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Meeting the Needs of the Ultra and The Family

A staff reporter

29 January 2005

One of the pressing industry debates is how to profitably service the different echelons of wealth within one operation. At the mainstream private banking level, most strategies have opted to segment services by industry type – for example, entrepreneurs, media and entertainment, industry, property and so on. However, at the top end of the wealth chain, private bank strategies are still struggling to discover a business model to cater for the ultra high net-worth and the family office. In this Private Client Management feature, Jonathan Newman examines the different investor profiles of these two wealth classes and analyses where the future strategy might be. Separating wealth into different categories has never been simple. The ultra-HNW market—typically those with assets above $30m, and the family office sector—typically those with combined assets of more than $10m, are no exception to the rule. What is apparent from the approaches of various institutions is the key differences between the two sectors revolve on three elements: investment profile, risk attitude and vision. With a family office client, the overriding objective is to maintain the wealth of the principals, ensuring meanwhile that the family members gain financially over successive generations. With the Ultra-HNW client, the investment approach is more singular where the overriding strategy is wealth accumulation. Recent research has supported an institutional focus on both of these segments of wealth. After all, the sums of money involved and the financial requirements can be greater than those of most small or medium-sized business. Further, the numbers of individuals in both sectors are growing. The family office tier has increased 12 per cent per annum in families with inter-generational wealth, according to the latest World Wealth Report by Merrill Lynch Cap Gemini Ernst & Young. Wealth management boutique, Scorpio Partnership, now indicates there are more than 11,000 families in Europe alone that have assets of more than $10m. Meanwhile, the U-HNWI tier has achieved a three per cent growth in the number of worldwide members to 57,000 compared to 2000. While vast wealth is the common denominator between the family offices and ultra-HNWs, these new markets have thrown up numerous strategic questions on how these wealth classes can be handled. Apart from the financial strategies of the two wealth tiers in question, the overriding issue is that the family office profile involves a group interest while the ultra is more singular. With this distinction stems the separation of financial management, needs and views. “The wealthy individual has his own money and therefore his own private office, whereas wealthy families seek to have their affairs managed as a unit due to the diversity of people and style” says Michael Maslinski, director at Maslinski Lawrence & Co., Taking a step further in investor profiles indicates that the two classes are not homogenous. The Ultra-HNWI, as the World Wealth Report 2000 pointed out, typically sources wealth from industries such as telecommunications, computer software and technology. These businesses are on the cusp of driving the new global economy and thus the client tends to have an increased market-driven attitude towards their own finances. In the short term these client are less risk averse and this dictates the investment strategy his/her 'office' seeks. Typically, this sector on average allocates 20 per cent, and sometimes as much as ten per cent, into alternative investments such as hedge funds and private equity to create in order to pursue favourable high risk and high yield products such as equities and venture capital. The short- to medium-term focus also means that the investor profile of an Ultra-HNW is more demanding. They require institutional calibre products tailored to their needs supported by personalised professional service because they are aware that at this level of wealth they can access such bespoke services. Moreover, industry practitioners familiar with these accounts explain that the clients demand absolute access in return for their custom. “Anything less than dialogue with the managing director or board is not acceptable,” commented one private banker in Berkeley Square handling several Middle Eastern ultras. Critically, given the singular nature of the relationship, he added, these clients are much less ‘sticky’ to any individual private bank. “They operate in a classic consumer fashion. They are price and performance sensitive. If they can get something better elsewhere, the private bank can do very little to prevent them placing funds there,” commented Sebastian Dovey, a director at Scorpio Partnership. These qualities differ dramatically from those required by a family office. Typically, asset accumulation is not the first priority. “The family office is the guardian of legacy,” described Maslinski. Issues such as generational planning, tax and estate advisory, investment strategy including philanthropy, financial reporting and investment advisory services are key to any family office approach. Each of these requirements can consume a wide range of experts – who can come at a price. There are also the host of ‘soft issues’ such as managing family values, family education in managing fortunes, counselling and family governance are ranked above plain vanilla wealth management on the shopping list of needs. Critically, with all these less tangible services involved in the total wealth management needs, a family office is often much more securely linked to a limited number of financial relationships with private banks. Clearly, the family office relationship is structured on the basis of a detailed understanding covering the needs and values of that particular family, and above all on their own personal service and dedication to these values and needs. Private banks have to gradually work themselves into a central gatekeeping position with the family wealth before all the above needs can be met. This takes time. “I reject quite strongly the view that the family office is just another marketing label, or another way of attracting new clients. It represents a commitment by the bank to achieve a far deeper understanding of client relationship,” says Maslinski. In spite of these clear distinctions in the requirements of these asset classes, a study by Family Office Exchange in the US suggests that the differences between the two wealth tiers are slowly merging. Indeed, their study showed that in Europe 52 per cent of the global financial family were primarily concerned with investment programmes whereas only eight per cent were concerned primarily with philanthropy. Perhaps a more telling figure is that 78 per cent of family offices were less than 20 years old with half again less than ten years old. To conclude it would seem that the U-HNWI has a different outlook only while he or she remains that which has made him or her distinct: an individual. Once, the generations become involved it is a different game entirely. For the private banking strategists, the trick is to manage the graduation from an ultra-HNW account into a family office wealth management service.