Private banking was once regarded as one of the most high-end financial institutions.
However, in recent years, with the changes in the market environment, industry pattern and client needs, more and more private bankers choose to leave private banking and run to the "new continent" of joint family offices. What are the challenges for the former private bankers to transform into joint family offices? How should family clients choose a joint family office? Recently, Mr. Xu Qinshi, CEO of F&M Family Wealth Management, was interviewed by New Wisdom of Family Office and shared his understanding of the above issues. The following is the original interview:
Leave the private sector
Wealth management is a large ecosystem in which there are many ecosystems. Private banking is one of the largest ecosystems; the United Family Office, as a new ecosystem that has just emerged, has great potential and is attracting professionals from other well-established ecosystems to join it, such as renowned attorneys, investors from well-known VC/PE organizations, experts in fee structuring, and so on. As time develops, they will build the home office ecosystem better and better.
I used to be in a private bank and then founded a joint home office in Singapore. In fact, many overseas private banks have family office systems within them to advise ultra-high-net-worth clients (those with assets of more than US$50 million). In recent years, why have more and more private bankers in Hong Kong and Singapore chosen to leave and enter the United Family Office track? There are several reasons.
First, private banking competition in Hong Kong and Singapore is becoming increasingly fierce.Because there are restrictions on domestic capital, the industry is basically in a state of "too many fish, too few fish" with the influx of more and more practitioners when the total amount of the asset management pond is not growing too much. In the long run, the resources of high net worth people must be scarce.
Secondly, upward mobility is blocked. There are usually two directions for a private banker to develop, one is to improve in the business direction, and the other is to transform into a management position. We have just mentioned that business promotion faces resource constraints, while moving to management positions, especially for Chinese working in international banks, is also difficult. I have many well-connected friends who have worked in banks for more than 20 years and have hit bottlenecks after rising to certain positions.
Third, compliance reviews have tightened.Ten years ago, to open a private bank account, you only needed to explain roughly where the client's money came from and what type of investment you wanted to make. Nowadays, however, it is necessary to produce proof of the source of the client's assets, such as the company's financial statements, audited statements, personal income certificates, pay slips or tax clearance certificates, and many clients do not have the means to provide these materials quickly and completely, coupled with the review of the time cycle is getting longer and longer, and now it usually takes six months to open a private bank account, which will result in the day-to-day work of the private bank has become cumbersome and complicated, and the efficiency of the service and quality of the service has declined compared to the past. have declined compared to the past.
Fourth, the differences in comprehensive products and services have become smaller. In the past, American banks, European banks and Chinese banks were slightly different in terms of products. However, many banks' products are now more or less the same, and the competition among banks has become more and more intense.Of course, in general, the private banks themselves are still very comprehensive in terms of product allocation and the services they can provide. However, from a longer time dimension, practitioners may encounter some bottlenecks in the future development of private banking, which is why many private bankers have left.
Image source：Unsplash
Changes in Family Clients
The wealth management industry is changing, and so are the clients. Nowadays, more and more family clients prefer the services of a joint family office for several reasons: In terms of external reasons, one is the incentive mechanism of private banks. Banks always assess the sales performance of private bankers, so practitioners inevitably fit into these sales-related incentives.
When private banks realised this, they proposed the balanced model as an optimisation solution to avoid practitioners selling a single product. However, this created a new problem: practitioners were worried about the mindset that selling unbalanced products would affect their bonuses, which in turn would affect their sales behaviour. Therefore, no matter how management makes adjustments, as long as the underlying reward mechanism does not change, the essence cannot be changed.
On the other hand, when a private banking practitioner's position is elevated above a certain title, part of the reward will be in the form of OPTION.The OPTION will be withdrawn when they leave their jobs, so some practitioners may be concerned that they are not inclined to sell products with long time periods due to the inconvenience of leaving their jobs.
Secondly, in terms of internal factors, the first is the trend of institutionalisation of individual investors.Many ultra-high-net-worth users have large assets and deep knowledge of the investment market. They used to be individual investors but now they have set up their own teams. For example, we once had a client who invested in stocks with a subscription of $10 million for a single stock, and such a scale of contribution is beyond the reach of some institutions. Therefore, from the perspective of asset size, they are no longer entirely individual investors, and there will be more and more demands for institutionalisation.
What is more, wealth explosion happens from time to time.Many ultra-high-net-worth clients have reached the peak of their wealth accumulation after their own companies went public. For example, Tesla created $240bn in asset appreciation in the past year, more than the combined value created by the famous Berkshire Hathaway over the past 90 years. There are also many practitioners in traditional fields who have opted out when their wealth accumulation has peaked and their wealth needs to be managed more systematically.
There are also changes in investment strategies, with more and more clients moving from passive to active investing. Many clients tended to be passive investors in the past wealth management model, but now more and more ultra-high-net-worth clients are starting to do active investment, especially when the second generation of these clients has the ability to independently manage the family assets, they will actively think about: how many assets do I want to allocate to securities this year, how much do I want to allocate to foreign exchange... ...This turns private banks into execution platforms rather than wealth management organisations that are relied upon.Therefore, after the improvement of the family office management system in Singapore in 2019, in front of such a huge opportunity, we naturally made a shift, the earliest to do single family office services, including how to set up a family office, as well as accounting and financial compliance; and later, due to the increasing number of clients and the broader scope of services, we expanded our more complete Later, as the number of clients grew and the scope of services became wider, we expanded our team to include a more complete team and established a joint family office.
