Multi-family offices thriving in tough times

Practitioners at multi-family offices are used to stepping up their activities during difficult economic patches. When times are tough, they normally see demand for their services go up, as ultra high net worth private clients begin to desert global, universal banks in search of a more bespoke service. These investors also tend to get jittery about the safety of their assets.

The current crisis is different in one way. The usual trickle is turning into more of a surge. Indeed some practitioners are expecting the trend towards wealth managers who really understand family business, and are able to share this with a wide variety of clients, to become a more permanent fixture in the industry.

“The multi-family office market is growing and has been a significant beneficiary of the crisis,” confirms Julien Sevaux, co-founder of Stanhope Capital, a global investment office overseeing approximately €5.9bn for wealthy families, charities and other institutions. “In the dotcom bubble, we saw demand go up and it’s the same now.”

But as with many trends in wealth management – including open architecture of investment products and intensive use of exchange traded funds (ETFs) by private clients – Europe lags some way behind the US. Now there are stirrings of discontent among Europe’s leading families and commentators believe the gap will eventually be narrowed.

According to Scorpio Partnership, the wealth management think-tank, there are nearly 15,000 private clients in Europe with assets of more than $50m (€40m) and a combined wealth of $2,900bn. Around one third of these – 5,000 – have a relationship with a multi-family office.

Latest figures from the The Family Wealth Alliance, estimate there are 150 multi-family offices in the US, with an average client relationship of $50m and total assets under advice of $450bn, up 10 per cent on 2010 figures.

Survey results from Campden Research and UBS show that leading European multi-family offices report growing business with 70 per cent launching recruitment drives during the next three years, as wealthy families develop an increasing distrust of banks and search for specialist, independent solutions.

There is a huge contrast to the more blinkered and conventional attitudes of 10 years ago, suggests Stanhope’s Mr Sevaux. “When asked to recommend a wealth manager, professional advisers are now much more likely to include multi-family offices on their shortlist,” he says.

“In fact, multi-family offices entering the ‘mainstream’ is one of the key reasons our business has grown so significantly.”

Clients wary of change do not usually explore the various options available in the market, he says. Because banks undertake marketing on a larger scale and many clients already have longstanding relationships with them, they have enjoyed a distinct advantage. “But now, being better advised, clients are in a position to choose.”

There is a perception, especially outside the mass wealth market, that multi-family and private investment offices understand clients better, as they look after the client’s entire financial wealth, including advising on business interests. Having fewer clients, they can invest in a much higher degree of engagement to understand the client and have a better understanding of the context of the family as a whole. This can involve providing extra specialised services, such as sorting out taxation and legacy holding issues.

“When people select a wealth manager they usually look at the size of the institution or reputation,” adds Mr Sevaux. “They can forget simple things, such as how people are remunerated and how that affects advice.”

INHERENT RISK

The way most bankers are compensated means the size of pay cheques is normally directly correlated with numbers of products sold, says Scorpio’s managing partner Sebastian Dovey. This means that ultimately, bankers put in certain risky products. This is one of the key elements of differentiation between the banks and family offices, he believes. “There is no discussion of the issue of alignment of interest in banks,” says Mr Dovey.

Another important consideration is the business and ownership model of the provider and whether the institution is independent or not. “A listed bank may have shareholder issues or pressures around how businesses are run. These may be very different to the interests of the families,” believes Mr Dovey.

“On the other hand, multi-family offices will position themselves independently. But there’s a perceived risk that if one family dominates, their asset allocations and opinions influence the decisions and solutions offered to other clients.”

This risk can be particularly on the minds of potential clients when a major founding family with its own capital base is associated with the investment office, with the examples of SandAire, the Rockefellers and Stanhope springing to mind.

Another consideration is the investment strategy of the firm involved. “There’s no point for a client to join a multi-family office whose primary interest is in property or real estate if that’s not where the wealth of your family comes from,” says Charlie Mueller, head of wealth advisory at Northern Trust, which particularly targets family offices among its client base. “You may not want to be overweight on these assets.”

True multi-family offices are generally more transparent than those predominantly servicing a single clan, says Adam Wethered, co-founder of Lord North Street, a London-based private investment office managing money for a small number of family clients. “They are providing a personalised service to you, so there is a greater transparency and the tendency to work to drive down costs for you.”

Because multi-family offices and private investment offices are set up and hired with the sole purpose of looking after wealth, it is generally thought they are more trustworthy than private banks, believes Mr Wethered. The latter, he says, do not have much incentive to manage and maintain families’ holdings in basic, low-fee asset classes such as cash or bonds.

