As India’s economy continues to flourish, ranking as the second-highest growth rate among G-20 countries in FY 22-23, according to the World Economic Forum, the landscape of wealth management is also evolving rapidly. High-net-worth individuals (HNIs) and affluent families are increasingly seeking customised solutions to preserve and grow their wealth. Two prominent options in this space are Family Offices and Portfolio Management Services (PMS). While both aim to multiply wealth, they differ significantly in their scope, structure, and services offered.
This article explores the key differences, advantages, and nuances of Family Offices and PMS in the Indian context, helping you make an informed decision about which option might be best suited to your needs.
What is a Family Office?
A family office is a private wealth-management advisory firm set up to manage the assets of a family or individual with a very high net worth, typically exceeding hundreds of crores of rupees. These entities provide a comprehensive range of services, from investment management to estate planning, philanthropy, and tax advisory.
Common Types of Family Offices in India
- Single-Family Office (SFO): Manages the wealth of a single family, allowing for highly customisable services tailored to the specific financial needs and goals of that family.
- Multi-Family Office (MFO): Manages the wealth of multiple families, enabling cost-sharing while still providing specialised services to clients.
- Virtual-Family Office (VFO): Leverages a network of independent experts and operates without the need for physical space or a dedicated in-house team, delivering services at a lower cost compared to traditional family offices.
Learn More: Types of Family Offices
Key Functions of a Family Office
- Investment Management: Manage and allocate investments across stocks, bonds, private equity, real estate, and alternative assets.
- Estate and Succession Planning: Focus on preserving and growing wealth while ensuring a smooth transition of assets and businesses across generations.
- Risk Management: Identify and mitigate key risks, from market volatility to personal liabilities.
- Philanthropy: Manage charitable contributions and establish trusts or foundations for philanthropic endeavours.
- Tax Planning and Compliance: Provide expertise in tax planning, reporting, and compliance to navigate the complex world of taxation.
What is Portfolio Management Services (PMS)?
Portfolio Management Services (PMS) provide customised investment solutions designed specifically for HNIs seeking strategies that align with their unique financial goals. Unlike mutual funds, which offer standardised products to the masses, a PMS is tailored to suit the goals, risk tolerance, and preferences of individual investors.
As per Securities and Exchange Board of India (SEBI) regulations, the minimum investment amount for PMS is ₹50 lakhs.
Types of PMS in India
- Discretionary PMS: The portfolio manager has complete control over making investment decisions on behalf of the client without needing prior approval for every transaction.
- Non-discretionary PMS: The portfolio manager provides advice, but the client has the final say on all investment decisions and is more involved in the decision-making process.
- Advisory PMS: The portfolio manager acts as an advisor and only recommends which stocks, bonds, or assets to buy, sell, or hold based on the client’s preferences. The final decision on executing those recommendations rests with the client.
Learn More: Types of PMS
Key Functions of PMS
- Personalised Investment Management: Each portfolio is customised based on the client’s risk tolerance, financial goals, and preferences.
- Professional and Active Management: Qualified professionals backed by a research team manage portfolios on behalf of clients.
- Transparency: The portfolio manager periodically provides a report to the client, as agreed in the contract, but not exceeding a period of 3 months and as and when required by the client.
Key Differences Between Family Office and PMS
| Feature | Family Office | PMS |
| Services Offered | Comprehensive wealth management, estate planning, tax advisory, and philanthropy management | Focus on managing investments across stocks, bonds, and other financial instruments as permitted by PMS regulation and mentioned in their disclosure document |
| Control | The family retains control and has direct influence over decisions | Discretionary or non-discretionary models: PMS managers have discretion or act based on the client’s approval in non-discretionary PMS |
| Regulatory Oversight | Less regulated as it is a private entity, but it must comply with tax and legal standards | Regulated by SEBI, adhering to guidelines set for PMS providers |
| Investment Horizon | Long-term, with a focus on inter-generational wealth transfer | Primarily short to medium-term, with a focus on capital appreciation. The investment horizon also depends on the nature of the security. |
| Flexibility | Highly flexible and holistic, offering a range of services beyond investment management | Limited to financial investments, with a primary focus on returns from the portfolio |
| Reporting and Transparency | Customisable reports and close oversight | Standardised reports with transparency as per SEBI regulations |
| Cost Structure | Expensive to set up and manage; requires a dedicated team of professionals | Fees are charged as per the agreement. This could be a fixed fee, or a return-based fee on performance, or a combination of both. |
In India, the rise of family offices and PMS reflects the growing sophistication of wealth management as more and more HNIs are seeking customised solutions to manage their wealth effectively. Both options provide unique benefits tailored to the specific needs of wealthy individuals and families. So, which one is right for you? To answer this, let us discuss the advantages and disadvantages of both.