Challenges of transforming the Joint Family Office
There are a number of differences in the philosophy and operating model of a joint family office compared to other approaches to wealth management.
The first is a change in philosophy and values.The advantages of switching from a private bank to a family office are obvious, such as the management philosophy, experience in client relationship maintenance, and client resources that a private bank brings.
However, the transition also brings challenges in terms of values.Because in the traditional private banking model, the client's demand is relatively single, mainly investment. However, the core demands of a family office are more diversified, not only investment, but also how to use the family office to expand the business territory, realise family demands and so on. Overall, a true joint family office needs to have several concepts.
First, the interests of the client are paramount. How to bind with the interests of customers, especially long-term binding together is the core value.
Second, buyer thinking. Only by shifting from a seller model to a buyer mindset can we better help our clients to do long-term planning.
Third, service is the core. It is important to take into account the business and family needs of clients, and not to aim at earning clients' commission. I think the "reward" of a joint family office should be to help clients build a complete family office operation system and investment system, and then get the value generated. Nowadays, many family clients do not know how to build a family office, how to operate a family office and how to manage a family office. At this point, the role of the joint family office is to help them build up the system of a single family office.
In building the system, we also need more skill sets. I think the most basic skills are operational skills and the ability to recognise investments.
There are a number of basic operational capabilities. For example, fund management skills, financial and bookkeeping skills, and relevant tax knowledge are all indispensable; at the same time, a family office is also a financial structure in itself, so practitioners also need to be aware of government policies, regulators' regulations, and relevant legal tools; and they also need to be familiar with inheritance-related structures.
There are two parts to investment discernment. One is the ability to control risk. Many private equity funds are looking for extreme returns, but this is usually not the philosophy that family offices follow when investing. I believe that family offices are more similar to the model of a mother fund in terms of investment, and they do not need to conduct very in-depth investment research on each asset class like asset management organisations do, nor do they need to thoroughly investigate the underlying details contained underneath a specific asset, but it is very important to have a good grasp of the use of financial instruments, such as options, derivatives, or the use of structured products.
The second is the holder's cognitive ability to invest.For example, let's say a client wants the home office to generate a return of at least 20 per cent per annum, but if he is asked how much he would like to invest in equities in terms of allocation to specific asset classes? The client, however, prefers not to invest in equities, believing them to be a risky investment. This could be a lack of knowledge about the asset class.
There is also a direction towards the ability to provide personalised solutions.Some clients want to use the home office to address some of their family's aspirations, such as facilitating corporate governance, second-generation grooming, segregation of couple's assets, external communication, and so on. For example, a previous client, after setting up a family office, wanted to set up a charitable foundation and use it as a window for the family's external communication. We also have clients who, after setting up a family office, want to use the family office team to manage the expansion of new business segments and so on.
Image Source：Unsplash
Advice for Asian family clients
We have sorted out five types of family offices in Asia, including single family offices set up by HNWIs themselves, joint family offices set up by professionals, family offices launched by banks, family offices of third-party wealth management organisations, and other types of family offices such as those of insurance companies and immigration firms. Some of these family offices are service-focused, some are corporate management-focused, and many more are investment and asset management-focused. Comparatively speaking, the family office ecosystem in Asia is still at a relatively early and barbaric stage, with no unified standards and systems yet. Therefore, given the current state of the industry, I would suggest that family clients pay attention to a few points when choosing a joint family office:
Firstly, it is important to look at the functionality of the family office and make a choice with an eye on the family's own aspirations. When I worked in private banking, I talked to many clients about the establishment of a family office, but ultimately did not get off the ground, and one of the most important reasons is functionality. Many clients would consider: why do I need to build a family office, my family situation is not that complicated, and I don't have that much asset distribution.Therefore, it is important to assess the function of the family office with the family's needs in mind. Some joint family offices specialise in the governance of family enterprises, some joint family offices specialise in solving family problems, and some joint family offices specialise in service and investment advice. Of course, there are also some comprehensive family offices that may be involved in both wealth management and asset management of the family, as well as the governance of family enterprises, and the integrated management of charitable and public welfare in multiple areas, making it difficult to make a choice. However, if we talk about integrated management without functionality, it is just a talk on paper.
Second, understand the management level of the home office, including the values and concepts of the entire management. Both sides must match in the direction of values. From the practical level, a family office from 0 to 1 at least need more than three years, not to mention the joint family office and family customers should be a long-term binding relationship.
Third, look at the experience of the family office.In fact, this point is relatively unfair, but every industry is not fully mature, will follow the Matthew effect, resources will be concentrated to the head of the organisation, and for the family office of this kind of organisation, experience is more important, the lack of hands-on experience of the family office is very difficult to do a good job of service. For example, recently many clients are considering optimising their financial and tax affairs for CRS, and if they find a service provider with no hands-on experience, they may lose out.
Overall, I think that family offices in Asia are really still at a relatively early stage, but there must be very great potential in the future. With the development of time, the whole family office ecosystem will become more and more mature, and after the big wave, joint family offices will definitely develop in a better and more professional direction.
