Isabella Fonseca, a senior analyst at Celent
and the author of a new report, European Family Offices: Where is
the Opportunity? cites the failings of private banks’ offerings to
ultra high net worth individuals (UHNWIs) as a key factor in the
success of European family offices.

But in addressing these shortcomings, private
banks are increasingly looking to meet family offices halfway
rather than seeing them as direct competitors in the race to
acquire UHNW clients.

One such example is the latest tie-up between
SG Private Banking and US multi-family office Rockefeller. SG
Private Banking chief executive Daniel Truchi, announcing the move
in London in June, said the global alliance would enable the
private bank “to learn from Rockefeller and develop the expertise
they have”, and provide a “complete solution” to family offices and
UHNWIs.

Standard Chartered, meanwhile, has a long
standing agreement with Fleming Family & Partners, via a 20
percent stake in the firm, which enables the private bank to
leverage the multi-family office’s (MFO) capabilities in Asia and
the Middle East. Other collaborative strategies centre around
family offices’ outsourcing requirements, which remains a rich vein
for private banks to tap.

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The Celent study, which surveyed 150 family
offices across Europe, reveals private banking to be the most
popular service for multi-family offices to outsource (70 percent
of respondents doing so), followed by master custody services (60
percent).

The latter requirement plays into the hands of
BNY Mellon, the world’s largest global custodian with more than $20
trillion in assets under custody, which provides a range of
services to 250 family offices worldwide. Jim McEleney, managing
director for international family office services at BNY Mellon
Wealth Management, told PBI that there remain a number of
services that wealth managers can provide to even the largest
MFOs.

“There is an awful lot we can bring to
families around wealth education and family governance – legacy
planning, succession planning.

“These are topics we’re surprised that some
families have not really thought about for the size they are – they
haven’t thought about getting the family ready for the money as
much as they’ve thought about getting the money ready for the
family”.

Private and universal banks that have gone a
step further and established family office groups to provide
similar services to those seen within ‘true’ family offices make up
22 percent of the total family office (FO) market, according to
Celent.

The study also notes that in the more mature
US segment an influx of Registered Investment Advisors (RIAs) has
played a significant part in boosting family office growth rates. A
sample of 69 MFOs in 2005 found that 50 had no family affiliations,
illustrating “the branding success of the family office in
general”.

Fonseca believes “we should expect to see this
happening in Europe as well – after all, an MFO is really a small
private bank”.

For McEleney, “the most interesting offices
for organisations such as ours are the ones that are creating MFOs
for co-investment alongside the lead family,” and he is not alone
in noting that such organisations “are having to professionalise
themselves up to an institutional standard to attract those
investors”.

That, however, could lead to the same kind of
difficulties that first prompted UHNWIs to turn their attentions
away from private banks, the report from Celent implies.

“The clear disadvantage of MFOs is that their
services tend to be less personalised and customisable than single
family offices [SFO]. The larger MFOs get, the harder it is for
them to maintain the top-notch personal service that the most
discerning clients demand,” it cautions.

There are, according to the study,
approximately 1,920 MFOs in Europe – 45 percent of the family
office market. More than 100 of these MFOs are based in London,
according to Seb Dovey of London-based Scorpio Partnership.

The UK capital’s reputation as a global
financial centre, coupled with the preponderance of UHNWIs in the
UK, is a likely cause of such concentration, but the key MFO market
in Europe remains Switzerland, says Celent.

The Swiss market is the most mature in Europe
yet still has “great potential”, with private banks such as Pictet
and Credit Suisse joining the likes of Julius Baer and HSBC in
catering for family offices in Switzerland.

Of the other markets assessed by Celent –
Austria, the Benelux, France, Italy and Spain – Austria, Italy and
Spain remain particularly underdeveloped in terms of family office
services, though each has potential advantages.

The Austrian market, for example, has
potential as a “key gateway” through which Central and Eastern
European HNWIs can be accessed. Currently, however, the incidence
of SFOs evolving into MFOs remains relatively weak, with law and
accounting firms making up the bulk of the available service
providers.

Italy is seen as offering “a promising
opportunity” for private banking and family office services, but a
fragmented market and current lack of onshore family office
capabilities, coupled with a less attractive tax environment, means
family offices in the UK and Switzerland have tended to gather much
of the country’s top tier wealth.

Family office penetration in Spain is
similarly weak, as is the private banking market. Some 75 percent
of available wealth is currently managed by unspecialised retail
players, with family office propositions largely confined to those
provided by independent advisory firms.

By contrast, the more developed markets of
Germany and the Benelux do provide significant growth opportunities
for family offices, Benelux in particular because of its proximity
to Luxembourg, which can function as an offshore centre while
remaining within 200km of 60 million Benelux residents.

