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March 1, 2007

It’s a Battlefield

By Spear's

William Cash reports on the increasing rivalry between private banks and family offices over UHNW clients

In Mayfair’s high-roller casino land, the casino bosses call their best (i.e richest) customers ‘whales’. In Mayfair’s equally discreet, marble-floored private banks and family offices, super-wealthy clients are called ultra-high net-worths (UHNWs) which is a small yet significant step up in the client status-sphere from ‘Key Clients’ (anybody with around £2m and above on deposit).

Were Nancy Mitford around today she would most likely be writing not about the distinctions between ‘U’ and ‘Non-U’ but between the UHNWs and their poorer cousins, the mere HNWs.

And nowhere are these coded distinctions more apparent today than in the battle that is currently being waged between private banks and the new breed of multi-family office (MFO) for providing ‘family office’ services to UHNW private clients.

Just as every Rich Lister now wants to say that they have their money with a boutique family investment office like Fleming Family & Partners (FF&P) – the pioneer of this new breed – so every private bank is re-inventing its Key Client department as a family-office service every bit as superior and bespoke as those offered by the MFOs.

One thing is certain. MFOs and FOs today are no longer about walking the family dog – as used to be the case with old-fashioned family offices (often based in Geneva or Zurich) that managed all the financial affairs of ultra-rich families, from investing assets to paying the school fees or finding a drug addiction clinic in Arizona for a black sheep family member.

The seriously rich today are increasingly looking for more than just the opportunity to multi-bank with several private banks – say, an account with UBS in Zurich, Coutts in London and JP Morgan in New York.

Whether it is vanity, snobbery or just dissatisfaction with the number of products and high personnel turnover at the big private banks, many wealthy types, it seems, now want to be able to talk about having their own ‘private office’.

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At dinner parties amongst this set (and, yes, they love to compare notes in between decanters of Petrus) you will hear guests competitively name dropping whether they are ‘with’ FF&P, Unigestion, Millbank, Stenham, SandAire or the UBS Family Office department in Curzon Street – almost as if talking about which club they belong to.

The rise of the multi-family office – and numbers of the breed in London are growing like new hedge fund start-ups – raises a number of important questions about what truly constitutes a family office today; and whether private bank FOs can legitimately get away with describing themselves as such.

Such is the feverish competition to be included on the beauty parade short-lists drawn up by accountants and lawyers of newly liquid UHNWs that firms are doing whatever they can to differentiate themselves from one another.

Lord North Street, the exclusive UHNW asset management operation off St James’s Street for families with over £20m run by William Drake (formerly with Granville Davies) and Adam Wethered (formerly with JP Morgan) don’t even like to use the term ‘Family Office’; they prefer the term ‘Private Investment Office’.

Coutts don’t have a Family Office department; they do, however, have an entire division devoted to UHNWs called The Private Office, headed by Duncan MacIntyre, while their Family Business division (services provided to the likes of Clarks shoes) is headed by Mark Evans.

JP Morgan Private Bank, on the other hand, do have a dedicated Family Office practice in London, which is headed by Richard Madeley and Matthew Haimes; UBS has a Family Office team at their Curzon Street office – for family offices which act for ultra-affluent clients – run by Giles Nicholas, who is also in charge of Key Clients in the UK.
HSBC Private Banking calls their service ‘Family Office Advisory’, with divisions in Switzerland, New York and Hong Kong. Andrew Hope-Morley heads the Swiss outpost, which has been around for five years.

Hope-Morley’s team, based out of Geneva, assists clients in areas such as philanthropy and tax advice as well as wealth management via a consolidation program called ‘WealthVision’: a proprietary software that consolidates, aggregates and analyses a client’s assets (both portfolio investments and fixed investments, such as family business and real estate).

