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Putting family fortunes on a more stable footing
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Two years ago, a group of China tycoons traveled to the US to learn first-hand about use of the so-called 鈥渇amily office鈥 to manage the fortunes of a single family. It was a sign that a growing number of China鈥檚 wealthy elite need help in structuring their assets and their legacies.
A family office is a private wealth management entity that offers family-tailored services that can include estate planning, tax and legal advice, investment management, and governance of charitable activities. It is a way to ensure the smooth transfer of family fortunes across generations.
British-based WealthInsight estimated there were more than 5,000 family offices operating worldwide at the end of 2012. And now this specialized form of wealth management is now expanding to the Chinese mainland.
Noah Private Wealth Management Co, CreditEase Wealth Management Co and Gruffin Plutus Family Office, three Chinese third-party wealth management firms, opened offices in Qingdao, Shandong Province. They were the first registered family office services.
鈥淚t might be a disappointing message to people who run private bank businesses,鈥 Scott MacDonald, founder and co-executive officer of the International Family Office Association, told a financial forum in Shanghai recently, 鈥淧rivate banks have their roles to play, but to ensure a family鈥檚 wealth in the longer term, a family office has more clout.鈥
With the number of high net worth individuals in China surpassing 1 million in 2014, and China to takeover U.S. as world鈥檚 cradle for wealth generation in the next five to 10 years, according to a report by Bain & Co and China Merchants Bank, there is no shortage of billionaires seeking to structure their fortunes.
鈥淐hinese wealthy families bond their wealth tightly with their businesses, and focus heavily on confidentiality and trust relationships with their financial planners,鈥 said Bai Hao, vice president and the chief executive officer of the Family Office Service Department at Noah. 鈥淭hese features spur the needs of more family-tailored services beyond the pursuit of high returns earned through financial products.鈥
Bai said many of his clients first sought the help of overseas experts in structuring family offices. But in the end, the language barrier and difficulties in transferring property assets abroad weakened what foreigners could accomplish. Then, too, it was harder to build intimate, trusting relationships across such long distances.
鈥淏esides providing a long-term asset allocation plan in property, private equity investments, funds and the stock market, Noah acts as a sort of 鈥榟ousekeeper鈥 for a client鈥檚 entire business, financial and domestic affairs,鈥 Bai said. 鈥淭hat can even include education planning for children.鈥
Whereas most private banks set a minimum of 3 million yuan (US$483,300) for client entry, Noah targets those with investable assets of more than 50 million yuan.
The clients are among the estimated 3 million first-generation entrepreneurs who have profited from China鈥檚 reform policies and who need guidance in ensuring that fortunes are well protected and can be passed on to heirs in the most efficient way possible, Bai added.
鈥淲e have signed up more than 10 families for this service so far, and we hope to have 50 by the end of this year,鈥 he said.
Most of these family office providers see China as a 鈥渂lue sea鈥 of opportunity. They are free at present from fierce competition and from government oversight. How this fledgling domestic industry might come under regulation in the future is yet to be seen.
Yan Huaijiang, a director at UBS Wealth Management and founder of the Shenzhen-based Panhe Family Office, told a recent forum that some of his clients were thinking about migrating to Australia to ensure their children鈥檚 education but they had no corollary plans handling assets.
鈥淭he concept of wealth management is still weak and hard to comprehend for some domestic customers,鈥 Yan said. 鈥淢ost of them still emphasize expanding their business footprint and rarely think about how to pass on their wealth to their offspring.鈥
And this fledgling industry requires a specialized talent pool.
Crystal Jiang, the founder and chairman of Shanghai and Hong Kong-based Donglin (China) Family Wealth, which has more than 100 mainland clients and US$4 billion of global assets under management, said leading operators need to take the lead in training professional talent.
鈥淚nstead of hiring people familiar with trading-related products, we need to nurture high-end financial architects,鈥 Jiang told Shanghai Daily.
Leo Guan, Donglin鈥檚 chief executive officer, said the company plans to establish a research institute together with the PBC School of Finance at Tsinghua University in Beijing by the end of the year to work toward that goal.
鈥淚t usually takes three to five years to educate an 鈥榓rchitect鈥 who can serve our family office customers,鈥 Guan said.
Yan Huaijiang said only about six of his team of 20 are qualified to handle family office structures.
鈥淲hat we are doing is very complicated, confidential and long-term,鈥 Yan said. 鈥淥ne has to be patient and do it step-by-step.鈥
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