There are institutions for high-net-worth families constantly emerging in the third-party service market for Chinese family-owned enterprises. Whether it is a family office, a private bank, an accounting firm, or a law firm, at their core these institutions are mostly focused on family wealth management. Before delving into wealth management, we first need to understand the current stage of development of the Chinese family within the investment industry and the challenges involved. For the time being, we can't directly apply ready-made solutions that work for other markets. It is only effective and meaningful to develop products and services while bearing the current state of Chinese families in mind.
Wealth allocation for Chinese entrepreneurs requires a joint effort from the family and institutions. Families need to have a clear idea of their own goals and a clear understanding of their own abilities, which will help them choose the appropriate professional institutions as partners in accordance with their own characteristics, in order to effectively manage family wealth.
Having a clear plan for offense and defense is very important when allocating assets. In most cases, family investors are in a state of pure offense or do not know whether to take a more offensive or defensive approach. Is the family suited to a more offensive or defensive strategy, or a balance between the two? This issue can be analyzed from two perspectives.
The first perspective is necessity – that is, from the perspective of the family, whether investment is necessary, and via what kind of approach.
The second perspective is operability – that is, if the family has the capacity to make the desired investment. Necessity does not mean that it can be done. Anyone can make an investment but there’s no guarantee it will be handled well.
We always remind families to pay attention to the issue of operability, because each family's ability is limited. As a buyer, families need to clarify these two issues when considering the investment layout.
(1) The relationship between invested assets and the family itself
When choosing an asset, families should consider whether or not they understand the risks and overall scope of the investment, and if this investment opportunity suits their family or not.
For example, if the family is engaged in a traditional industry, then is it still necessary to invest in traditional industries? Which is more important – risk hedging or business synergy? Having a professional come in to assist you by assessing your options (and not make the decision for you) may be required.
Another factor is: what kind of investment opportunity does the family face? Is the information presented on the surface consistent with the substance of the investment target?
Only after understanding these two issues can we consider the relationship between the family and the investment. A good investment should be a suitable investment and not just an investment with high expected returns.
(2) Distribution between buyers’ and sellers’ assets
Most of the investment opportunities in the market are essentially positioned by sellers, not buyers. There are few investment opportunities positioned by buyers, but the family is the ultimate buyer and should consider more investment with strong buyer positioning.
When we assist families in screening investment opportunities, we are more inclined to pay attention to whether the assets themselves have strong buyer attributes.
What is the meaning of a buyer attribute? Take investment institutions for example. Their difference lies in the fact that their business model is to earn profit by helping customers buy good assets or by selling products to customers. The business model and operating mechanism of the asset itself determines whether its buyer or its seller attributes are stronger.
(3) Distribution between active and passive management
The “active” mentioned here refers to whether the family should be deeply involved in the invested assets’ management process. The important difference between family investment and non-family investment is that a family has a lot of resources to use, which is often forgotten. These resources also play a very important role in inheritance.
If resources can play a role in the investment process, especially in post-investment management, then the same investment held in the family’s hands is much less risky than in others’ hands.
(4) Find the boundaries of the circle of capability
The last issue is where the boundaries of the investment capability is, which is an issue of feasibility. Roughly speaking, these capabilities can be divided into five types. The first is the ability to find a "good" project by family standards; the second is the ability to judge whether the project is "good” or not; the third is the ability to obtain this "good" project; the fourth is the ability to manage a "good" project well; the last one is the ability to hold onto a "good" project until the project brings the expected returns.
The domestic family office market is still at a very early stage, and the business rules and models are still in the process of taking shape. In this area, both financial institutions and family offices like us are still exploring.
As an independent third-party family office, we would like to share with you some of our past experiences and the lessons we have learned.
(1) Do not recommend investments that a family does not need
Don't recommend something that the family office thinks is good for the family, but recommend something that the family thinks is good in and of itself.
This is a matter of common sense, but it is also a mistake that we have made ourselves. For example, one attempts to apply the service concepts of the world's leading family offices to domestic customers, but with no noticeable effect.
The reason is that overseas services and products are aimed at a fourth or fifth generation overseas families, while the domestic family is currently still in the first or second generation.
Family needs in different inter-generational periods are completely different. In addition to the inherent characteristics of the Chinese market, the blind application of international experience will result in mismatches in time and space dimensions.
(2) Take advantage of the trend and don't be a know-it-all
Just as the development of China's economy is based on the advantages of latecomers, in the field of family services, there are also many pioneering countries and regions, such as Japan, Taiwan, and Hong Kong.
In the family inheritance and family office business, there are many straight and winding paths, and they have all been walked before.
Today, it’s also very difficult for China's family service market to bypass the laws of the industry's development. Therefore, it is more realistic for us to first determine at which point in these industry trends we are, instead of focusing on how to work hard.
(3) Risk-controlled defense as a foundation
We hope to help families to participate in the investment business on the basis of controlling risks. The external situation is currently still in a state of high complexity and uncertainty, so there’s no doubt that having control over uncertainty should be a priority. There is no doubt about that.
The best way to control future risks is to create the future. Even if you play it defensively, this is a positive form of defense, not a failure to do anything. Risks will not automatically disappear because of inaction.
We are looking forward to working with our clients, and we are very interested in how we can help them shape a controlled future for their family. Among the three things we discussed, “defense, offense, and inheritance”, we always put "defense" first. Only go on the offensive after building a strong, defensive foundation and avoid taking unnecessary risks.
(4) Talent is king
After talking with the family about what to do, we still have to figure out if there is anyone who can actually do it. It is very likely that no one in the family can. The most common problem we have encountered in family inheritance is an extreme lack of talent.
The most important aspect of a family business is having middle-level cadres, which Chinese companies in particular think very highly of. Family management also needs "middle-level cadres".
Some families are prone to having problems when they reach the second generation. This is not only a problem of lack of ability within the second generation, but also a problem of lack of ability within the team around the second generation. Without a reliable talent pool, the family will inevitably fall into recession. On the issue of family talent, we are also actively developing solutions and have already begun some positive practical work.
