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We have often heard that the principles of investment are the same for all investors, and most of us will agree to that. But when we design portfolios for ultra high networth (UHNW) investors, things start becoming a bit complex. The sheer size of the portfolio, the direct or indirect linkages to family business or an entrepreneurial venture, sensitive family dynamics add a lot of interplay and, hence, complexity to the wealth planning process. For starters, while a simple asset allocation plan may be good enough for most investors, for an UHNWI we have to create segregated ‘need pools’ which will have very different portfolios.

Let’s take the case of a business family running a single line of packaged consumer goods business. The family may need to keep some money aside for emergencies and unforeseen issues in the family business that then needs to be invested in very low capital risk products with high liquidity. Some capital must be set aside to support their lifestyle, cash flow needs and, hence, will need to yield a net return that beats ‘lifestyle inflation’. This pool will be relatively liquid and mostly in listed securities. Finally, some pool of capital will be segregated to focus on future wealth creation, which naturally comes with high risk investment options such as venture capital investing. This last pool also gains importance when a family member has to be allocated some capital for entrepreneurial endeavours outside the family business.

Case study of a family run FMCG biz
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Case study of a family run FMCG biz

For the above family, we had two options to structure the portfolio and holding vehicles.

Option 1: Create a relatively liquid portfolio to start with and distribute that to the different family members post an event. From then on the members would be free to invest as per their own needs

Option 2: We had to create a central pool, which is run by the karta of the family, and some smaller pools, which are run by the designated members themselves. Under this, we create a family capital tree with segregated portfolios.

In this case, the family chose to go with the second option with an intent to create proper portfolios and not wait for the distribution of wealth.

After construction of the portfolio, the focus must be on risk assessment and mitigation to identify the factors that may affect the financial well-being of the individual or family. From our experience of advising scores of family offices, we have seen many investors put a lot of effort in planning and executing a portfolio but not focusing on an ongoing risk assessment exercise. If the UHNW investor does not have oversight on the portfolio, the price is paid via higher volatility, which may lead to sharp losses. These sharp losses can create a rift in family, leading to interpersonal and intergenerational issues.

In-house or external family office?

Probably the biggest challenge deciding on setting up an in-house team to manage the family office or working with an external advisor. If the investor chooses to create an in-house team, the challenge is to attract and retain quality talent which has hands-on experience managing large portfolios. Continuity of internal teams is a key issue. When a senior employee leaves and the family has to bring in new employees up the curve, it affects continuity and also demands more time from family members. We have come across single family offices that struggle to hire quality professionals or keep them adequately enthused. While lack of expertise and experience will affect the portfolio, key employee turnover opens up the portfolio to risks. With great wealth comes great complexity; however simple you attempt to keep the solution, the sheer needs of most UHNWIs do require expert handling that has its own set of challenges.

Munish Randev is founder at Cervin Family Office.

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