The UHNW today is spoilt for choice. Family offices to come in many different styles, from the ex-Oxbridge, college-bursar type with a Sloaney secretary and an accountant who might be running the money for an aristo family that owns a small chunk of London, to operations with Russian- and Greek-speaking fund managers that are run no differently from a slick Mayfair boutique investment bank.

A good example of the less stuffy style of MFOs today is Whitley Asset Management set up by writer turned financial adviser Edward Whitley, (scion of the Whitley brewery family and ghostwriter of Losing My Virginity, the official Richard Branson biography). According to their website: ‘Whitley Asset Management acts as independent financial advisor to a small number of families.

‘Our clients are typically individuals and their families whose companies were built up over one or more generations, and then partially or wholly sold by the older generation with a view to diversifying for the long-term benefit of the next generations’.

Nothing out of the usual here, you might think. Yet a client or would-be investor on a beauty parade might be mildly surprised if they included a visit to Whitley’s offices. Whereas most MFOs boast swanky Mayfair suites in Georgian terraces, Whitley Asset Management is run from a bohemian-looking Notting Hill house on Queensdale Road, W11, with (so I am told) Whitley himself often opening the door in civilian clothes (i.e., no dark suit and tie).

When I called up for an interview he politely said that he preferred to keep his outfit ‘below the radar’. There are many UHNW clients who would probably be quietly relieved to find that they are not paying exorbitant fees in order to pay for flash Mayfair office rent. Whitley is genuinely low profile and hands on in terms of dealing with clients personally which, again, is what many clients like.

Sebastian Dovey, managing partner with the Scorpio Partnership, a leading research consultant to the family office sector, says that there is increasing evidence that UHNW clients are preferring to choose a multi-family office as opposed to having all their money looked after by a single private bank (or banks). ‘It’s not a bad thing,’ he says.

‘What clients have to be careful of is whether they are buying into something which is uniquely family-office orientated or are they just buying into a package. It’s not apparent sometimes that there is a difference going to them versus going to a private bank’.

Does he think that Family Offices within banks can properly be called Family Offices? ‘The inherent weakness of a private-bank family office is that the senior people who run them are still employees of a much larger organisation. That’s the attraction which private clients have to working within a family office. They are much closer to the decision-maker.’

So there is an inherent conflict of interest with banks selling their own banking products to clients as opposed to selecting the best independent products through ‘open architecture’? ‘Well, it is a potential conflict,’ admits Dovey. ‘But a lot of the time clients see the repositioning of a private bank family office with a line like: “We act as your internal arbitrator and ambassador.

‘We will go into the bank where we are recognised as representing the largest private clients for the bank and therefore we have kudos.” And that’s how the banks sell clients on the family-office front.’

What is certainly true is that the MFO revolution has meant that banks are no longer looking for total control of all client assets, which was how it was eight or nine years ago when the banks first started setting up these family offices.

The big private banks beg to differ. They argue that the scale of their assets and the range of their services and products give their top clients a level of access and level of service that is unmatchable. When I asked Giles Nicholas his view on the rise of the independent MFO in London, targeting clients with £50 million plus, he replied: ‘Do we feel threatened? Yes and no.

‘Anybody targeting the ultra-high-net-worth space has to represent some sort of competition, but we also see them as partners and clients. We always seek to become the trusted relationship advisor of any client, family office or individual.’

Nicholas cited UBS’ ‘vast buying power’ as a principal advantage, meaning that the bank can generally get better access to fund managers and deals. ‘We have access to investments and products across the spectrum and we can do a lot in areas we would never expect a multi-family office organisation to compete – currency, banking, lending, the global offering and the multiple booking centres and so on.’

What is interesting about UBS is how their family-office approach today seems to be more aligned with working closely together with single or multi-family offices rather than simply trying to compete with them head on. Does this co-operation ever result in a power struggle between you and the MFOs for asset allocation?

‘Well, it can happen but there is always an incentive for cooperation in the handling of an underlying client relationship. If a family office turns to us and says, ‘Look, we want you to do X & Y for this particular client and not try to take the relationship over, we would and could perfectly well respect that’.

