Private banks are setting up specialist teams to target the growing number of family offices, but must better align their structures to accommodate this demanding client segment
European, US and Asian private banks have been busy strengthening relationships with their wealthiest clients during the Covid-19 pandemic, as international families identify an “inner sanctum” of advisers.
Of the 10,000 single family offices (SFOs) estimated to exist globally in a recent report from DBS Private Bank and consultancy EY, at least half were set up in the last 15 years, with Asian families increasingly seen as the rising sources of wealth.
Not surprisingly, private banks are all setting up specialist teams to target this expanding segment. Clients in this space typically start with $250m in assets for offices seeking outsourced solutions, rising to $750m for those with their own staff, according to Citi Private Bank.
“In a crisis, the ‘big money’ seeks a single, consolidated book of record, so with the touch of a button, they can track exposure to certain industries or geographies,” says an ebullient Dave W. Fox Jr, head of the global family business unit at US wealth manager Northern Trust.
“We also saw this flight to quality in 2001 and 2008,” says Mr Fox, whose unit oversees $600bn of client assets, recalling clients’ response to the 9/11 atrocities and the global financial crisis.
Up to the task?
Covid, says Mark McMullen, head of the family office division at Stonehage Fleming, administering £50bn ($70bn) of client assets, has proved a major test of bonds binding advisers to families, which are asking two simple questions: “Are the people who look after my money now in my inner sanctum? Will I really value them in the future or are they now just a commodity?”
One of the ways these wealth managers have been proving themselves in 2020 is through their ability to discuss sensitive nuances around succession planning. “Mortality and incapacity have become important issues for people thinking about the next generation, with more conversations about transfer of wealth and its associated risks,” suggests Mr McMullen.
This theme of wealth transfer is also linked to reputational management, with sophisticated families starting to care more about legacy, keen to be seen as “good citizens” by the surrounding society.
“The attention to the recent pandemic and social revolutions has opened the door for many banks to take action around issues that may not have been on their radar in an impactful way before,” says Rochelle Clarke, CEO of US business transition specialists Succession Strength. “Increased societal focus on these matters has also proved the catalyst for unlocking previously unallocated funding for supporting initiatives and re-examining internal policies.”
These catalysts have heralded a new role for the financial adviser, believes Ms Clarke. “The pandemic has highlighted the need for financial service providers to be more than executors,” she says. “Entrepreneurs are now looking to these providers for advice and guidance in navigating the uncertainty.”
These evolving conversations about environmental, social and governance (ESG) investing are becoming more central to the relationship precisely because Covid has highlighted previously hidden elements.
“Investors have started to see the tangible effects of that way of thinking on how corporates function and perform,” says Dina de Angelo, executive director of Switzerland’s Pictet Wealth Management. “The pandemic has accelerated this discussion, because supply chain issues have become more visible. Families today understand much more than a year ago about how pharmaceutical companies work and how quickly research and development has progressed globally. The story has played out in front of our eyes.”
This means ESG has become a central tenet of families’ investment portfolios, one expected to grow further in coming years. “This is part of a shift whereby the wealthy no longer see philanthropy as the sole route to having a positive impact,” says Matthias Lehmann, head of the global family office for Western Europe at UBS Global Wealth Management. “They are now seeking to do good across both investment and business activities.”
Hot topic
The generational shift of responsibilities and assets has further amplified this trend, says Gerard Aquilina, partner at Cone Marshall, a law firm advising family offices. “The younger generation is insisting these topics are discussed with their parents. I don’t see concern about what we are doing to the planet in any way diminishing. If anything, because of the pandemic, there is more consciousness there.”
A watershed moment in ESG investing came when investors realised the resilience of returns. “It used to be that ESG and impact investments had a reputation of not necessarily being profitable,” recalls Mr Aquilina. But the tide has turned, with ESG funds among best performers in 2020. “They have shown that it’s not just charity any more, that we can now do good things and also achieve healthy portfolio results.”
Private banks have joined their clients on “journeys” reflecting a fast-changing environment around suitability of investments. “So far we have excluded the ‘red flag’ industries from portfolios, including arms, nuclear weapons and tobacco, with zero exposure to gambling in direct equity stocks,” says Delyth Richards, head of the client solutions group at Kleinwort Hambros in London.
“But how can we take that further and engage with companies? That is something we need to improve, taking more of an active role in voting against certain positions, when boards are not fully representative. We want to build on this shareholder engagement element.”
Within most firms, these sensitive, holistic conversations with the highest echelon of clients are handled by an “elite squad” of private bankers, better rewarded than peers dealing with lower segments. UBS, the world’s largest wealth manager, restructured its offering in early 2020 to create a global family office unit along these lines. In order to target a handful of rich, sophisticated, international families, says Mr Lehmann, the bank selects “the very best advisers in the industry and services from across the whole of UBS, to meet the full range of their private and business needs”.
Back in 2010, when Cone Marshall’s Mr Aquilina headed international private banking at Barclays Wealth, he warned a Zurich audience to “beware of the complexities” of dealing with top-tier family clients. Their “demanding and often unreasonable requests” regularly exposed the flimsiness of private banking structures.
