. This article explores the family office concept in India, covering its role, advantages, and crucial factors for establishment, as well as the disclosure obligations tied to succession planning structures established outside India.

It highlights the Family Investment Fund (FIF) structure that enables single-family offices to manage family-specific funds with potential overseas investment benefits. Munish Randev from Cervin Family Office elaborates on the various family office types: primarily Single Family Offices (SFOs), which ensure privacy, customization, and control despite high operational costs. Family offices can also be structured as corporate entities, availing reduced corporate tax rates.

Those set up in International Financial Services Centres (IFSCs), like GIFT City, are entitled to multiple tax incentives including exemptions from income, dividend distribution tax, and goods and services tax (GST). The article also discusses the growing interest among ultra-high-net-worth families in wealth management and diversification through various family office structures, emphasizing tax optimization and succession planning in an increasingly complex financial landscape.

How To Set Up A Family Office?

Setting up a family office involves a comprehensive plan that includes various activities essential to managing a family's wealth and legacy. The initial and most crucial step is to define the family's specific goals, which will guide the entire process. From there, it is essential to evaluate the feasibility of creating a family office by understanding the family's needs, expectations, and the various models available. This process includes decision points such as determining the purpose of the family office and evaluating whether a single-family office (SFO) or a multi-family office (MFO) is more suitable.

Once the structure is decided, the next steps involve developing policies, legal frameworks, and assembling a team aligned with the family's values and objectives. It’s also critical to establish robust systems and technology for operations, including IT infrastructure and cybersecurity measures. A meticulous checklist can facilitate this process, ensuring that all elements from staffing to investment policies contribute to the family office's efficiency. The creation of a family office is akin to constructing a custom-designed solution for wealth management, requiring both strategy and personal commitment to achieve the desired outcomes.

How Are Family Offices Structured In India?

Family offices provide personalized services beyond traditional wealth management, including estate planning, taxation, philanthropy, and concierge services. They can be structured as Single Family Offices (SFOs) for one family or Multi-Family Offices (MFOs) for multiple families. The article explores the concept of family offices in India, their roles, and benefits, alongside considerations for their establishment and disclosure requirements for succession planning.

With over 300 family offices in India, this figure reflects a significant rise from just 45 in 2018, largely driven by an increase in mergers, acquisitions, and IPOs. Since liberalization in the 1980s, the demand for sophisticated wealth management strategies has surged as India’s wealthy population grows. Family offices are evolving into holistic service providers, promoting family unity and legacy preservation. They typically operate as separate legal entities, like investment companies or family trusts, managing average assets of approximately USD $100 million.

Importantly, since 2014, these offices have invested in over 200 startups across sectors like fintech and e-commerce. The landscape of family offices in India is marked by innovation, collaboration, and a strong focus on long-term wealth preservation.

How Do Family Offices Make Money?

Family offices primarily generate revenue through investment management fees, typically charged as a percentage of assets under management (AUM), which represents the total value of investments managed. These offices cater to ultra-high-net-worth individuals, mainly focusing on wealth preservation across generations. They often use a dual fee structure that includes both investment management and performance-based fees, aligning their earnings with investment success.

Family offices can encompass diverse structures, including traditional setups where a wealthy individual establishes a legal entity to oversee their family’s wealth. The rising popularity of family offices is attributed to increasing wealth concentration and the need for comprehensive financial services, including trust and estate planning, alongside investment management. Operating usually with a minimum threshold of $50 million in investable assets, they provide dedicated teams to handle intricate financial matters for their clients.

These offices engage in various investment strategies, extending to private equity, venture capital, hedge funds, and real estate, effectively serving as a one-stop financial resource for the affluent. Additionally, while aiming for profitability, the primary objective remains to safeguard family legacies and manage wealth effectively through tailored financial planning and comprehensive services.

How Much Money Do You Need To Establish A Family Office?

Creating a Single Family Office (SFO) is generally advisable for families with a net worth exceeding $100 million, as annual costs can range from 1% to 3% of that amount. Multi-Family Offices (MFOs), which cater to multiple families, can offer more cost-effective solutions for those with net worth between $50 million and $100 million. Typically, a small family office employs around six staff members and incurs annual operational costs of $1 million to $2 million, while medium-sized offices may have higher expenses. Costs vary significantly, and families considering an SFO should be prepared to allocate a substantial portion of their assets toward these services.

While the common starting point for establishing a family office is around $100 million in net worth, families with $50 million or more may find MFOs to be a fitting choice due to lower costs. Key decision factors include wealth complexity, sustainable income from investments, and effective cash flow management. Families must determine responsibility for various functions such as investment management, legal affairs, and tax compliance. Establishing a family office is often more relevant for families wishing to retain control over their wealth, manage investments closely, and provide financial security for future generations.