Perhaps the trickiest area is the subject of in-house product pushing. Some of the smaller but highly respected boutique multi-family offices say that the clear advantage they have over the banks is that they don’t offer products (or very few) and that as a result they can simply choose the best products for their clients without any conflict of interest.

Nicholas rebuts any charge that UHNW clients at UBS are pushed UBS products, saying UBS have a ‘completely open architecture’ approach. ‘If you look at our hedge-fund platform of our single managers, a very small percentage of them will be UBS, the rest are all third-party. If you look at our equity funds offerings, a very small percentage are UBS products and so forth.

‘So it is genuine and we like it that way too. It shows exactly what the client likes to see, which is that we are just as harsh to our own products as we are to a third-party manager. And if they don’t perform, then they don’t merit a place in a client portfolio’.

JP Morgan have moved in the same direction as UBS, recognising that co-operation can be just as effective as competition. For over 150 years, the bank has served as a financial adviser to many of the wealthiest families in the world and is certainly no stranger to the vanities and needs of the super-rich and their family offices.

‘We aim to understand the individual circumstances of each family and its wealth and determine the right approach,’ says Olivier de Givenchy, UK head of JP Morgan Private Bank.

For some families, particularly the more sophisticated or better resourced, the JP Morgan relationship is more akin to a brokerage service whereby the bank acts as a conduit for the best product ideas available, including the bank’s own investment platform (JP Morgan Asset Management).

For other family offices, the bank may provide a more comprehensive service incorporating portfolio construction and risk-management advice as well as investment advisory services. ‘The goal is to be accepted by a family office as their trusted banking partner, bringing resource and guidance across a range of needs, and to sustain our reputation for providing truly objective, first-class investment advice,’ he explains.

So much for the big banks. At the other end of the spectrum is going with a boutique family office. In the UK, at least, anybody drawing up a shortlist of firms would have to place Fleming Family & Partners near the top.

Arguably the UK’s most successful multi-family office, with offices in the Bishop of Ely’s former palace in Mayfair’s Berkeley Street, Fleming Family & Partners invest on behalf of over 40 ultra-high-net-worth families who invest more than £3.8 billion between them.

If you are looking for a model of what a modern MFO can be today with all the elements in place – independence, access to private equity deals, superb personal service and client interests very much aligned with the founding family – then FF&P is probably as close as one can get to understanding why the big banks are worried about losing UHNW clients to MFOs.

You can tell that FF&P really is very much a ‘family’ office from the sparkling, marble-floored reception lobby, where glossy brochures for Rory Fleming’s exotic fishing and hunting trip company called Shackleton are piled up on the tables for HNW clients to take away.

The firm’s advisory board is made up of a Who’s Who of City figures with deep global connections, including Fleming family member Roddie Fleming, Lord Renwick, and Sir John Craven. The board’s access to exciting deals across the globe means that clients are never lacking investment opportunities – whatever their appetite level for risk. Richard Fitzalan Howard is in charge of private-client asset management.

Other key figures include Group CEO Gavin Rochussen, Simon Peck (ex-Deutsche Bank), Neil Honebon (London CIO), Bob Michaelson (Group Investment Director) and Jonathon Gage, ex-army and ex-UBS.

The one question that is frequently asked of FF&P is how can it both keep expanding – the total number of families with the firm is now over 40 – and maintain the high level of service and performance upon which the firm’s reputation has been so brilliantly forged, in under seven years.

I asked Fitzalan Howard if there was a natural cut-off point in terms of the number of clients that can be properly managed, or does the original FF&P model need changing to make it closer to a conventional bespoke private bank? ‘The way we look at it is how fast can you grow in a particular year. So there are times when you can put more money to work in certain strategies and there are times when you can’t.

