A growing dissatisfaction of private banks is driving more and more UHNWIs to join a family office or set up one of their own. Oliver Williams asks what these discrete money managers offer that the banks do not.
“I went to a very good Swiss private bank and I asked them: ‘If I were to give you $50m but I want you to build a portfolio of 25 stocks and I want to speak to the analyst and I want to be involved. Do you offer that service?’ They said, ‘no we’ll put you into a fund.’”
This attitude from various private banks caused Jérôme Stern, heir of the Stern banking family, to establish his own family office, J. Stern & Co. His story is far from unique, according to family offices interviewed for this article.
“We had two founders,” says Jonathan Bell partner and chief investment officer of Stanhope Capital. “Both who were looking for investment solutions and they had gone to private banks and investment management firms and both felt that, actually, they preferred the model of someone like Bessemer Trust [a US multi-family office]”.
“Mandeep Nalwa was a private banker in his own right,” says Mithun Ghosh, reciting the history of Singapore’s Taurus Wealth, of which he is COO. “He was at a stage that he believed working in the mandate of a private banking set-up was limiting. It was sales dominated and institution-driven and he was feeling a bit conflicted … so he set up a family office”.
Self-serving sales strategies
All of these family office founders cited a dissatisfaction of the services provided by private banks. But what exactly was it that annoyed them enough to set up their own offices?
For it was the self-serving sales strategies of private banks that drove them away.
“Form a bank’s point of view, they’re just trying to push products,” says Tayyab Mohamed, director of Agreus Group, a recruiter for family offices. “Families would go to the big banks and they would be sold a product.”
“Banks are stuffed full of salespeople and not relationship managers,” says Dr. Michael J. Oliver, the co-founder of Global Partnership Family Offices (GPFO), a networking forum for family offices.
Sales are fine for some, but only if the product being sold is quality. “You don’t mind being sold-to if the evidence is that you’re being sold good things,” says Bell.
“But if the evidence is that you’re not being sold good things then you question it in a way that is different from questioning someone’s judgment.
“There’s always that niggling doubt: ‘Was I put into it so that he could get a high commission or high fee, not because it was the best investment?’”
Wealthy families and individuals are increasingly asking those sorts of questions as they become more financially savvy, says Stern: “Over the last 20 years I think the competence of the clients has increased significantly, sometimes even more than the private banks themselves.”
Fees for what?
Many private banking clients start asking questions like these after a period of poor returns, however. Normally they go along the lines of, “why am I being charged such high fees for meagre returns?”
“I would resent paying a huge amount of money to people who manage money and return sweet FA, when I can put my money into a passive fund which costs much less and returns the same”, vents Oliver.
According to the World Wealth Report by Capgemini, a consultancy, he is far from alone. HNWIs were largely unsatisfied wealth manager returns in 2018. “Strong investment returns in 2016 and 2017 did not yield an overall 70% HNWI satisfaction level globally – arguably the ‘passing grade’ for the industry,” the report noted.
By contrast, the average portfolio return for family offices in 2017 was 15.5% according to the UBS Global Family Office Report.
But there is no one reason why family office returns are often (but not always) superior to private banking ones. Each family office invests differently, as the industry adage goes: “If you’ve met one family office, you’ve met one family office”.
Many give more weight to alternatives. Stanhope Capital has just doubled its hedge fund allocation to 15%, for example. “Hedge funds have done really badly for about 10 years and we’ve seen an increase in the number of strategies recently which we think might be able to outperform”, says Bell.
For Oracle Capital Group, a London-based multi family office, it is about being able to provide the kind of personalized services that the banks cannot. “Family offices do not simply offer to clients specific products but rather can turn to the entire market to provide a solution which is required for each client,” a spokesperson told PBI.
The long-term investment outlook of a family office also means portfolio plans are enduring. J. Stern & Co. has evolved from a single to multi family office but has always adhered to it’s ‘long term value stock picking’ philosophy. “You buy 25 of the great global stocks which you buy and then hold with little turnover,” explains Stern, whose family have stuck to the same approach since the Second World War.
The single-multi family office
Opinions vary on definitions between a single and multi family office. Strictly speaking the former manages the wealth of one family, while the latter two or more. However, many are seeing a grey space open up between the two, where single family offices (SFOs) use the services of multi-family offices (MFOs).
“That is something that is happening and that is the model which we have been capturing,” says Stern.
“An interesting market for us is the single-family office market,” James Fleming, CEO of Sandaire Family Office told PBI in December. “We have examples of a couple of single-family office clients where we manage their liquid wealth for them. We also have another family office where we manage the private equity side of their allocation.”
Ghosh outlines some of the benefits of this approach: “You’re leveraging a larger team of experts, back office set-up and, of course, the regulatory and compliance costs and the benefit of cross-pollinations from a wider client base”.
Future of the family office
The swing of UHNW affinity in family offices’ favour is also coupled with a rise of their number. Research from estate agency Knight Frank last month showed the global UHNWI population is forecast to rise by 22% over the next five years.
Surely that means more family offices popping up?
Two thirds of the family offices that participated in UBS’s Global Family Office Report were established in 2000 or later. In Singapore alone, the number of family offices has quadrupled between 2015 and 2017 according to the Monetary Authority of Singapore.
But more family offices opening does not necessarily mean more family offices overall. As Bell puts it: “There is a natural life-span of a family office in that a family starts a family office with the patriarch normally in their 50s or 60s. By the time they’re in their 80s either they close it, they merge it, or the next generation takes it on.”
The succession of a family office is their biggest killer he says, especially when multiple siblings take over: “They may disagree on what they want to do, so sometimes it works, sometimes it gets split up and sometimes it closes”.
Founders might be wary on handing their family office down. “Some principles still have a steely control on family offices. There’s inevitably going to be tensions”, says Oliver.
MFOs are no exception, Mohamed believes: “A lot of multi family offices, which are unheard of often fall apart. There are different opinions and views on the long term.”
The cost of them is another killer, he says: “We think if you’re [worth] over $100 million it’s a percentage point in the costs to have staff employed in a private office.”
MFOs, which are designed to spread the cost over multiple families, can also feel the cost. “There are a lot of family offices that struggle to get beyond being a boutique for a small number of families,” says Bell. Stanhope Capital employs a research team of 20. Other major MFOs have similar sized teams.
However, MFOs that do get beyond ‘boutique’ status quickly become something else. Stanhope Capital now manages capital from 40 institutions as well as 150 families, so does not fit the strict definition of a family office. “We’re an investment office”, says Bell.
Europe’s largest MFO, Stonehage Fleming, looks after 250 families, making it more akin to a small bank or wealth manager than its origins as an office for the Fleming family.
It is this kind of fractionalisation that keeps the family office sector in check. It is an industry that does not quite know what it is, not aided by the fact most family offices do not label themselves such and most family office service providers do. “I really don’t like the term”, adds Stern. “We’re a private investment office”.