This publication recently interviewed one of the heads of UBS's global family office about how this business is faring and the type of client demand it sees.

In the endless debate over whether wealth management is best achieved by the “standalone” route or by a “do everything” approach, one area where banks are trying to prove the case for a universal model, it appears, is in catering to family offices.

With the family office market still relatively young in fast-growing Asia, and still seeing development in more mature economies, private banks that see ultra-high net worth clients setting up offices might regard this trend as a threat to some of their business. But as family office founders will find, the costs of trying to do everything in-house can be prohibitively expensive and so these entities will need to outsource a chunk of their work. In recent years, some of the big-brand banks, with investment banking, corporate finance, wealth management and other services, have seen this area as an opportunity.

It isn’t surprising, therefore, that the world’s biggest wealth manager, UBS, with around $2 trillion of assets under management, is making a determined push at the family office market. According to its own figures for the end of September, AuM managed with the bank’s global family office stood at SFr65 billion ($67 billion) out of total ultra-high net worth money at UBS of SFr478 billion. The GFO assets produced a return on assets of 40 basis points – the overall return on assets for UHNW client money is 57 bps. Outside of the Americas, GFO revenue expectations for this year stand at SFr260 million. This is, in other words, significant business and UBS expects and hopes it will increase as a share of the total.

Other banks with global family office offerings include Deutsche Bank; JP Morgan; Citi; Credit Suisse, HSBC as well as smaller houses such as Pictet. Societe Generale had a family office involvement through its stake in Rockefeller, although it later disposed of its stake to the Rothschild dynasty.

So what sort of skills can a bank such as UBS give to a family office? This publication recently spoke to Philip Higson, vice chairman - Wealth Management Global Family Office. He has been at the bank for 15 years out of a career spanning over three decades.  

In an interview at the firm’s offices in the City of London financial district, Higson pointed to how, after several years of caution and conservatism post-2008, family office clients are getting more interested in areas such as private equity and venture capital – but to get a ring-side seat isn’t always easy without an external guide such as a big bank.

“Some family offices don’t typically move fast enough to get into some of the best deals,” Higson said.  “One of the most important questions to ask a family office is does it have the capacity to do the necessary due diligence [on deals]?”

Family offices have been more conservative in their asset allocations. Given their broader mandate, many have stayed with high cash balances for much longer than other market players, but this is starting to change. “The buzzwords are now private equity, venture capital and direct investments,” he said.

There have been four years of rising public markets and these have enabled some good exits for private equity firms delivering high internal rates of return. Family offices are looking for private equity deals with good co-investment opportunities, where they had piggy-backed on the due diligence process of the PE shop.  “We can suggest to a client to go into a private equity fund with a particular specialisation or via a fund of funds. We can look at hedge funds and private equity funds as a sort of filter but the ultimate choice has to be in the hands of the family office,” he said.

Higson has noted some specific regional trends: “Families in Asia are looking for European mid-sized companies where they could add Asian distribution for the company. There are very deep pocketed, clever families with the ability to add value. They are people driving club deals with the ability to ensure good stewardship of companies via board representation and industry expertise.”

The comments about greater interest by FOs in areas such as private equity and venture capital are interesting. A few years ago, this publication asked family offices, private investment offices and other UHNW advisors about venture capital among other asset classes. Hardly any said they had much, if any, exposure to it, citing in some cases the weak IPO market. Ironically, those “vintage" investments established when valuations were weak in the aftermath of 2008 might turn out now to be great for internal rates of return. Timing, after all, makes all the difference.

Complexity and cost
Getting family office clients access to certain asset classes is only part of what a bank such as UBS aims to do, and the complexity of any offering – ranging from help with investment through to providing the financial plumbing of custody and reporting – can see fees vary considerably. “The cost of serving family offices varies depending on how complex the service is: the blended average fee across our GFO book including lending fees is 40 basis points. Subject to the level and type of activity, total fees can be in excess of 100 bps of AuM down to as low 10-15bps,” Higson said.

UBS’s own research as released a few weeks ago has shown that the average family office spent 86 bps on operating costs, of which investment activities accounted for almost half; more than half of investment-related spending (21 bps on average) was allocated to external specialist firms. Family offices managing over $1 billion allocated 35 bps toward outsourcing, compared to an average of 58 bps for smaller offices. Family offices that outsourced investment management were the least likely to outperform against investment benchmarks.

Asked about how its own business experience went, Higson said:  “We [at the GFO] share our chief investment officer's view with clients but most FOs will do asset management and manager selection themselves so we help in all the other areas.”

A good deal of the complexity – or otherwise – of UBS’s task depends on whether the family that has created a family office still runs a business or has sold up.  About one-third of the family offices UBS deals with will have an existing operating company associated with it, Higson said.

Another area where the bank can, Higson said, shed light on matters for FOs is in the complexities generated by different tax and other rules in certain parts of the world.

Family office clients with cross-jurisdictional interests have specific tax rules in each country. Some families will consider moving their domicile in order to optimise their ongoing tax liabilities and this can drive the type of investment approach they adopt. For example, in Monaco, where there is no income or capital gains tax, a client with a trading mentality can be active without being concerned about CGT, he said.

In Germany, by contrast, as well as Italy and France, tax rules mean that activities with less than a 12-month time horizon are more heavily-taxed, encouraging longer holding periods for investment. This encourages investment to stay under the roof of a business and /or to have long-term investments like real-estate, Higson said.

Ultimately, however, what any bank needs to understand in serving UHNW clients creating family offices is protecting wealth for future generations: “The top wish of beneficial owners is for the family office to deal with inter-generational wealth transfer…it’s their raison d’etre.”