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.
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.
Big 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