Private banks have prided themselves in identifying and prioritising needs of global families, against a fast-changing backdrop of digitalisation, generational asset transfer and rising interest in socially responsible investments.
But the new, overarching, coronavirus concerns in 2020 have left the top players of Zurich and London scrambling for clues from client video calls and asking: ‘How will Covid-19 change the way families interact with wealth advisers?’
Most banks had already been rethinking the way they service these cross-border clans, which are building up their buying power to resemble financial institutions. But fallout from the pandemic means they will have to focus even more intensely on this key client segment.
Until recently, the world’s largest private banking group, UBS Wealth Management, served approximately 6,500 clients with assets of more than $50m, from its Zurich-based ultra-high net worth clients unit, headed by Joe Stadler. This included a sub-segment of 500 global family offices.
But during 2019, Mr Stadler felt things could be working even more smoothly. His suspicion was that the lower end of this spectrum behaved more like standard high net worth clients, whereas the higher end were predominantly global families with a different dynamic.
Internal research backed the hypothesis of Mr Stadler, who went to UBS CEO Sergio Ermotti to ask for a game-changing deal. If the Zurich board allowed Mr Stadler to dramatically reduce his client pool to just 1,500 accounts, he would personally guarantee these would become far more frequent users of investment banking, asset management and private banking products and paid advice, boosting revenues right across the board.
“We can now concentrate on complex clients, who need access to the investment bank and the entire offering of UBS,” says a confident Mr Stadler. “We don’t care if we have one, two or three people talking to them. We have the teams available, because we have reduced the number of clients and focused on the very largest.”
The quest at UBS – as it is at other ‘Galactico’ banks – is to encourage the wealthiest families to have a more exclusive relationship, working with fewer private banks. Currently, 40 per cent of the global families served by UBS see the Swiss giant as their “house bank”, leaving huge scope for growth.
“That leaves 60 per cent with multiple banking relationships,” ponders Mr Stadler, who expects the rest of the private banking fraternity to also up the ante.
“We were the front runner, creating the Global Family Office in 2010. Everyone wants to emulate and copy us,” he boasts. “Now more and more clients need ‘one bank’ coverage. It’s a definite trend, because as clients grow, their needs grow with them.”
The plan today is to cover both private and business needs with one team, as families begin to resemble institutions, with a more global remit. “We are seeing a clear internationalisation of families across jurisdictions,” says Mr Stadler, whose unit has also developed a more global structure to better service its cross-border client base. “The second generation often lives in a different place from the first one,” he adds.
While these major families were all monitoring the coronavirus epidemic from the moment it emerged in China at the end of 2019, immediately dominating discussions around Chinese assets, he plays down any panic among the upper echelons of the UBS client book.
“These are professional clients, with institutional behaviour. They look at things very differently to retail clients.”
Rival players report a nervous reaction in some jurisdictions and a calmer approach in others. “The fear of the reality has taken over from the reality,” believes James Holder, global head of Citi Private Capital Group, co-ordinating global coverage of family-controlled assets.
The more global the family, the more they access information from different territories, which may be further along the infection curve. Families with branches in Asia are more sanguine and keener to carry on with business.
“Infection rates in Hong Kong have plateaued and families over there are getting on with life,” says Mr Holder, referring to a “crisis fatigue” for families subjected to a year of civil disturbances and uncertainties of an economy battered by President Trump’s trade war with China.
Since the start of the global pandemic, Citi has hosted regular calls for small groups of families, sharing best practices for business continuity. “Family offices are under-resourced at the best of times,” he says. “While an office of 10 to 12 would constitute a larger staff, many are running their operations with two to three key executives at the most.”
The crisis has left physically isolated families, with quieter operating business, keener to connect both with other families and their bankers. The conversation has moved on from general family office issues, to specific opportunities and challenges in treasury and asset management and real estate trades.