Advantages and disadvantages of PMS
Advantages:
- Professional Management: PMS seeks to offer the benefit of professional investment management with strategies tailored to individual risk profiles and financial goals.
- Regulation and Transparency: PMS is regulated by SEBI, and the client’s investments are handled transparently and professionally.
- Low Entry Barriers (Compared to Family Office): While still catering to HNIs, PMS is more accessible in terms of cost and complexity compared to setting up a family office.
Disadvantages:
- Higher Fees: A PMS typically charges higher fees than mutual funds, with the fees often based on performance or AUM alongside other costs, such as exit load, performance fees, etc., attached to it.
- Limited Scope: While PMS focuses on personalised investments, it does not offer the holistic wealth management services available through a family office which include more than just investment management.
Advantages and disadvantages of Family Office
Advantages:
- Tailored to Family Needs: Family offices can offer services that go beyond investment management, such as estate planning, tax optimisation, and lifestyle management.
- Intergenerational Wealth Transfer: They help manage and transfer wealth seamlessly across generations, with a strong focus on preserving the legacy.
Disadvantages:
- High Costs: Setting up and maintaining a family office can be expensive, with the need for a dedicated team of professionals.
- Complexity: Managing the range of services offered by a family office requires specialised skills across domains, which makes it much more complex than a PMS.
Conclusion: Which One Should You Choose?
The decision between a family office and PMS depends on several factors:
- Level of Wealth: Family offices are typically suited for UHNIs or families with wealth exceeding hundreds of crores.
- Complexity of Needs: If your needs extend beyond investments to estate planning, philanthropy, and comprehensive wealth management, a Family Office may be the right option.
- Focus on Investments: If you are primarily focused on maximising returns from your investments with a professional portfolio manager, PMS offers a more cost-efficient solution.
- Control and Involvement: Consider how much direct control and involvement you want in managing your wealth. Family offices offer more control, while PMS provides professional management with varying degrees of client involvement.
- Cost Considerations: PMS is generally more cost-effective than setting up and maintaining a Family Office.
- Regulatory Comfort: If you prefer a more regulated environment, PMS offers the assurance of SEBI oversight.
It’s essential to evaluate your unique financial situation, long-term goals, and the level of portfolio management you need. We strongly recommend consulting a certified financial expert before making any investment decisions to ensure your strategy aligns with your financial goals. If you’re exploring options like Portfolio Management Services (PMS) and want transparent insights on fee structures, get in touch with Dezerv. Our team offers customised wealth management solutions tailored to meet diverse financial needs, helping you navigate these choices with confidence. Reach out to Dezerv today to book an expert call and get started on a path toward your financial future.
FAQs
What is the key difference between a Family Office and PMS?
A Family Office provides comprehensive wealth management services, including investment management, tax planning, estate planning, philanthropy, and lifestyle management. In contrast, PMS primarily focuses on personalised investment management and portfolio strategies for high-net-worth individuals.
Who typically uses Family Offices in India?
Family Offices are usually set up by ultra-high-net-worth families or individuals with significant wealth, often exceeding hundreds of crores. They are designed to manage complex financial and personal affairs across multiple generations.
What are the two types of Family Offices in India?
The two common types of Family Offices are Single-Family Offices (SFO), which manage the wealth of one family, and Multi-Family Offices (MFO), which manage the assets of multiple families.
What is the minimum investment required for PMS in India?
According to SEBI regulations, the minimum investment required for PMS in India is ₹50 lakhs.
Is PMS regulated in India?
Yes, PMS is regulated by the Securities and Exchange Board of India (Portfolio Manager) Regulations, 2020, ensuring transparency and accountability in the management of clients’ portfolios.
Which option is more cost-effective: Family Office or PMS?
PMS is generally more cost-effective than a Family Office. Setting up and maintaining a Family Office can be expensive due to the need for a dedicated team of professionals, whereas a PMS charges fees as per the agreement. This could be a fixed fee or a return-based fee on performance, or a combination of both.
Disclaimer:
Securities investments are subject to market risks; please read the Disclosure Document carefully before investing.
The information contained in this article is for knowledge purposes only. This article should not be construed to be an offer to buy/sell any securities or provide any investment advice to any party
In the preparation of this article, Dezerv has used information developed in-house and publicly available information and other sources believed to be reliable. While reasonable care has been taken to present reliable data in this article, Dezerv does not guarantee the accuracy or completeness of the data. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. Actual results may differ from expressed or implied performance due to market uncertainties. The statements made herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions.
This document should not be reproduced or redistributed to any other person without Dezerv’s prior permission.
Dezerv and/or its subsidiary/associates/employees are not liable for any risks/losses pertaining to any assets/securities or investment opportunities available from time to time.
External advice: Please consult your legal, tax and financial advisors to determine the implications or consequences of your investments in such mutual fund schemes or before making any investment decisions.