Here, Family Wealth Report talks to London-based Yolande Escher Dwivedi and Jeroen Kwist of BNY Mellon Wealth Management about the globalization of family offices, the challenges and opportunities of this, and issues related to selecting service providers.

At a time of increased globalisation of wealth and geographic dispersion of high net worth individuals, wealthy families often have spouses, children or other contacts in multiple countries due to their resources facilitating more travel, international home ownership and access to sophisticated global investments.

BNY Mellon believes there are clear opportunities for wealthy families to embrace a global family office model and likewise for family offices to capitalise on the business prospects associated with serving international clients.

As families increasingly look beyond their home jurisdictions for investment opportunities, business value chains are spanning more continents, with suppliers in Asia, production in eastern Europe, real estate in the UK and investments in the US, for example. Clearly, the family office sector is evolving in line with this, but facing its own challenges along the way.

Perhaps one of the biggest challenges is around who to trust in an increasingly complex world as families ultimately regard the safety of their physical and financial assets as paramount. There are also often significant differences between the various jurisdictions in which families may operate or have interests – in terms of regulation, investing, tax and visa requirements, to name just a few.

It is therefore crucial that their financial and lifestyle needs can be catered for on a truly global scale, including with sufficient communication “touch points.” Families have understandably come to expect a higher and more “on-call” level of service from their providers.

Service provider challenges

Among the most obvious issues facing service providers is resource allocation and being able to offer fresh but relevant regional investment products and opportunities. They must fully understand the jurisdictions in which their clients operate or have interests – in a range of contexts including the “harder” elements of tax and investments as well as the subtler aspects of culture and trust. On a more practical level, they need to be able to serve clients “around the clock” to accommodate the fact that many will probably be in a different time zone. Meanwhile, global information security is a major concern affecting institutions of all shapes and sizes, with end-clients becoming increasingly cognizant of data hacking threats, for example.

Family offices tend to reach out to a wide set of service providers, resulting in them having multiple custodians and investment managers – a “scattered” approach that BNY Mellon discourages at a time of increased industry complexity, and need for consolidation in particular. Having a “master global custodian” that is responsible for reconciling records with those of each investment manager can be much more effective, according to

Escher, a wealth director at BNY Mellon Wealth Management, and Kwist, managing director of international wealth management.

“The word 'global' is important in that,” said Kwist. “We see that family offices do sometimes struggle with the multi-bank model and the disparate solutions this approach entails.”

“We become the master custodian for clients' assets. We have capital markets functionality, we can do consolidated performance reporting, FX, funds trading...there is a lot of things we can do. Others will try and source that from many different providers,” added Escher. “They [family offices] are all doing it differently,” said Kwist.

If a family office has, say, three or four service providers and wants to take advantage of investment opportunities in Asia, for example, having a staggered structure in place can make this type of endeavour much more complicated than it should be. “That's where the master global custody concept comes in...the idea of working with a single provider across regions,” said Kwist.

“Appointing a master custodian has felt like creating an extension to our family office. Getting access to institutional capabilities via a tailored service with a flexible online consolidated reporting system allowed our office to shift more focus to its core competencies and objectives,” said a client of BNY Mellon’s Family Office Services group.

“For example, being able to outsource more administrative tasks, especially for hedge funds and private equity holdings was a big relief for us as it not only saved us time, but also reduced operational risks. It also allowed us to focus on more value added activities, such as uncovering new investment opportunities which is a big priority for the family.”

Regional differences in the family office sector

Kwist and Escher explained that, in the US, when a family experiences a liquidity event and comes into wealth they will usually structure their assets first, look for a master global custodian and then pick the investment managers. After that, they'll round out all of the other things they need from their family office in terms of capabilities.

By contrast, in Europe families typically select investment managers before looking for a global custodian, which can complicate their family office infrastructure and create difficulty when it comes to reporting, for example.

“They are at risk of getting get stuck in that structure because they’ve already invested in it,” said Kwist. “As they grow, it becomes more complicated with regulatory changes, etc., and they realize they should have built it differently.” He added that service providers historically haven't been as willing to “partner” with family offices in creating a structure that is perhaps most beneficial to them in the long run - they would often jump straight into a conversation around investment management, for example. But Kwist and Escher believe this is slowly changing.

Another issue is that, as wealth grows, families may wish to preserve some independence and bring in CIOs, CEOs, CFOs, etc., who are more self-sufficient. “At that point you don't always need a bank and this is when a custody provider can be very useful – helping with operational efficiency and execution – an 'orchestrator, if you will' - rather than just managing assets,” Escher said.

Regional variations

While most, if not all, of the points raised thus far are relevant globally, there are some clear regional trends that may be of interest to service providers looking to capitalize on the globalization of the family office model.
Family offices in the US tend to be focused on having “best in class” infrastructure and investment managers, Kwist and Escher noted. Finding the right service provider that can deliver an end-to-end investment management is therefore increasingly integral to the set up of a family office. US family offices often safeguard their assets with a global custodian and “cherry pick” investment managers to complement their core investment strategy.

Meanwhile, in Europe there has been a sharp increase in financial sophistication among family offices. Five years or so ago, the industry was largely focused on family constitutions, whereas today much more time is being spent aligning structure to more closely mirror individuals' values and investment strategies. Many European family offices are also still operating in a legacy operational set-up, which is often inefficient, labour-intensive and expensive to run.

Asian families are generally heavily reliant on banks still, with global brands being a significant attraction. As the industry sharpens its focus on multi-generational succession planning, Kwist and Escher anticipate regional consolidation and a subsequent reduction in banking relationships per family.

Conclusion

BNY Mellon believes that existing family offices that have developed into more complex structures would serve themselves well by considering how they may be able to streamline what they currently have in place.

The key for family offices, according to Kwist and Escher, is the need to find service providers who a) understand and can respond quickly to cross-border opportunities and issues, and b) create fewer dependencies for sophisticated clients by allowing them to pursue their entrepreneurial ambitions, their global investment strategy and personal mobility.