He singles out private equity investments as a “mega-trend” which families are following, backing similar sentiments from UBS. Currently there is a fashion for families clubbing together to maximise the impact of these investments, with two thirds of Citi’s clients preferring single asset transactions to pooled funds.
As well as this greater level of engagement, he points out an increasingly polarised client base. Core ultra-high net worth families – with assets of between $250m to $750m – are served by a team providing dedicated administration and execution services. These families also outsource legal services, asset management, risk management and consolidated reporting to third parties. Nearly three quarters of his asset base follows this outsourcing model.
But the remaining, highest value segment displays a very different behavioural dynamic, resembling an institution. “These offices have hired professionals from an asset management organisation, hedge fund, real estate or private equity shop. They have taken the fundamental decision to run their own assets. This represents a major inflection point.”
These families, says Mr Holder, which run assets of $1bn and above, have decided to control their own destiny and steer the management of their portfolios in a particular direction. This strategy can, in the right hands, lead to a profitable, family-led investment businesses.
“There is an opportunity here for a family to exploit an inherent advantage in a particular segment, sector or geography,” says Mr Holder.
The main investment speciality for family offices, and the key area they have recruited specialists in, is alternative investments, particularly private equity.
But not all family offices have the bandwidth to truly focus on illiquid investments and the banks do not necessarily provide them with the service they need, says Leah Cox, an ex-Credit Suisse private banker, now managing director of the IANUA Market alternative investing platform.
“If you categorise yourself as a family office, you are constantly bombarded by messages about deals on LinkedIn and other channels,” says Ms Cox. “Most of them you have to take with a pinch of salt.”
Private banks, she believes, no longer have the institutional expertise to service family offices requiring illiquid investments and run the risk of losing assets as a result. “We all know that if money is flowing out through the doors of private banks, this money does not come back,” she warns.
Private banks are challenged in their ability to show deal flow to investors, who are increasingly demanding institutional quality information, control of their investments and discounted fund fees. “Some families are very institutional in their structure,” she says. “And while others may be smaller and leaner, they still see themselves as part of this institutional framework.”
Having “beta-tested” her platform with 20 family offices, Ms Cox is convinced this segment has become a key source of funds for private equity investments. “We have seen an explosion of family offices as vibrant pockets of capital,” she says.
“People assume families look at all the deals and that it is easier to get them to invest. But while the desire is there, the infrastructure is not necessarily there. It is our aim to bring these private markets to the clients, through creating and building an institutional format for families.”
Private bankers are also reluctant to book private equity investments, because they are not always compensated for them. “It is very difficult to record private equity on a private bankers’ reporting card,” believes Gerard Aquilina, partner at family advisers Cone Marshall, and an early pioneer of targeting global families during his stints at UBS, HSBC and Merrill Lynch.
“If a family invests $1m into private equity, it is not reflected in the AuM of the private banker.”
Where private and investment bankers are required to co-ordinate portfolios of global families, the investment banker would typically have more contact with the clients, than the private banker, who often introduces the family. “This leads to a lot of hostility and friction when it comes to private equity,” volunteers Mr Aquilina.
Although joint ventures between investment and private banking units involving shared revenues have helped reduce any bad feeling, a perennial struggle to create a viable structure to serve global families has taken its toll. Family offices requiring institutional pricing levels for private equity investments have started to position themselves as attractive destinations for corporate finance specialists.
“While there is a definite trend for migration of specialist talent to family offices, the flipside is that the family office has to convince the institutional expert to leave a corporate structure with human resources and high compensation levels,” says Mr Aquilina. Family offices typically do this by providing loans for key staff to co-invest in private equity.
Shelter from the storm
Significant stakes in these illiquid, alternative investments have protected families from the volatility of public markets during the ongoing crisis. Regular communication with clients has been stepped up since the start of the coronavirus spread, says Charlotte Thorne, co-founder of London-based family investment advisers Capital Generation Partners.
“This is not because we need to speak from a portfolio perspective, but because our job is to keep calm and steady and explain to people what needs to be done.”