‘I think that we can grow and I have always said that I think we can grow this business at roughly 20 per cent a year, excluding market movement and investment return, very comfortably, but you couldn’t double it every year because certainly in some of the private-equity situations and hedge-fund areas, some of the best managers are closed to new investors.’

Apart from stellar performance, one thing that definitely excites FF&P clients (who are becoming increasingly international) is the opportunity for clients to participate in some of the exciting entrepreneurial investment-banking-type deals that the firm offers to families – such as the now legendary Highland Gold deal, led by Roddie Fleming, which involved buying a Russian goldmine from Roman Abramovich and brought massive returns for investors.

‘One thing which we are quite keen to do is ensure every client has access to all the asset classes,’ adds CEO Gavin Rochussen.

Indeed, this is where a firm like FF&P really excels – whereas at a private bank within Citigroup Private Bank or Goldman Sachs, only the very wealthiest (typically clients with $100 million plus) will be offered the chance to participate in private-equity-style deals, at FF&P, the whole process is rigorously democratic and fair.

Says Fitzalan Howard: ‘Whatever the size of the client – and some of the trust portfolios are really pretty small because of grandchildren and so on – we wanted to give every portfolio access to the same opportunities, irrespective of size and therefore we put some very complex structures in place to enable what is essentially illiquid, which normally would only be available to someone of a certain size, to be broken down into bite-size chunks across really quite small portfolios. So you are giving the benefits of scale to some people who wouldn’t normally get it and that applies particularly to private equity and hedge funds.

Another smaller MFO new player, with a fast growing reputation, is AlphaOne Partners, run by the energised former Goldman Sachs wealth manager Nicholas Sarkis, an urbane Frenchman who manages assets of about $2 billion for around 25 wealthy international families.

His company does not have a single founding family heavily invested in the fund, which he believes is an advantage. ‘The business is owned by the partners,’ he says. ‘What I have learnt is that families do not want their assets to be managed by firms whose capital is in the hands of other families.’ First, he says, because they are worried that they will not be treated equally over access to investments.

Second, the best management firms are owned by the people who work in the firm, not by passive shareholders. If you start paying people who are just sitting on their hands having a passive interest in the firm, then you are taking that money away from the cash you could be re-investing in terms of performance.

‘Investing is something where you need to take risks, which is very similar to owning capital in the business,’ he says. ‘If you don’t own capital, chances are that they are not the right platform.’

Sarkis spends much of his time interviewing fund managers, and scouting for the best emerging hedgefund talent. His hands-on approach means that he is out-and-about in Mayfair, Zurich and Geneva with his ear to the ground. He wants to be the first to know on Hedge Row when a fund manager is getting divorced or taking prescription pills for depression.

‘Not returning our call, or not disclosing information are red flags,’ he says. ‘I have seen probably 150 managers last year. We do very sophisticated reporting. We look at risk adjustment across asset classes. We drill deep to find the correlation between managers, so now we are up to an asset policy that is so big that we are going to have management fees that are getting close to zero.

‘What we are trying to do is bring to private banking the best from hedge funds and private equity, which are performance-related fees, co-investments and best practices. This is the multi family office model.’

With so much competition and choice, some firms have realised that they are best suited to positioning themselves as niche players, specialising in looking after a very specific type of international UHNW client. An example of a highly successful firm with this approach is Stonehage, headed by CEO Giuseppe Ciucci, which is now in its 32nd year and has $24 billion under administration.

The company was started in the late 1970s to look after wealthy families of (Jewish) South African origin and has now diversified into looking after UHNW international families all over the world. ‘A classic example would be an international family in London that is resident but not domiciled,’ Ciucci says.

‘There is a huge problem with many of the existing firms that handle such families, mostly because they don’t understand how complex family wealth can be, especially after a few generations. Families and their assets can be spread between London, Australia and America. We would advise them on how to invest their money, and manage the reporting so that it is seamless.’

