Family Office

Europe's private banks in quest of family office

A staff reporter, 5 June 2002

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Family office has become a fashionable catch-all term for private banking for people with so much money and property they cannot keep track ...

Family office has become a fashionable catch-all term for private banking for people with so much money and property they cannot keep track of it all. But experts working in this lucrative but secretive field with some of the world's wealthiest families draw a distinction. They say families should be wary of institutions re-branding traditional private banking services as a platform to leverage further products and services.

A family office is a team of professionals dedicated to preserving a family's substantial liquid wealth over generations, noted Ian Partridge, of Loedstar SA in Geneva, which specialises in independent training for wealthy families. Liquid assets of $100m are usually the starting point. A family office may be independent, run jointly by the family and its employees, or bank-affiliated, when the family runs domestic aspects like property while the bank handles the financial side with liability for any mistakes.

Partridge says it is vital for the bank to be dispassionate and this objectivity distinguishes a genuine family office. "You can't be an objective advisor if you manage 100 per cent of the assets yourself," he told Private Client Management.

"There are hundreds of private banks but only about 20 have fully integrated family office efforts with a level of objectivity because of the compromise involved. You have to give up something, they must start earning more consultancy fees rather than asset management fees, something banks do not traditionally do."

Pictet & Cie, HSBC Republic, Bank Julius Baer, Deutsche Bank, UBS and Credit Suisse have some of Europe's best established family offices and maintain they provide services with a degree of objectivity via an "open architecture" approach under which they offer third party alongside in-house products. JP Morgan has developed a family unit in Europe under Tim Peters while Merrill Lynch is due to launch a European family office early in 2003. Accountants, such as PricewaterhouseCoopers, also offer such services.

Mary Jane Fredrickson of the Family Office Exchange, an Illinois consultancy that serves 350 families, said would-be clients should check whether the family office is treated as a separate cost centre "to determine neutrality and independence".

Many families do not set up a properly structured family office until a trigger event forces them to professionalize the operation. Institutions that have gone into or are eyeing this market see their task in tapping ultra high net-worth clients before things go wrong, although more often than not they are approached after disaster strikes.

Some, like UBS, aim to catch clients early on, helping them with a company sale or flotation via its investment bank UBS Warburg before passing the custom over to UBS Family Office to handle the newly-acquired liquidity.

Pictet launched Europe's first family office business in 1998—a model envied by rivals—headed by Morag McLure. It had been growing organically for years as more and more families who came into significant wealth made ill-informed decisions under pressure from a flurry of financial advisors vying to offer their services.

"Three or four years later they realise something is not quite right, it may be investment performance or taxation, and they invite us to take a look at this one issue. But once you start looking at that it's like opening a Pandora's box," McLure said.

Pictet spends considerable time with clients to determine which family values they want to preserve and whether, for example, as is still more prevalent in the US, philanthropy has a role.

"They are not just looking at it as a pot of money and we are not just selling products to conserve that pot of money—we are trying to take a more holistic approach," said McLure.

"Our philosophy is that family office is like a group of consultants who are trying to solve the problems of the family, whether issues of family governance, investment issues or tax structuring or political risk".

Multi-currency assets may be held in a multitude of forms in several countries. This complexity is one of the toughest challenges facing banks and why banks such as Pictet with global custody expertise are well placed. "All that information has to be aggregated, pooled together, analysed and pulled apart again. It's a complex tangle and global custody is one of the important variables," Fredrickson said.

Banks usually charge on net asset value and sometimes time spent consulting. Experts estimate that while basic charges range from 30 to 75 basis points, they may reach 200 basis points, or two per cent, once additional product and service charges are added and as much as 300 basis points for an exceptionally complex portfolio.

In the US, where the Rockefeller family is seen as having founded the first family office with the break-up of Standard Oil in 1911, there are between 3,000 and 3,500 family offices, according to Fredrickson. There are just over 1,000 in Europe but potential for more. London consultancy Scorpio Partnership estimates there are more than 11,000 families in Europe each worth more than $100m.

HSBC Republic launched its Family Office Advisory in late 2000 with the help of Dina de Angelo, who was headhunted by Schroders to set up a family office service. Andrew Hope-Morley came across from Union Banque Privée to HSBC last October and has focused the service on capital preservation, estate/trust and insurance planning by analysing a family's situation and designing a global portfolio. The flagship of HSBC's unit, a sophisticated IT platform capable of analysing and consolidating an UHNW family's entire wealth, is due for launch in early 2003.

If HSBC Republic succeeds in creating such a platform it would achieve something banks and institutions in the US have long sought. Fredrickson said she was only aware of limited software solutions but no all-encompassing IT tool on this scale.

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