CapGen’s portfolios have been “quite conservatively positioned for a year and a half”, says Ms Thorne. “We knew that the downturn was coming, but did not know where from. Because our portfolios were ready for just this sort of possibility, we have been able to go to our clients and explain why we are not running around screaming.”
More of these discussions during the current crisis are held with family members rather than family office employees, she confirms. “Many families can become disintermediated from their wealth. They have a lot of excellent advisers, lawyers and trustees involved but sometimes they want direct conversations with the person at the raw end of the job.”
The influence of environmental, social and governance (ESG) factors in investment is also transforming many portfolios and helping boost performance. While for some families, ESG considerations are merely a “hygiene factor”, reassuring members that precautions are being taken to avoid reputational damage, others prefer more serious engagement.
“If you sell your operating business and become a financial investor, you have no glue to hold the family together anymore, which your industrial identity once gave you,” suggests Ms Thorne. “Families need an identity and common purpose. The knowledge that they are having an impact on society can bring a family together and give it meaning, without necessarily having to create a family governance charter.”
The nature of the ESG filter is also changing, with the governance criteria becoming the most important when conducting due diligence of funds. “We are not absolutist about whether a fund is investing in fossil fuels,” she says. “It’s more about how well the underlying investment is managed and how flexible and engaged the management team are.”
There is little doubt at CapGen that this engagement leads to both higher returns and greater satisfaction for family clients.
“Well managed underlying entities, across all assets, not just the social and environmental aspect, goes hand in hand with higher margins,” says Ms Thorne. “Clients can enjoy the sense that their wealth can be invested for the long-term, that it’s not doing harm to the environment and that it’s supporting well-run businesses.”
ESG is also currently the fastest growing component of the services provided by independent, Zurich-based office Tiedemann Constantia for its global family clients, says CEO Rob Weeber. Today $3bn, of the $22bn managed with its partner Tiedemann Advisors, is allocated to ESG or impact strategies.
“Our impact and traditional investment teams are beginning to merge,” says Mr Weeber.
“Quality filters used on equities are equally applicable to traditional portfolios and ESG investments.”
However, he says it is too simplistic to suggest that younger family members are pushing the ESG transition, while their parents remain wedded to traditional investments. “The next generations are looking for returns and if these come in from an investment that aligns to their values, then that is the route they will choose, but it is not exclusively the road they are travelling down,” he adds.
Rather than a generational sea-change in the behaviour of families, he believes crises are a more important catalyst, with a massive change of behaviours occurring after 2008 and similarly large movements expected in 2020.
“Because wealth management was no longer in fashion and hedge fund managers and investment bankers were made redundant, many of them moved into the family office space, leading to a huge shift in professionalisation,” he says.
These entities are now viewed by Tiedemann as investment funds with single sources of capital, rather than traditional family offices. “They have risk management processes, investment selection and reporting which rivals most institutional fund managers,” says Mr Weeber.
The current crisis, he hopes, will make a dent into climate change, aiding the work of those families trying to reduce society’s carbon emissions. In a short time, he believes, Covid-19 can accelerate trends which may have taken years to be effective.
“In our line of work, it has been all too easy to jump onto a plane for a single meeting. It will be interesting to see how client engagement changes. As wealth managers, we have been fast-tracked into this transition, more than most industries.”
Asia’s tech advantage
The traditional family office markets of Europe are being leapfrogged by Asian families utilising the rise of technology, says James Holder, global head of the Citi Private Capital Group.
“China is one of the market leaders in vast data resources and is extending its lead in artificial intelligence and machine learning,” he says. These advantages are currently being pressed in the design of a series of platforms for family offices.
“We will see future specialisation accelerate,” adds Mr Holder, who believes families will increasingly seek to build their own data hubs as the cost of these operations falls over the next five years.
“A family can demand and collate data as they see fit. Custodian or provider data can be packaged and made readily available on demand by families or platforms which consolidate data.”
