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.”
Getting past the ‘gatekeeper’
Banks looking to work with family offices, meanwhile, typically face a not-inconsiderable challenge before they can even begin to discuss their range of offerings: that is, the need to get in front of the family office’s key decision maker in the first place, some private banking sources point out.
This task can become even more difficult if the family office ‘gatekeeper’ and his team feel threatened by this kind of interaction, they say.
Nevertheless, “even the wealthiest families like to have some leverage, [and] have assets that need to be managed and require bank accounts,” Kearney notes.
And such necessities can prompt key family office decision-makers to pay the banks a visit at some point, since “banks still control the payment channels”.
Meanwhile, it’s not just private banks that are after family office business – wealth managers are also interested, observes Lesley Hodgson, head of Northern Trust’s global family & private investment offices group for the EMEA region.
Northern Trust is a NASDAQ-listed, Chicago-based and internationally-active financial services company, which had assets under custody of US$6trn at the end of June, and assets under management of US$946bn.
“We recognised the trend of families establishing their own offices when we set up our global family office group in 1982,” she says.
“With the current pace of wealth creation, family office clients are a key driver in the wealth management arena, and therefore a key client type.”
Hodgson observes that family offices are often as large in terms of assets as company pension schemes or large corporations; and that, like these institutional investors, are accustomed to taking a long-term approach to investing, as well as being comfortable with some degree of risk.
“It is important that transparent and un-conflicted services offered to institutions are offered to family offices, which demand institutional levels of transparency, timeliness and technical aptitude,” Hodgson says.
Wealthy families looking for the “best of the best” understand that one provider is not going to be able to offer that across all their needs, and therefore, private banks need to change their approach, Hodgson adds.
“Service capability will include fiduciary, banking, credit, custody, investments, reporting, succession planning, governance and philanthropy.
“While the traditional private bank would be driven by its investment offering, family offices now want flexibility, expertise and transparency across their entire portfolios, and that means utilising multiple providers.”
Ultimately, the extent to which family offices engage with private banks and wealth managers often boils down to the former’s attitude to outsourcing, with the obvious argument in favour running along the lines of “the knowledge a private bank can bring to a family office cannot be compared to the in-house expertise a family office can normally obtain”.
That is certainly the view of Hodgson, who says even the largest family offices might struggle to recruit the right people. “Not being able to hire the very best [investment professionals], from an already limited talent pool, can lead to [the family office] sacrificing returns,” she concludes.