A decade later, the challenges have intensified. “Private banks must be careful what they wish for,” says Mr Aquilina, who also held senior roles at HSBC and Merrill Lynch. “Most of these families are still active. They are less interested in an extra 2 or 3 per cent return on portfolios than asking how you as an institution can help them in their business.”
This starts with financing loans, including specialism in derivative structures, capital protection and foreign exchange, all requiring investment banking expertise. Banks looking to combine these specialisms with their ability to service the top tier of family clients, although improving, still face an uphill struggle.
Today, the notion of honing a crack team of top bankers dealing with 100 leading global families is the only way forward, believes Mr Aquilina. “Family offices have their own highly experienced corporate finance staff, so selling mutual funds to them is not what they are looking for,” he says.
“Institutions like UBS and Credit Suisse are increasingly creating specialised teams to address these family offices, using bankers from the institutional side, corporate finance and trading. This is a trend that will continue. I don’t think it’s reversible, I think it’s obligatory.”
But getting this offer right is no walk in the park, wealth advisers agree. “These banks have been quite successful, working with families across generations and jurisdictions,” says Ed Marshall, global head of the family office and high net worth practice at US law firm Dentons and himself a former senior private banker at both Citi and Credit Suisse.
“Integrating different parts of the same banking organisation is a very easy exercise to do on a piece of paper. The proof will be in the pudding.”
Moreover, it is not a universally popular model, both among clients and industry voices. Some leading wealth firms believe having an investment bank within the group incentivises the sale of unnecessary products and services, incompatible with a family’s financial needs.
“We actually think it’s a conflict to have an investment bank when you’re trying to be a wealth adviser,” says Northern Trust’s Mr Fox. “You have to wonder which side of the transaction some of these banks are really on at the end of the day.”
Northern Trust prefers to bring together a “knowledge exchange” of 600 wealthy families, sharing “intellectual DNA” via a “vendor-free experience”.
Cultural fit
Other banks in different geographical regions believe the cultural fit of bankers is much more important than their ability to push products.
“In the past, it was very easy for our bankers to manage investments on autopilot, with one or two calls each quarter to the family,” says Lee Woon Shiu, regional head of wealth planning, family office and insurance solutions at DBS Private Bank in Singapore. “But in these days of Covid, with things moving at such a rapid pace, it makes sense to have closer contact with bankers.”
The Asian approach to families differs from the Western, with Mr Lee himself leading the “outreach” to major client prospects, before accounts are allocated to key bankers, based primarily on geographical location and expertise.
“Our Chinese team is from China and we would allocate one of them with the same values to work with a key client,” comments Mr Lee. “For us, this cultural affinity is paramount. It’s not just about getting someone who is very senior and very good at investments. We have to find somebody who can understand what clients from that region need and what is in their interests.”
His clients, typically coming from China, Indonesia, Malaysia, the Philippines and Thailand, have been speaking to the bank about a broader number of topics, including educational planning and risk diversification as well as portfolio management. Western clients are also looking to dip their toes in Asian waters, keen to assess the level of expertise available in Singapore, now marketing itself internationally as an attractive hub for wealthy families to structure and domicile their assets.
Numbers of family offices setting up in Singapore – believed to be in their hundreds – increased fourfold between 2017 and 2019, with 2020 numbers expected to demonstrate a further hike, says Mr Lee.
“For political reasons, the wealthiest families in China have to invest heavily in their domestic markets,” he says. “But at the same time, they would like to have the resources for the best access to international markets, which is why they want to find a good landing point, with tax benefits, status and immigration possibilities. Those concerns cause them to turn to Singapore.”
This notion of competing hubs, still relatively new to the family office world, is likely to gain traction. “The Singapore authorities have taken something very traditional and given it a new, innovative twist to provide family offices with tax benefits, permanent residency status and employment passes for staff,” says Mr Lee. “It’s a very refreshing new chapter to the narrative and many family offices like that.”
Single centre
Other small centres are joining the fray. “Rather than having all assets held in different jurisdictions, where each will need to demonstrate substance, consolidation into a single, tax-neutral jurisdiction brings a solution to the challenges as well as synergy of costs,” says John Hunter, head of banking and fiduciaries at Finance Isle of Man.
There is no requirement for the wealthy family to actually reside on his island, confirms Mr Hunter. “In fact I know a few enjoy their time in various locations, but use the Isle of Man as the centre for the family’s wealth and succession planning,” he says.
The island offers special grants and preferential tax treatment to families who want to establish a presence and make use of local services including banks, law firms, shipping and aircraft registers and the IT infrastructure.
“The emphasis should be on which jurisdictions can best meet the family’s global needs, at a cost considered acceptable,” he says.
But smaller territories may struggle to keep up with old stalwarts. “People have still been moving to the UK during the pandemic. That trend has not slowed and we have been busy getting them structured properly for the move,” says Pictet’s Ms de Angelo.
Asian families are particularly drawn to the UK, now buying up rural properties. “During the pandemic we saw families with their children in home learning, who wanted to get them out of London, giving them space and air to breath. The English countryside is an alluring place to be. These are all positives for the UK,” she says.
This quest for family security has been one of the pandemic’s key takeaways for private banks, with a much deeper “thought process” about future living patterns, says Ms de Angelo. “We are seeing much greater introspection about what we want our lives to look like and where we want to live, making our environment around us the best it can possibly be.”