How To Start A Family Office In India?

Building a family office involves several key steps: hiring staff, establishing policies and procedures, testing systems, preparing for business continuity, refining financial models, planning communication protocols, and addressing cyber threats, culminating in a technology launch. In India, the concept of family offices is still developing, driven by the rise of ultra high-net-worth individuals (UHNIs). Munish Randev of Cervin Family Office outlines the three primary types of family offices: Single Family Offices (SFO), Multi Family Offices (MFO), and virtual family offices.

These entities manage wealth, corporate governance, succession, taxes, and legal advisory services for families. While some families may choose to set up their office in India, others consider jurisdictions like Singapore or Dubai due to favorable tax and regulatory environments. Family offices are increasingly relevant to support the growth of Indian startups. To build a family office, one can follow steps such as feasibility assessment, designing structures, implementation, and ongoing operation.

Establishing a family office can involve a minimum corpus of USD 10 million. Family offices cater to diverse needs, making them essential for first-generation entrepreneurs and families seeking personalized wealth management. Evaluating investment levels is crucial in deciding the degree of involvement in setting up a family office.

What Are The Disadvantages Of A Family Office?

Establishing and maintaining a single-family office presents several drawbacks. Primarily, high costs can pose a significant barrier, suggesting a gradual adoption might mitigate expenses. Additionally, creating governance documents can lead to disputes among family members. Single-family offices can be effective for families with assets between $25 million and $100 million, often involving minimal personnel. When considering whether to build or outsource a family office, families should weigh the pros and cons.

While building offers control over the office structure, it also entails reduced autonomy within a multi-family setup. Each approach varies in benefits based on the family's particular needs, client base, and organizational framework. Challenges within family offices include entitlement, sibling rivalry, and integrating spouses into the business. A single-family office focuses on fulfilling specific family financial goals but can bring complexity and high costs.

The potential for scope creep, privacy concerns, and reliance on limited expertise also complicate operations. While the allure of family offices is rising among affluent individuals, careful consideration of expenses, control, and overall family dynamics is essential. Ultimately, families must assess whether the benefits of forming a single-family office outweigh the inherent challenges and costs involved.

Why Is Family Office Important In India?

In India, the family office concept has significantly gained traction over the past 8-10 years due to the rise of high net worth individuals (HNIs) seeking efficient investment and wealth management solutions. The increasing wealth among ultra-high net worth individuals (UHNIs) and the complexity of their investment needs are primary drivers behind this growth. Family offices are evolving from traditional advisory roles to becoming major players in the stock market by providing liquidity and consolidating investment strategies.

The trend includes a shift from ancestral investments towards innovative asset management, fostering a comprehensive family legacy and efficient succession planning. With over 300 family offices now in India, including both single-family and multi-family setups, they have become essential for managing multigenerational wealth. Key services provided by family offices include expert legal and tax advice, custom financial planning, and investment diversification beyond traditional assets.

This evolution not only helps businesses professionalize their asset management but also contributes significantly to India's economy, which relies heavily on family-run enterprises. The future of family offices in India is promising, marked by technological advancements and a focus on long-term wealth preservation, positioning them as holistic providers beyond mere financial management.

What Is The Minimum Investment For A Family Office In India?

In India, family offices serve to manage and grow wealth for affluent families, typically requiring a minimum asset threshold of Rs 2, 000 crore for direct participation. For multi-family offices, the portfolio size should range from Rs 100 crore to Rs 2, 000 crore. These entities emerge from the increasing wealth of ultra-high-net-worth individuals (UHNWIs), which is projected to grow from around 150, 000 families with a cumulative value of $2 trillion to 400, 000 families in the coming years.

Family offices are particularly vital when wealth exceeds the Rs 100 crore mark, offering targeted investment strategies that differentiate from mutual funds by tailoring strategies to individual family goals and risk tolerances.

The establishment of a family office is primarily to preserve wealth across generations, requiring registration as investment vehicles to participate as anchor investors in the market. Family offices typically engage in both traditional and alternative investments, often holding assets longer than venture capital funds concentrate on fund performance. Recent reports indicate that family offices have invested over $5 billion in Indian startups, driven by the desire for targeted investment and wealth management.

Operational costs for establishing a family office can range from ₹8-12 crore annually; however, this is deemed excessive for smaller portfolios under ₹200 crore. Ultimately, for families with wealth exceeding ₹50 million, the establishment of a family office becomes economically viable, fostering a more personalized wealth management approach.