Can private banks tap family office market?

Private banks cannot help but look longingly at the trillions of dollars of assets held by the thousands of family offices dotted across the globe. Here, International Investment HNWI contributor Paul Golden looks at how these private banks go about trying to tap this considerable pool of wealth – and the potential advantages they claim to offer to some of the world’s wealthiest clans.

Although some family offices are established explicitly to avoid entrusting wealth to private banks, the two types of entities are far from mutually exclusive. Indeed, most of the world’s leading private banks offer advisory and other services designed specifically to cater for family offices, which family office advisers Kirby Rosplock and Barbara Hauser describe as an obvious target market for globally-active private banks in particular.

These offerings are variously described by banks in their marketing materials as “combining the personalised service of a private bank with sophisticated cross-border strategies that are typically reserved for major institutions”,  and “[relieving] the family office of all the administrative work involved in the investment process”.

Such services, another bank notes, create for the family office “a platform that allows the implementation of an investment strategy tailored to your family’s objectives”.

Common themes, behaviours
While the specific requirements of different family offices can vary greatly, there are some common themes and behavioural patterns that the banks normally take into account when they look to work with a family office, according to James Holder, head of family office at Citi Private Bank.

“In particular, the extent to which an office chooses to outsource/in-source its core activities can shape how it works most effectively with a banking partner,” he says.

“Some offices will have core, traditional private banking needs – particularly for treasury/cash management services, asset allocation and asset management – whereas others, particularly those that choose to in-source asset management by a single asset class, may require more wholesale or institutional services.”

Philip Higson, vice chairman of UBS’s global family office group, says the degree to which family offices represent a significant customer segment for private banks depends on the range of services each bank provides.

“If the private bank is only focused on investment advice and mandates, in a narrow sense, in some cases it is potentially in competition with the family office,” he notes.

“If, however, the role of the private bank includes [such services as] global custody, lending, execution, investment banking, private investments and specialist mandates, such as those that require significant teams to conduct due diligence on hedge fund or private equity managers, [these services are] complementary” to what the family offices normally provide.

Size, cost and expertise
Indeed, if there is one thing family offices struggle with that private banks are normally able to help them to overcome, it is enabling them to offer the family or families whose assets they manage a standard of service that is better, for the price, than an asset manager the size of a typical family office normally would be able to, Higson and other experts point out.

Although “a family office’s range of requirements cannot be managed with a small team”, Higson says, it typically is able to benefit sufficiently from the lower costs and greater experience that a private bank can provide it with, such that it doesn’t need to be enlarged.

Kleinwort Benson Private Bank managing director Paul Kearney, (pictured), agrees about the role private banks can play in helping family offices manage their balance sheets – and he’s better-placed than some to comment on the relationship between private banks and family offices, having spent time in both camps.

In 2006 Kearney was one of the original founders of Karrig Strategic Capital, a family office established for a European technology entrepreneur, and he was a managing partner of that business when it became a wholly-owned subsidiary of Kleinwort Benson in 2011.

“Many family offices have gone through a period of evaluation over the last five years, prompted in part by operational costs,” he says today.

“Families of significant wealth will always require a nucleus of skills around them – in many cases, they are now trying to determine the minimum size of team that can leverage the capabilities of not just private banks, but the wider financial sector.”

Source of wealth
In addition to size and cost considerations, the extent to which family offices can make use of private banking services can also be related to the source and nature of the family office’s wealth, and how recently it has been amassed.

For instance, where the main activity is the family in question’s business, the family office function may be embedded within the company, and specifically, fall under the remit of the firm’s chief financial officer.

In such cases, the eventual sale of the family business often ends up being the catalyst that leads to the creation of a separate family office, family office experts point out.

According to Kleinwort Benson’s Kearney, the motivation for bringing Karrig Strategic into Kleinwort was a desire to find a bank that didn’t view the family office as a mere distribution channel for investment solutions.

“Banks have realised that a mode of engagement that focuses solely on distribution of product, or the gathering of investment mandates, creates a rather binary relationship,” he explains.

For this reason, private banks that want to do more business with family offices need to understand their specialist needs, Kearney says.

“What they need least is more investment products.

“[What they need instead is] help in understanding and finding smart ways of managing risk.”

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