“Relevant competencies in the asset management
area are already consolidated,” the study adds.

Yet it is Switzerland which will remain the
focus for family office activity, with the study predicting that it
will build on its existing reputation as a wealth management
stronghold to “consolidate its position as the European hub for
family offices.”

This may be due to the fact that there remain
numerous single family offices in the country, and hence a
particularly strong need to outsource capabilities.

Indeed, the 750 European SFOs provide ample
opportunities for external wealth managers, despite a recent study
from the Wharton Global Family Alliance revealing that more
European SFOs tend to keep wealth management related activities
in-house when compared to their American peers.

This is particularly the case for investment
related activities, the study found, with 63 percent of European
SFOs performing asset allocation in-house compared with 47 percent
of American SFOs. Celent says that the equivalent figure for MFOs
in Europe was 98 percent, making it the service most likely to be
kept in-house.

McEleney contends that SFOs “are diversifying
globally. They’ve got investment types in their portfolio now that
are increasingly complex. So the ability on their side to handle
the spreadsheet the way they used to isn’t really there. The
benefits of a global custodian for the SFOs is definitely something
we’re witnessing”.

Investment allocations themselves are likely
to be influenced by the structural nature of the SFO.

“Family offices managed by the founder of the
family fortune are the most actively involved in investment
decisions”, says Celent, while “family offices that are larger,
more spread out, more generationally-distant from the founder tend
to delegate more of the investment decisions”.

Delegation tends to lead to a more risk-averse
strategy, the Celent study adds, and while the Wharton report
contends that globally, “on average, asset allocation is very
similar across first and later generation SFOs”, it acknowledges
that “there is a significant difference with regard to principal
investment in companies”.

This manifests itself in the form of a median
of 10 percent of wealth being allocated to private equity among
first generation SFOs compared with five percent for later
generation SFOs. Furthermore, an average of 14 percent of first
generation SFO wealth is allocated to principle investment in
companies compared with nine percent for later generations.

On a global level, the number of family
offices has doubled over the past decade to 12,000, with the US
accounting for a similar number (4,000) as is found in Europe. MFOs
make up 75 percent of the total US family office market, 30
percentage points higher than the equivalent figure for the US.

Citing a 2005 study by Bloomberg, Celent notes
that the highly concentrated nature of the US market means that
some 69 MFOs were managing a total of $220 billion in assets at
that point in time, with the top three (Bessemer Trust, Rockefeller
& Co and Harris myCFO) managing 46 percent of this total.

More recent asset under advisement figures
from Cerulli, which unlike Bloomberg include the US Trust
multi-family office and Northern Trust, show a more evenly
distributed model. The rapid growth seen in these figures is in
part due to the “enhanced productivity inherent in the business
model”, according to Celent.

Larger US MFOs also reap significant benefits
from an increased number of multi-generational relationships, with
all MFOs with AuM in excess of $5 billion generating more than
three quarters of their revenue from such sources. By contrast,
multi-generational relationships generated just 34 percent of total
revenue for those with under $0.5 billion in AuM.

The greater demands of managing
multi-generational relationships is another factor in the
increasingly complexity of MFO management.

For SFOs, the desire to remain “hands on”
wherever possible also creates a demand for more accurate
reporting, according to the Wharton study. From an investment point
of view, European SFOs are more likely to request frequent,
highly-detailed information on their investment activities than
their American counterparts.

Over a third (39 percent) of European SFOs are
informed monthly compared with just 16 percent of American SFOs,
while 46 percent of European SFOs provide very detailed data in
contrast to 29 percent of American SFOs.

Celent forecasts that the arrival of more
asset managers and service providers into the family office market
will be coupled with a desire among offices themselves to use
technology to automate key tasks such as reporting and investment
management. Accordingly, wealth managers are increasingly adapting
their capabilities in response to such demands.

BNY Mellon’s Private Workbench, a state of the
art programme launched earlier this year, is an example of the type
of service now being rolled out by financial institutions catering
to family offices.

McEleney says: “More and more we are seeing
family offices that not only want to collect and collate
information at a specified point in time, but also to be able to
manipulate that information for analysis and reporting
purposes”.

“Governance is becoming more formalised,”
McEleney continues, “family offices have a bigger and bigger
requirement on them for really professional, timely and accurate
reporting. Private Workbench really is their portal into all the
investment information we might have for them given we’re their
custodian of record”.

But McEleney does caution against private
banks and wealth managers doing too much in their desire to
accommodate family offices, pointing out that BNY Mellon is focused
on honing its current services rather than looking to continually
expand its range of offerings.

“We are practical in realising that our family
offices are going to diversify across a number of different
managers. That’s where I see a difference between ourselves and
some of our competitors”.