Family offices join forces to take on banks

The recent merger of multi-family offices (MFO) Stonehage and Fleming Family & Partners follows SandAire’s acquisition of private investment office Lord North Street earlier in the year. This may be just the tip of the iceberg of a growing trend, which sees independent players joining forces, with the aim of targeting disillusioned clients of big international banks.

Scandals surrounding mis-selling of products, tax evasion and rigging of key benchmarks have undermined client confidence, offering a clear commercial opportunity to conflict-free institutions.

At the same time, the increased cost of regulation is putting pressure on wealth managers’ margins, driving consolidation to create much-needed scale.

Despite having a very mature UHNWI population, the family office space in Europe has remained highly fragmented. It is mostly dominated by unsophisticated single family offices, set-up by private bankers which families had close relationships with, explains Stefan Jaecklin, Zurich-based head of wealth management for consultancy Oliver Wyman.

Many single family offices of the past had a tax optimisation purpose, but new regulation and tax transparency has eliminated this “raison d’etre”, he says.

In the new regulatory environment, responsibilities and liabilities make it increasingly difficult to operate at a micro-scale. More  investment will be required in digital management information systems and client reporting, as well as infrastructure to keep up with regulatory needs and client expectations. These cost-intensive needs will benefit larger private banks, which have been investing heavily into improving their UHNWI offering. MFOs must invest to keep up.

“Larger multi-family offices can attract and retain more talented client coverage and investment professionals,” says Mr Jaeklin. “The structure of these larger entities will look more like a proper business rather than a boutique highly dependent on a few key individuals, which highlights the ‘key man’ risk often associated with boutiques.”

Many MFOs are indeed investment boutiques, claiming to offer more personalised services than banks, and have expertise in manager/product selection and asset allocation.

However, in a complex regulatory environment, as families become increasingly global, it becomes crucial for MFOs to adopt a holistic approach, and offer advice on corporate finance, governance, succession planning and philanthropy.

A multi-jurisdictional approach to providing solutions is also critical. However, it remains a challenge to charge clients for these services.

There will undoubtedly be further mergers in the sector but the rationale for such mergers will depend on the business model of the entities concerned, believes Guy Hudson, executive director at Stonehage, and there will be room in the market for a wide variety of offerings.

 “There are definitely increasing demands in terms of regulation and the marketplace is intensely competitive, both for clients and talented staff,” says Mr Hudson. “Smaller businesses may see the benefit of increased scale in enabling them to meet these demands.”

However, the merger between Stonehage and FF&P was driven primarily by what both parties believe to be “a compelling opportunity to create the leading MFO in the Emea region”. The combined business will serve a client base of more than 250 wealthy families, and will manage, advise and/or administer more than $43bn (€34.6bn) of assets. 

The firms claim they will benefit from each other’s experience and services in the investment arena, with FF&P bringing a “well established” private equity operation and corporate advisory service and Stonehage bringing its “holistic advisory approach”, and greater international reach.

“We will offer a broad range of services and experience, to meet the needs both of UK and international families, many of which have complex assets spread across a number of different jurisdictions,” says Mr Hudson, claiming the merger will generate increasing interest and leads.

The inappropriate behaviour of some employees of various banking brands reinforces the independent players’ perception of interesting opportunities available in the wealth management sector, says Alex Scott, chairman of SandAire. The London-based MFO continues to operate as an individual corporate brand alongside Lord North Street, which it fully owns, with offices in London, Geneva and Singapore.

“Although cost of compliance has increased over the past three to five years, the commercial opportunity is the real driving force behind mergers, not regulation,” he says.

In the case of SandAire and Lord North Street, by combining forces in March, they were able to move from being “too boutique” to become a medium-sized business. They are hoping this will be an opportunity to attract new talent, while scale brings an advantage in terms of new clients too, as the network expands.

The opportunity to look carefully at best practices within each company has enabled the new group to broaden skills, and enhance risk control, personalised asset allocation and manager and product selection, says Mr Scott. A bigger team having complementary skills and acting effectively as a team is going to be stronger, or so the thinking goes.

Wealthy families and institutions such as foundations increasingly seek a multi-asset, multi-national, multi-manager approach and independent advisers who can help them establish the best asset allocation and the best way of delivering it.

This is difficult to achieve in a banking environment, though they are “not competing head on with banks,” he explains.

“As multi-family offices are becoming sophisticated, we anticipate increased competition with private banks. However, each one has advantages and disadvantages and the picture will be rather one of ‘co-opetition’,” says Oliver Wyman’s Mr Jaecklin.

“Many clients are unhappy with their banks and MFOs interpose themselves as trusted advisers and have a role to play,” says independent family office adviser Gerard Aquilina, “but they barely scratch the surface of client AUM which is still housed with the banks.”

Banks, he says, have custody and prime brokerage services, balance sheets, scale, global reach and in-house expertise so they are formidable competitors. “It is healthy competition and good for the clients to have an alternative.”

At the time of going to press, large private banks such as Credit Suisse or JP Morgan were unable to comment on recent trends.

MFOs cannot compete with them on products. But on the service side, where they can be more nimble, attentive and personalised, it may prove to be a whole different story.