Scott McCulloch is editor of Families in Business.
Swiss family offices, where wealthy families have their money managed, are reportedly embracing outsourcing in a bid to keep pace with the growing cost and complexity of managing investments. Meanwhile, family offices are said to be a growing feature of the private banking sector as rich families seek to take greater control of their wealth. The problem is whether the tripartite notion of control, outsourcing and privacy can ever meld. For any investor seeking privacy, it is difficult to see how they can co-exist.
The problem is twofold: family offices now spend half their workday dealing with back-office operations such as fund administration. Lucille Knapp, who heads up wealth management at the Northern Trust, believes they would rather spend more time using their intellect. And why not. On the client side, the risk and growing complexity of investment strategies is forcing many investors to seek independent objective financial advice.
Investors, as a result, are setting up family offices or seeking out family office-type services from their private bank or independent advisers. The big idea is that having a family office, or access to their services, gives investors access to multiple product providers without having to spend more time personally managing their relationships. The second challenge is confidentiality: powerful families tend operate in a vacuum, where the need for privacy leaves few avenues to discuss their experiences with others.
This is at odds with outsourcing. Despite the growing costs and complexity of managing investments, only one in four Swiss family offices have outsourced parts of the businesses to specialists, according to new findings (see story page 6). Yet farming out administrative functions, such as compiling performance reports for clients, would allow family offices to focus on their core business: advising family members and managing family assets.
Given their penchant for hedge funds, clients of family offices would sleep better at night if they could be assured that their offices were indeed using their intellect rather than spinning out reports. Wealthy investors are increasingly turning to fund instruments as a main source of investment returns, but they want to know more about the risks. Then there are the fees. Investors should be wary when it comes to selecting a hedge fund: returns depend on performance fees, which can be stratospheric and which vary wildly across the alternative investment industry.
Earlier this year a Citigroup Private Bank survey of the super wealthy, conducted in association with McKinsey, found that high net worth investors were increasingly turning to the family office concept in order to control their disparate investments and personal wealth needs. So where does this leave private banks? They have endured much criticism about failing to adequately address clients' needs. True, their fortunes have improved as assets under management rose by 13% to $6 trillion last year, but clients have grown wary of so much emphasis on asset gathering and generic products.
Industry insiders say the holy grail for private banks is to be the trusted adviser. To do that they must know a lot about a family and its inter-generational issues. Family offices, which pride themselves on confidentiality and security, tend to do better there. Whether wealthy families truly embrace outsourcing to better manage their investments remains to be seen.