The family office segment is booming in Asia. However, they face a handful of challenges related to governance, costs and other areas, according to a McKinsey report, which also provided potential solutions that could be offered by service providers.
Family offices are on the rise in Asia, in parallel to the region’s rapid generation of wealth. However, there are still hurdles to overcome in the nascent space.
According to a McKinsey report based on interviews with senior industry representatives, there are five main challenges faced by family offices in Asia: weak governance, rising operational costs, limited alternatives access, limited understanding about insurance and other value-added services as well as out-of-date technology.
Weak Governance
McKinsey noted that many family offices have weak governance structures, lacking formal decision-making processes and clear guidelines for information sharing.
Service providers could offer potential solutions including advisory services that tap fiduciary specialists to support governance in multiple jurisdictions. They could also assist in setting up an efficient operating model or act as a mediator to ensure proper balance and control within the family office.
Operational Costs
According to McKinsey analysis, personnel are typically the largest cost, accounting for about 45 to 65 percent of operating expenses for a single family office with $15 million to $500 million in assets under management. Competition for talent is intense in Hong Kong and Singapore while retention is difficult due to lower compensation and less structured working environments compared to hedge funds and investment banks.
The way service providers can help include advising on target recruitment profiles, helping consider whether to hire in-house or external talent and connecting family offices with top recruitment firms.
Alts Access
The third challenge cited in the report is access to alternatives. Family offices said that they have limited access to tailored alternative investment solutions such as early-stage startups, pre-IPOs, and institutional-grade infrastructure solutions, despite strong interest. They also said that they would like more personalized advisory services, adding that many providers still focus more on selling products.
Providers could resolve this challenge through various methods such as the creation of «founders’ clubs» where startup founders can connect and co-invest in deals. They could also support families in conducting independent due diligence on deals being considered.
Insurance and Value-Added Services
The report highlights that family office engagement with insurers is currently limited. One possible reason is that many offices are led by ex-bankers who are «more comfortable formulating investment strategies than working with insurers on a comprehensive plan that includes wealth transfer and succession planning».
Insurers could grow their family office businesses via education about their benefits beyond life coverage. They could also build an ecosystem for value-added services including tax advisory, immigration support and legal support.
Outdated Tech
The fifth and final challenge is outdated technology at family offices. This is especially the case with regard to the large amounts of data they hold, with lacking expertise to consolidate and derive meaningful insights.
With limited resources to build in-house solutions, tech providers could support family offices in areas such as portfolio performance and analytics, data aggregation on investment and automated financial reporting.
Asia Growth
Despite the challenges, there are rich opportunities for Hong Kong and Singapore, which are beneficiaries of wealth flows from the region, led by mainland China, India and Indonesia. Since 2020, the two hubs saw the number of family offices quadruple to 4,000, accounting for 15 percent of all offices globally.
The McKinsey report is authored by Bernhard Kotanko and Joydeep Sengupta, senior partners in the Singapore office alongside associate partner Vishal Kaushik, Bangkok-based consultant Anchali Singh and Frankfurt-based associate partner Sarina Deuble.