He says that he will often take on a new client who has a family fortune of between $100 million and $150 million only to find that it is ‘completely unstructured’, the reporting and the investment style is historical, fragmented and erratic. ‘We consolidate it all and simplify it. Stonehage Investment Partners, a division of ours that acts independently of the trustees in Jersey and Switzerland, then advises as to what should be done. We then find the best managers and outsource to them.’

One of the firms that Stonehage knows well is Stanhope Capital, a multi-family office that was founded a few years ago by Daniel Pinto and Julien Sevaux when they combined the assets of five founding families. The firm now manages assets for over 30 families with assets of more than $2 billion, and has a partnership with Bessemer Trust, one of the US’s largest family offices, owned by the Phipps family.

Stanhope came into being as a result of Pinto and Sevaux’s respective experiences. Pinto had advised some very wealthy families at Warburgs and found that these families were poorly served by the traditional private banks. Sevaux had done the rounds of wealth managers to find a home for his own family fortune – he is a Worms family heir.

‘I realised that putting your fate into the hands of banks does not make sense, because what banks are good at is manufacturing certain products and then selling those products, and that is what they are focused on. They are not focused on advising people from a firm point of independence and although they have fantastically able people when you are a private client, you don’t get the benefit of that. You have one private banker and that is it.’

Because of their unique experience of dealing with private banks (Julien for his own family’s wealth after Worms was gradually broken up, starting in 1997, and Daniel for his clients), the two partners were ideally placed to see the advantages of the MFO model over the traditional private banking model.

‘What my family and Stanhope’s five original families did is what most families do, which is pick three banks,’ Julien says. ‘After a while, I realised that we were in a precarious situation because we didn’t have central control over asset allocation and risk, which is the most important thing.

‘And when you fragment your assets between three banks, you realise that the banks are generally all doing the same thing. You are going to them not for specific domains of expertise that they have but for a brand name, because of their balance sheet, more kind of emotional and intangible things.

‘But given the fragmentation of investment talent in today’s world, you need to have someone centrally doing your asset allocation, and with any asset class going to find the best managers. Some of those managers are still within banks, but many of them, if not most of them, are now in independent boutiques.

‘Which is why Daniel and I set up Stanhope – to independently source the best managers, like Richard Oldfield of Oldfield Partners’.

Pinto adds that in a global economy the drawback for UHNW families sticking with the single-family-office model is that they are generally very focused on one asset class and their domestic market: ‘We wanted to create the best of both worlds, including depth of expertise across all global asset classes and the transparency and independence which you particularly find in single family offices.’

Another firm operating from a South African historical background is Stenham Advisors, headed by the talented and affable Harry Wulfsohn whose firm won a prestigious award at this year’s PAM awards. Stenham was originally a family office for extended family members who wanted to make sure their assets were preserved outside of South Africa so that if they needed to leave in a hurry they could.

The firm has been looking after family members’ wealth for over a century. Although based out of a Georgian building near Holborn – where the boardroom is decorated with African safari memorabilia, family photos and geneological trees – Stenham also has offices in Switzerland, Luxembourg, the Channel Islands, the Netherlands, Israel and South Africa.

Following a management buy-out of family members, not active in the business, in 1996, the firm is now run as an MFO for wealthy families who want a ‘conservative’ approach to portfolio management – clients range from European and South African families to South American – although the firm’s domestic and international property funds have shown spectacular profits in the last few years.

Hedge funds and gold are two other areas where the firm boasts expertise, especially when it comes to managing risk. The lessons learnt from the experience of Black Monday in 1987 still temper his firm’s investment philosophy and if you seek low-risk, Stenham are acknowledged as masters in this strategy.

‘Our investment philosophy is all about de-risking client portfolios,’ says Wulfsohn. ‘You could say that we are in the business of selling risk management.’ And today, with many leading City figures predicting that another Black Monday could just be around the corner, as inflation and interest rates rise, and debt reaches endemic proportions, there might be no better investment than taking a meeting with Mr Caution himself, Harry Wulfsohn.

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