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EXCLUSIVE INTERVIEW: UBS Aims To Meet Challenges Of World's UHNW Families

Tom Burroughes

8 July 2013

Among the ranks of the world’s ultra high net worth individuals, simply having great wealth is no guarantee that the persons concerned understand how best to guard and grow it. And while becoming better understood, some concepts such as family offices can be unfamiliar.

At , the Zurich-listed wealth management firm helps clients navigate the reefs and shoals of such matters as part of the family services and advisory business that it set up in 2000, building the unit continuously ever since. It developed a local presence in Asia in 2005 and now covers the topic globally with eight specialists. (A number of other private banks, such as its Swiss rival, Credit Suisse, have launched similar units.)

Advising wealthy families on issues such as business succession, art collecting, philanthropy or property management goes beyond simple financial metrics. And at a time when firms are battling hard in a competitive environment, having a broad service range to put on the table is important, Mario Marconi told this publication in an interview in Zurich. He spoke in his firm’s Barengasse offices alongside Henry Hirzel, managing director, head of UBS Family Advisory.

As far as the field of family offices is concerned, for example, the process of setting one up, or exploring the options around them, can be perplexing for the uninitiated, Marconi said.

"Families realise that organising a successful wealth transformation is complex. Besides the size of some families and spreading of family members across the globe, it is challenging to unite the family behind a common goal and find the suitable roles for family members,” Marconi said.

“With family offices, families may in the past have under-invested in infrastructure. People are looking at what is the right set-up,” he said.

At UBS, the family advisory group embraces three broad lines: family governance, family offices and family businesses. It is a high-touch form of business and not cheap to conduct.

But UBS plainly thinks the results are worth the effort. As reported earlier this year, pre-tax profits at the wealth management arms of UBS both in the Americas and other regions of the world rose in the first three months of 2013 from the previous quarter, while new business inflows in some segments rose to pre-2008 crisis highs. At Wealth Management – the segment not including Wealth Management Americas – pre-tax profit was SFr664 million ($708.9 million), up from SFr398 million, a 67 per cent quarterly increase; adjusted pre-tax profit was SFr690 million, up from SFr415 million. Wealth Management Americas profit before tax was $251 million compared with a profit before tax of $216 million in the prior quarter. (UBS also was honoured at early May’s WealthBriefing European Awards event in London with the award for Swiss -based private bank – international clients team.)

Or to put it another way: far from being a luxury offering, family advisory business to UHNW individuals looks to be fitting very snugly inside this recovery story – at least so far.

Professional

The UBS executives dwelled on how, from their vantage point, the family office sector around the world had more ground to cover to improve standards.

Hirzel was struck by how the family office sector in Europe – and elsewhere - needs to get more professional; he referred to industry statistics from Europe and other regions suggesting that only about half of family offices have formal written risk policies and guidelines in place and almost 40 per cent did not have written investment policy and guidelines, meaning there is no coherent investment strategy.

“In the US, percentages are similar; it is still an opaque space,” Hirzel said, noting that family offices still do not exchange information very much. (UBS is trying to work on this: earlier in June, the bank ran a family office summit in Singapore.)

This dearth of knowledge and systems presents a rich opportunity for banks such as UBS to exploit by offering advice.

A number of wealth managers are now offering family office and related services, including Credit Suisse, Citi Private Bank, Societe Generale as well as smaller players such as Berenberg.

Cost variation

One tricky issue – and one that this publication hears about frequently from people operating in this space – is the relatively lack of clear, comparable data on how much it costs to run a family office. This means that at the highest end of the wealth spectrum, families often have less comparable data to work on than is the case of retail investors browsing mortgage or savings products on the web, or a Sunday newspaper.

And this issue bites because, as Hirzel said, the cost of running a family office varies considerably. The average operating cost of a single family office in Europe/Asia is about 65 basis points (as a fraction of assets under management) and when asset management costs are added, it comes up to around 130 bps, he said.

“I have seen family offices with costs in the 10 to 15 bps range the most expensive one was 2.25 per cent, which was on the very high side. It is certainly helpful for people to know roughly where they are,” he said.

A recent study in the US by the Family Wealth Alliance, the research and consulting firm, showed that running a family office can cost $1 million or more a year, so that these structures are financial viable for families with at least $100 million in assets. (In the US, there are about 5,000 such households.)

Hirzel mentioned a trend where people increasingly say that their friends have a family office and do they need to have one also.

And the kind of support role that UBS provides can be illustrated by its recently “family transition seminar” in Wolfsberg, Switzerland (the UBS Platform for Executive & Business Development). “A lot of this is about the basics and about how to get the next generation up to speed,” Hirzel said.

Outsiders

Family businesses that haven’t been used to engaging outsiders, and which are looking to grow and develop, sometimes must face up to tricky issues - another matter on which UBS can offer a guiding hand, said Hirzel.

“The question is, what should a family office do for you, the owner? What do we outsource, and what do we do in-house? We see a trend of more outsourcing towards a 'virtual family office' where you outsource whatever you can,” he said.

The demands of UHNW clients where family offices are concerned vary by region, noted Marconi. “In Asia, the process is still about the process of setting up a family office, while in Europe and the US, it is about restructuring what already exists,” he said.

Arts and giving

Marconi spoke to this publication shortly after attending the Art Basel event in Switzerland, referring to how much of the work UBS does with clients is looking at different aspects of risk management in art. “It is not just about not buying fake art but about issues such as storage, transportation and insurance,” he said.

“The other role we play is advising clients about what is happening in the market, such as the effect of Asian money, which is inflating prices like crazy,” he said.

Marconi pointed out that the arts advisory and philanthropy side of UBS’s activities is an important way to connect with clients in a way that goes beyond narrow investment issues. “The business is similar to consultancy in helping families navigate the arts space and philanthropy space,” he said.

These services are aimed at UHNW clients, he said, adding: “This is not an easily-scalable business. Another dimension is that we are strategically committed to this business. We don’t do this for the marketing….you need to invest in this,” he said.  

This business is global. On the philanthropy side, a total of 32 people worldwide work in it, and it is run from Zurich with hubs in Asia and the US. On the arts side, there are three advisors at UBS.

How it works

When a client has a meeting about art, or philanthropy, or about a family issue, the meeting will involve the relationship manager and whatever specialists are needed.

“Sometimes there will be partnership with an external network,” Marconi said, pointing out that some specialist advisors outside of UBS can be called upon to give advice and help in specific situations.

One trend Marconi said he has noticed is the greater professionalism of philanthropy today compared with a decade or so ago.

There are trends such as the blending of professional investment practices and philanthropy, such as “venture philanthropy”, an approach popularised by such mega-wealthy benefactors as Microsoft’s Bill Gates.

“It is a nascent area...it is still pretty new.” There has been in 2012 about $8 billion of such 'social investment', another $9 billion expected this year.  Overall, the industry is estimated at $50 billion. I think people need to see action.” 

“We believe that the potential is much bigger than that but it will not happen fast. How you make this concept and approach more mainstream is the big question everyone is trying to address. The basic infrastructure for the industry to flourish still needs to be built,” he said.