Kleinwort Benson out to boost efficiency in the family arena

Establishing a reputable wealth management franchise is all about recruiting top quality private bankers, believes Paul Kearney, a Kleinwort Benson board member and head of the bank’s private investment office, who is often asked to sit in on interviews for new recruits.

“We are looking for relationship managers with integrity that can be trusted, while many of the people you see tend to be salesmen rather than RMs,” says Mr Kearney, who is regularly called on by parliamentarians to explain the financial industry to politicians keen to get to grips with economic questions.

“Ideally, you would recruit somebody who has a smaller ego than their clients, but unfortunately, that is not always the case in banking.”

Very few of the bankers he meets are actually driven and motivated to finding solutions for clients rather than selling products to line their pockets.

“Bankers must always remember what their role is on the pitch and stick to their position,” says the keen Manchester United fan and frequent visitor to the football club’s Old Trafford stadium. “They have to know when to take a decision and when to pass the ball to a colleague.”

The best RMs, he says, are not necessarily the most knowledgeable on complex issues such as tax, estate planning or structured credit, but they know enough to help clients navigate these topics. “Their role is to make sure the client thinks about these issues and asks the right questions,” he says.

The family office area in which he specialises is particularly populated by the wrong type of adviser, he believes. “You meet bankers with ‘family office’ on their business cards, and you are supposed to trust them. Yet all they are doing all day is selling services to family offices and using these clients as a distribution channel for their products,” says Mr Kearney, currently responsible for looking after seven major family clients, each with assets of more than £100m (€120m), and soon “onboarding” two or three more.

“Our relationship is intimate; it’s about helping families to fill in the gaps in their strategy, or we can be the outsourced solution, if they are setting up their own office.”

Cutting costs

This service can involve the bank taking on the family’s chief investment office role, implementing the decisions by putting money to work, building a reporting and corporate governance infrastructure and most importantly of all, helping to strip out costs associated with investment activity.

“We particularly look to minimise hidden and embedded costs for family clients,” says Mr Kearney, recruited from Karrig Strategic Capital, where he managed the family wealth of a European technology entrepreneur. He had also previously served stints with accountants Arthur Andersen and Zurich Capital Markets.

“Families are increasingly looking at all their costs and asking: ‘What am I getting in return for these costs?’”

A family would have to be “very, very rich” in order to have a whole team working for them, able to carry out all these functions themselves, he says. “It may often make sense to outsource part of it. In terms of economies of scale, we have to build these functions for a handful of families, not just one-time use, so we can deliver them at cheaper prices.”

Like many other banking practitioners, Mr Kearney is sceptical about how many of the recently established family offices are actually making money for their founders. “It is not an efficient use of resources for each office to hire its own risk officer and chief operating officer,” he believes.

“They were born out of a post-crash concern, looking for empowerment of families. That’s all very well, but how do you achieve that and who do you surround yourself with to do it for you?”

In an ideal world, there would actually be more family offices, but they are so inefficiently constructed that most are quickly forced to take on more money from other families in order to survive.

“Once you have built it, the only way forward is generally to extend it into a multi-family office,” says Mr Kearney. “There is a clear proliferation of sub-scale family offices. If you just have a few hundred million and you are doing everything in-house, the equation doesn’t work.”

His system involves persuading family office clients to outsource some of their most expensive activities to his team. “If you have just one or two people internally, rather than half a dozen, it becomes a different proposition,” he says. “We hope to offer an infrastructure which can make them more viable.”

Typically, the handful of clients serviced by Mr Kearney have broad international interests, but with strong connections to the UK, Western Europe and sometimes the Middle East, many having started their relationship with Kleinwort Benson during the 1970s.

One of his main roles is to oversee their portfolios and make sure they are cost-effective, especially in their use of external money managers. Typically, the wealthier the family, the more money managers they use, he finds.

“The wealthiest have most points of contact with the market,” says Mr Kearney. “The first family we worked with had 22 investment managers. You can see very quickly where the fees are out of kilter and where the risk/return trade-off is not working properly.”  

The advantages on offer in a changing industry

Approached in 2011 by the bank’s CEO Sally Tennant – who previously held senior roles with Gartmore and Schroders – Paul Kearney took little convincing to join Kleinwort Benson and help build a solution for the ultra high net worth space.

 Aquired by RHJ International from Commerzbank in late 2009, Kleinwort Benson today runs £5.4bn (€6.4bn).What Mr Kearney saw prior to joining was a fast-changing industry short-changing cost-conscious clients, who were becoming increasingly keen to switch to trustworthy institutions with respectable brands.

If you could create the right suite of products with a palatable fee schedule and a good team of advisers, Mr Kearney knew it had become easier than before to persuade clients to switch banks.

“People are changing managers more often than they did in the past,” he reveals. “Banks used to like private client money, as it was very sticky. Now people are expecting their managers to deliver returns on a more consistent basis and they are becoming less tolerant of pauses in performance.”

A disenchantment with the whole system and ethos of Swiss banking is also playing into the hands of London-based wealth management boutiques, he believes, with their bond with the UK, if anything, getting stronger.

Large banks in Switzerland were affected by a stand-of with the US tax authorities, which they ended up losing, affecting client sentiment.

“People have subtly changed their view on whether they want their assets managed in Switzerland and that is hugely positive for the UK,” says Mr Kearney. “Switzerland was always an expensive jurisdiction to have your wealth managed in. Certain families are now far less enamoured with the magic of Switzerland as somewhere you have your international wealth looked after.”

With wealthy families re-assessing their private banking arrangements to make sure they are getting value for money, Mr Kearney suggests all banks must redraw their fee schedules to offer more transparency.

“The financial industry has slightly mugged itself by smuggling in fees to asset management and importing them into private banking products,” he believes.

By disguising these fees, we are left with a service which few clients respect, he says. “You don’t value it if you don’t pay a fee for it,” says Mr Kearney, in a belief that clients typically respect their doctors and accountants far more than their private bankers.

“That is very unhealthy and a difficult place to come back from. But it stems from the whole system of retrocessions and rebates, which advisers got for persuading clients to invest. It is an absolutely poisonous arrangement, which regulations such as RDR have done perfectly well to nail. But it will take some time to make this transition.”