A stream of private banks are tapping into the lucrative
world of the mega-rich. Banks are offering ultra high net worth
individuals access to family office capabilities, usually the
domain of independent institutions. Farah Halime investigates these
new private bank offerings and questions their
independence.
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The ultra rich are the ultimate target audience for
the private banking sector. So it is no surprise banks are getting
more serious at competing with family offices set up by the wealthy
to manage their investments and trusts.
In the past few months, at least
three of the top 10 private banks have capitalised on the family
office phenomenon by launching specialist family office units. But
what advantages will these bank-run units bring to clients, and can
open architecture platforms really provide the promised
independence?
There has been a huge creation of
wealth globally over the past 10 years. The 2010 Merrill
Lynch/Capgemini World Wealth Report estimates 10m people in
the world are classified as high net worth individuals (HNWIs) with
a combined net worth of $39trn.
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banks woo sophisticated UHNWIs
A disproportionate amount of this
wealth remains concentrated in the hands of ultra high net worth
individuals (UHNWIs) with $30m or more in investable assets. At the
end of 2009, UHNWIs represented only 0.9% of the global HNWI
population, but accounted for 35.5% of global HNWI wealth.
Banks have responded to a demand
from UHNWIs to manage their wealth better and in increasingly
sophisticated ways.
HSBC started its Family Office
Partners service earlier this year. The joint venture is between
the bank’s Global Private Banking (PB) arm and Global Banking and
Markets (GBM) division, the investment banking arm of HSBC.
HSBC targets clients with
$500m net worth
Equipped with 50 clients with an
average net worth of $500m or more, the bank has plans to extend
Family Office Partners coverage to more quasi-institutional clients
next year.
“It is definitely early days. There
has been an internal soft launch but there hasn’t been an official
launch as such,” says Neil Stand-ring, a co-ordinator of the global
steering committee charged with running the partnership.
The bank is sticking to its
traditionally cautious approach and says the number of clients
handled by the partnership is unlikely to increase until next year.
The idea is to provide clients – 90% of whom are private banking
clients and the remainder from GBM – access to the bank’s products
and services across GPB and GBM.
Standring would not be drawn on a
target figure for assets under management but says their business
clients would typically have a significant portion of their wealth
tied up in their business interests.
Open architecture
illusion?
Citi followed hard on the heels of HSBC by launching its Global
Family Office Group. The family office unit is different but subtly
distinct in terms of the bank’s structural model. It already works
with a range of family offices and their families and is “open to
external clients”, in contrast to HSBC’s offering which is limited
to the bank’s own customers.
Citi says it is formalising the
services it already offers to HNWIs, who have $25m or more in net
worth. The family office will offer cash management-based products
including managed investments, trusts and advisory services –
typical of what clients request. This is all offered on what it
claims is an open architecture platform.
Open architecture is a much bandied
about term in the wealth management industry that suggests a bank
provides access to the best products in the marketplace,
irrespective of the provider.
Unsurprisingly, most big banks
describe themselves as having open platforms, including Citi, which
says it does not give preference to its own products, but sceptics
have questioned this.
Bank family offices
‘unlikely’ to achieve complete independence
Jürg Frey, managing partner at
Marcuard Family Office, says a family office unit within a private
bank is unlikely to achieve complete independence.
“It is almost impossible to be
completely independent from the big mother house,” he says.
Clients may feel obligated to
choose the private bank’s products or services as opposed to the
best product available, Frey adds.
This brings into question the goal
of banks in setting up family office units. Banks are faced with a
“huge challenge”, cost-wise, to build up a family office, Frey
says. He suggests institutions may be forced to offer their own
products and services to boost revenue.
It is likely these banks will take
on at least ten clients for their family office unit, as evidenced
by HSBC’s 50 clients, and this inevitably increases costs.
“In order to finance the overhead,
you need to have a lot of revenue and commission. It is not just
advisory services they will offer,” Frey says.
Family offices just revenue
boosting exercises?
It begs the question, is a family
office becoming a euphemism for an extension of an investment bank
where the primary purpose is to boost revenue?
Amir Sadr, head of the Family
Office Group for Europe, Middle East and Africa at Merrill Lynch
Wealth Management, says generational planning underlines the focus
of a family office. By focusing more on tax and inheritance
retention for example, family offices are looking to preserve their
money for many years, making them risk-averse.
