Northern Trust positions itself as central hub for network of global families
During the coronavirus crisis, most wealthy clients are trying to get as much information as they can from both peers and advisers, says veteran banker David W. Fox Jnr, president of the global family office (GFO) group at US wealth firm Northern Trust.
“They are calling up and asking what we are hearing from the rest of our clients,” says Mr Fox. “Most of all, they want to know what other people are thinking and doing.”
This notion of the private bank as facilitating a network of families is key to this vision of private banking for the new decade. It is also one of the key factors which differentiate the offer for global families from other parts of the financial services spectrum.
The way this top tier behaves, analyses opportunities and invests is unique among different wealth segments, believes Mr Fox, responsible for overseeing $94bn of the $314bn Northern Trust manages for wealthy clients. “This wealthiest segment views the market very differently from mass affluent clients,” with the latter panicking and seeking safety, while the former has been identifying potential investments, in the belief the pandemic will pass sooner rather than later.
“They are asking where the opportunities are and whether their portfolios are behaving the way they expected in this stressed environment,” says Mr Fox, with families looking to balance portfolio immunisation with potential new allocations.
“Nobody anticipated the coronavirus, but they anticipated a market correction as things have been too frothy for too long,” he believes. Most global families had structured investments more conservatively than the mass market, who find their assets down 20 per cent during 2020, he says.
But there is no elitism to these claims. Mr Fox, happy to be addressed as ‘Dave’ by colleagues and clients, is quick to state these results do not mean wealthy families are in any way more intelligent or creative than poorer compatriots. It is rather a case of them having greater resources to research opportunities and navigate challenges. “It is times like this that validate the necessity for family offices,” he says.
Size matters
A global family needs to have enough money and investment opportunities to justify employing internal staff. They must also make career opportunities attractive to defectors from banks or asset managers.
“You need a career path and commensurate compensation. There are not as many family offices like this as you might think. It takes a lot of wealth to get to this point.”
Such commitment must be long-term, enabling families to pursue illiquid investments. “Once you have invested, you have to wait many years in private equity to get your money back,” he says. “You have to ask yourself: ‘What is your deal flow like and how many staff can you afford to have sitting around?’”
The size of operations serviced by Northern Trust may take some parts of the industry by surprise. “If you have 100 basis points from a $5bn asset pool to pay the family office, you can afford to bring people in, but not with $100m,” believes Mr Fox, who maintains families need “a critical mass of investing dollars” to operate successfully in this space.
“If you have a family office to manage $200m, you really don’t have the ability to bring in top quality individuals.”
Family offices can save significant costs by using a wealth firm without its own internal investment bank, says Mr Fox. As an ex-member of senior management at JP Morgan, where he was vice chairman of investment banking, he is convinced his former employers, alongside the likes of Citi and UBS, have a very different approach.
“The big difference between us is that we don’t have an investment bank, so there is no conflict of interest,” he says. Northern Trust has instead hired a team of these ‘poachers-turned-gamekeepers’ from the Wall Street houses to oversee an outsourced model for clients needing to sell or buy businesses.
Clients coming to Northern Trust for these services, he claims, benefit from bringing in external investment banking and legal expertise. “This means we won’t be in a conflicting situation where we are using our own investment bankers and we won’t charge as much. Our families really appreciate that model.”
He talks about the contrast of working for a bank where wealth management is one of many, linked businesses, compared to one where it is the core of the bank’s interests. “Wealth management determines our stock price, whereas in other firms, the wealth business is not what drives the bottom line,” says Mr Fox.
Those banks which imbed their family office business in either their asset management or investment banking unit see the family office business as “a distribution channel, a placement mechanism, which is not what families want,” he says.
Direct investments
He also contrasts “fee-laden” fund investments with the type of co-investments between different families which Northern Trust tries to promote through its network, preferring to alert families to those opportunities which mirror their own business expertise. This is something close to Mr Fox’s heart, having attained knowledge of the shipping, chemicals and real estate industries during his investment banking days.
The return parameters of these direct investments are more persuasive, he asserts, plus they can be combined with families’ ambitions to change society through impact or environmental, social and governance (ESG) lenses.
“Direct investments fulfil all these needs for family offices and allow them to attract other investors,” he believes. “Running a family office investing in 15 different businesses, where you know the CEOs, is a very interesting job, plus the employees get to co-invest too.”
While investors in funds receive regular, high quality reports, they have no access into insights from their investments and learn very little from the experience.
The younger generation, he says, typically has a stronger appetite for running investments hands-on, while older relatives are more interested in the mainstream business. Mr Fox has a keen understanding of these generational differences, having followed his father, who was previously chairman of the Chicago-based firm, into the senior echelons of Northern Trust.
The Covid-19 crisis, he believes, will help the younger generations influence their parents into new patterns of working and increased use of technology. “Now we are all working from home because of the coronavirus, but this is no big deal for the next generation, who have already been doing this for years,” he says. “Unlike their parents, they have not been going into the office for some time.”
The notion of preserving the environment and preventing pollution by avoiding carbon-generating stocks is already culturally ingrained in younger family members, but is just beginning to enter the psyche of family patriarchs.
“The older generation has a lot more of a passive approach to investing excess liquidity from their business,” he says. “They weren’t paying attention to ethical investments or screens for human rights abuses, but now there is a lot more screening going on.”
Younger cohorts within families are even beginning to form their own satellite, mini-family offices or enclaves within the broader structure, to fulfil their specific investment needs.
Wealth firms, says Mr Fox, need to know when to step back, “leave the room” and allow the families to develop at their own pace. “We have to act as that conduit or sounding board, but not damage the family fabric. We pull it all together and allow them to talk to each other,” he says.
Yet talking is often not enough and developing a digital infrastructure is becoming more and more important to families, especially the younger generations. “You have to stay on top of the technology to provide a secure, integrated and accessible method for each family to share information on a global level,” he says. “We invest heavily in technology geared for family offices to enable this.”
It is the combination of this technology and empathy with the investment psychology of global families which Mr Fox believes will help shape the wealth management industry through the crisis and the new decade.