Induced by performance fees, private bankers are more likely to have loyalty to the hedge funds and private equity firms, which are supposed to be service providers rather than direct clients, because they pay higher fees to the bank.

Private banks also typically charge a multiple of the family office fee for delivering the same service. “Families who wish to be associated with a name to boast about doing business with, such as JP Morgan as opposed to Lord North Street, should go for private banks,” says Mr Wethered. “But it is a psychological difference. You are paying more for a service which is difficult to prove.”

One of the main draws of a multi-family office can be a lower turnover of staff than typical banks, says Allen Berg, chief investment officer of BNR Partners, a multi-family office managing assets worth €1.17bn for 12 families. “We are much better at relationship management as our staff gets to know clients over a longer period of time,” says Mr Berg.

Successful private banking teams, responsible for billion dollar books of business, are regularly poached by rival banks. “I know of a client of a private bank who found out the whole team managing his portfolio had left,” says Stanhope’s Mr Sevaux. “He was only told about this two weeks after they had gone.”

Smaller numbers of clients also make relationship management easier. “In a private bank, one private banker manages 200 to 300 clients,” he says. “In Stanhope, one private banker manages 10 to 12 clients. Our adviser inevitably manages larger clients and can offer them tailor-made advice and provide closer contact.”

Observing this growth in the multi-family office segment has clearly spurred private banks to adjust their own offerings for this customer base. Several major wealth management groups, including Société Générale, Credit Suisse and UBS, have started offering services to family and multi-family offices.

Through its ‘one-bank offering’, Credit Suisse delivers to family offices its services across three divisions: asset management, investment banking and private banking.

The logic is that family offices can access a service from any of these divisions. Even though they may have a global custody relationship office elsewhere with a competitor, the bank believes the client might still be interested in a specialised service such as trading equities through the investment banking platform.

Also quick to jump on the bandwagon has been UBS, which has set up the UBS Global Family Office Group, a joint venture between the bank’s investment bank and wealth management divisions, which delivers to family offices services and solutions tailored to their needs.

Despite the multitude of benefits a multi-family office may bring, private and universal banks still have the global advantage, due to their international networks of offices. These can be of particular interest to ultra high net worth individuals, who have global interests and international portfolios to manage.

“Most multi-family offices are usually focused on domestic issues, local reporting and local taxation issues,” says Laurent Joly, head of global wealth planning solutions at Société Générale Private Banking. “For international strategies, you need to go to private banks of a sufficient size.”

But clients don’t necessarily have to choose between the two. “Multi-family offices and private banks don’t need to be seen as competitors,” says Mr Joly. “They are complementary.”

Multi-family offices cannot offer credit or banking facilities, and are unable to provide services such as estate planning and international wealth management, he claims. They also lack the critical size to deal with corporate bonds, not having the expertise to analyse balance sheets of large corporates who are bond issuers.

“Multi-family offices need to work with private banks like ours, which have a team of analysts analysing balance sheets of companies,” says Mr Joly. “There are many times when they need us and we need them.”

Today’s client should be able to choose from a variety of services provided by different types of institution, believes Northern Trust’s Mr Mueller. “Multi-family offices and private banks both offer unique and specific value pr0positions,” he says.

“There are a few firms that are able to combine the intimacy and smallness and benefits that come of multi-family offices with the breadth and depth of resources and capabilities that a private bank brings. An ultra high net worth individual should not always think about either or. If you can find that ‘best of both worlds’ that really bring it together, that’s really the best of both.”

Yet there are critics who say clients are ill-advised to opt for such a combined approach. Using the services of both a multi-family office and private bank is not a viable option, says Duncan MacIntyre, head of Coutts Private Office. “You end up potentially having to pay a multi-family office to introduce you to a series of private banks, which you are going to pay anyway. It would be an illogical cycle.”

Meeting the management

Ultra high net worth individuals are strongly advised to get to know and understand the due diligence process and resources that a wealth advisory firm uses for screening and selecting managers and products which populate their investment programmes.

“Clients need to consider the background checks, monitoring and risk management infrastructure of the firm, so in this day and age, high profile broad-based investment scams are not going to come about in their investment programmes,” says Northern Trust’s Charlie Mueller.

Families need to reflect on the trustworthiness and integrity of the firm and the experience and expertise of the staff. In order to do this, Mr Mueller suggests that clients interview the firm, not at their home or office, but travel to the firm’s headquarters to not only meet the team serving them day to day, but also the backroom support staff.

“Clients should consider their chemistry,” says Mr Mueller, and ask themselves questions, such as “do I feel comfortable with the individuals I’ll be working with? Will this be the firm I can trust for several generations to come?”