“I wouldn’t say family offices are
investing in riskier assets. In some ways you could say they are
quite conservative,” he says.
On Merrill’s independence, Sadr
says that in many cases family offices typically deal with a
multiple of banks.
“They have their own
responsibilities to manage the wealth of their clients so they are
out to look for the best advisers and the best rate of returns,”
Sadr says. “We saw this trend a while ago and that is why we have
an edge.”
Accessing all areas
The incentives for tapping into the wealth of the mega-rich are
clear. A strategy many of the private banks have taken on is to
merge investment banking and private banking giving clients access
to the global corporate markets and therefore higher returns.
In a similar move to HSBC and Citi,
Merrill Lynch combined its wealth management arm with its global
markets and investment division to create its specialist family
office unit in early 2007.
UBS, which launched its Global
Family Office Group this month, will partner its UHNW arm and
investment bank, taking over the business handled by its UHNW
Institutional Group.
The formation of the new unit is
another step in UBS’s effort to restructure the bank and create
more synergies between the bank’s large private banking arm and its
investment bank.
By providing access to unique
investment products on the global markets, family office clients
are potentially getting good returns on high-quality deals. Every
HSBC Family Office Partnerships client has a client servicing team
comprising a relationship manager, a corporate or investment banker
from global banking and a representative from global markets.
Standring says clients who have
initially had basic private banking accounts are now getting
exposure to global markets and investing in more complex products
such as corporate bonds and M&A mandates across retail,
infrastructure, real estate, alternative energy and mining
sectors.
More risk than
return?
But as with most global markets, the risk exposure is
potentially high and the result of combining investment banking and
private banking into the family office unit offering is two-fold.
By linking the family office unit to investment banking, banks may
gain good revenue but clients may lose more money. Analysts warn it
may also lead to higher capital needs to provide a buffer against
riskier investments.
Swiss private bank Julius Baer,
however, has rebuffed the trend to link private banking with its
corporate arm. In May 2009, it split its private banking division
from its asset management side and instead formed two independent
companies with individual listings on the Swiss stock market.
At the time, Julius Baer said its
asset management business, GAM Holding would remain the preferred
product provider for the bank’s private clients. Crucially, the
asset management arm remains separate to the private banking unit,
lessening the risk of negative returns from corporate markets.
Frey admits banks have been and
will remain a competition to independently-run family offices such
as Marcuard but he re-asserts the core value of the family
office.
“The relationship to our clients is
very strong. A couple of partners here have invested money in the
business and will be with the company for a while,” he says. He
says the fluctuation in the job role that large private banks see
is “unpleasant” for clients.
The phenomenon gripping private banks will only succeed if top
organisations such as HSBC and UBS take on board and apply the
strategies of a small family office, says Frey. But the lure of
netting much-sought-after UHNW clients means the trend is only set
to continue.
Family office: Quick facts
Family Office Group
- Offer cash management-based
products including managed investments, trusts and advisory
services - Clients who have $25m or more in
net worth - Similar services on offer to
Citi’s Global Transactions Services, which services institutional
clients and multinational corporations - Headed by Catherine Weir, formally
chief executive of the bank’s Europe, Middle East and Africa
region
- Total group assets under
management – $200bn - Operates different structural
model. It has split its private banking arm from its asset
management division, distancing its family office clients to its
investment banking business - This in contrast to other banks
listed, which have merged private banking with investment banking
arms - Total group assets under management $166bn
Family
Office Partners
- Joint venture between HSBC’s
Private Banking and Global Banking and Markets division - 50 clients – all existing HSBC
clients - Clients who have $500m or more in
net worth - ‘Client Servicing Team’ per client
– relationship manager from each division - Neil Standring is a co-ordinator
of the global steering committee charged with running the family
office - Total group assets under management – $354bn
Global Family
Office Group
- A “one-bank” strategy
- Global joint venture between
Global Ultra High Net Worth (UHNW) unit and Investment Bank - Focus is primarily on up to 250
largest institutional-like or professional family offices and
client - Headed jointly by Global UHNW head
Joe Stadler and Jerry Wattenberg - Total group assets under management – $1,483bn
