While there is undoubted potential for the multi-family office (MFO) formula in Asia, it’s not all plain sailing. The sector faces a challenge as it wrestles with issues such as rising cost and a shortage of suitable staff.
But perhaps a more pressing problem is the fact family offices have been struggling to offer impressive returns.
UBS and Campden Wealth Research’s Global Family Office Report 2016, released in November, estimated Asia-Pacific family office portfolios had returned an average 3.9% year-to-date. That’s after a flat 2015 when portfolio values were unchanged.
Industry insiders say another big problem MFOs face is the lack of visibility on the entire portfolios of their clients.
Wealthy Asian individuals tend to prefer distributing their wealth across multiple wealth organisations, be they banks or MFOs. As a result, the multi-family office typically manages just a portion of the family’s assets, which makes risk management all the more difficult, according to Pathik Gupta, head of wealth management for Asia Pacific, at Scorpio Partnership.
He took families with around $500 million to $1 billion in investable assets as an example. “Ideally, an MFO should be managing $300 million to $500 million [of these assets]…to be able to create a highly specific value proposition that fulfils the family’s objectives. Yet many of them—including some of the bigger names—have clients that bring in $150 million to $200 million. That gives an MFO just 20% to 30% visibility of a family’s entire portfolio.”
A lack of visibility on the entire portfolio means the wealth adviser isn’t able to manage the portfolio risk in a holistic manner.
In turn, that leads to some MFOs relying on the risk management frameworks of private banks, which remain the typical custodians of wealth assets even when their investment services aren’t being used.
However, this isn’t necessarily a good solution. “Even the private bank might not have full visibility on their clients’ portfolios,” noted Gupta.
A combination of higher costs and relatively low returns could well pave the way for consolidation in this segment over the next few years.
“Consolidation will be one way for entities to deal with regulatory challenges. One of the easier ways to support increasing compliance functions is to merge or partner with another firm to share those resources,” said Jessica Cutrera, founding partner of The Capital Company (TCC), an IAM, and a committee member of the Association of Independent Asset Managers Hong Kong.
Reports are already trickling in of cash-strapped independent asset managers (IAMs) looking for buyers. AsianInvestor in late July noted several EAMs (external asset managers) were said to be seeking buyers. Private banks are seen as the most likely acquirers, but that raises concerns about what it will mean for EAM clients.
So who are the most vulnerable? Nadav Lehavy, managing director at Sandaire, an international, family-owned MFO with an office in Singapore, argues the first victims will likely be entities that act simply as gatekeepers to multiple banking relationships.
Claudia Zeisberger, senior affiliate professor of decision sciences and entrepreneurship and family enterprise at INSEAD, who is sceptical about the mission of MFOs, argues family offices which take on too many families might struggle to do justice to their individual and often very “personal” mandates.
“When there are too many masters to please, you typically converge to the lowest common denominator,” she said.
One way family offices might be able to serve multiple masters is by embracing innovation. For instance, family offices could offer clients holistic investment advice if they could use digital solutions to consolidate portfolios and statements.
However, this won’t be easy or cheap. “This requires intensive investment in technology, which smaller outfits may find challenging to do,” said Jason Lai, chief executive officer of Thirdrock Group, an IAM which began as a multi-family office (MFO) in Singapore in 2010. He added: “MFOs/SFOs need to have sufficient scale and a certain level of AUM”.
Nevertheless, he believes it is essential to survival. “Existing wealth managers who are unable to maintain investments in digitalisation may, at best, lose profitability and market share, and at worst face extinction or be swallowed up by larger or more digitally mature players.”
Lai’s emphasis on the importance of technology is bolstered by a demographic shift in the region. Over the next 10 years 59% of Asia Pacific family offices expect a generational transition; this rises to 75% over 15 years, according to the UBS and Campden report.
“The rich are getting younger and in order to work with decision-makers, it’s important to understand that their profile is different from the patriarch-driven style of functioning,” said Shirley Crystal Chua, founder and CEO of Golden Equator Wealth, a Singapore-based MFO.
Thirdrock’s Lai’s believes the wealth management workforce of the future will most likely include digital talent including engineers and computer scientists, as lines between fintech and investment firms begins to blur.
“Global asset managers might partner with independent wealth managers to expand their distribution capabilities, while IAMs might internalise product development and partner with leading robo-advisers to enhance their business models,” he predicted.
Urs Brutsch, managing partner and founder of HP Wealth Management, an IAM that also offers MFO services, says successful MFOs of the future will be valued for their ability to access illiquid investment areas.
“Clients will need to be convinced of your special capabilities, among which access to private investments will be very important. Clients are done with private equity funds unless they are granted co-investment rights and are increasingly eyeing direct investments in companies, where they know exactly where their money is going.”
Size, tech savvy and illiquid investment know-how; tomorrow’s Asia family offices are set to look very different from those operating today.
This is the second of a two-part article adapted from a feature in the latest print edition of AsianInvestor.