Private banks are important for wealthy Asians, but they should not be the “centrepiece” when it comes to looking after their money, argued Karim Mrani-Alaoui, chief investment officer at a Singapore-based single-family office.
Speaking at AsianInvestor’s second annual Family Office Forum in Singapore recently, he said the centerpiece should be a competent, independent entity, paid exclusively by the family, in order to avoid conflicts of interest.
“Private banks can take on many roles, primarily that of a custodian, but also product distributor, portfolio manager, trust company, etcetera,” noted Mrani-Alaoui. “One has to be diligent in ensuring whether, for each of these services, the interests of the bank are fully aligned with the interest of their clients. Raising this point is partly answering the question.”
Asian families are starting to realise the value of having an independent party looking after their assets, to complement the role of private banks, Mrani-Alaoui told AsianInvestor on the sidelines of the conference.
It’s ultimately a governance issue, he said. “When the interests of the client are not aligned with the interest of the bank, clients have to bear two types of costs." The first is that clients may be pushed to invest in overpriced products, with hidden fees and back-end commissions.
But the bigger of the two costs stems from the natural incentive for banks to push investments that suit them, rather than the investor, said Mrani-Alaoui. This could result in a portfolio containing unwanted risks, such as complex structured products, volatile stocks, junk bonds or exotic FX exposure.
Such risks materialise in times of stress, he added. The 2008 global financial crisis and the eurozone turbulence in 2011 revealed some degree of mismanagement of assets, as risks that had built up in portfolios materialised in a “brutal” manner, he noted.
All that said, with the family office segment still nascent in Asia, many family offices in the region are not well structured, said Mrani-Alaoui, but this is changing.
In Southeast Asia, the single-family office (SFO) concept ranges from the "one-man show", where responsibility is handed to a trusted person – either a family member or a close friend – to fully established corporate entities, licensed by the regulator and employing a team of skilled professionals, he noted.
Mrani-Alaoui said he was aware of at least two major SFOs in Singapore that had moved in this direction in the past few months, but declined to name them.
Importantly, family offices need to know how to use private banks to meet their specific requirements, said Noor Quek, founder of Singapore-based NQ International, a family office advisory firm, speaking at the same forum. Advisers can help facilitate this by introducing them to the right entities so that the family office receives ‘best in-class’ solutions, she noted.
Quek said Asia’s wealthy families currently needed independent advice more than ever. “There’s a lot of confusion going on that wealthy families have to grapple with,” she noted. She pointed to issues such the generational transfer of wealth, the frequent movement of private bankers amid industry consolidation and the state of the global economy.
However, multi-family offices and external asset managers face similar compliance and regulatory issues to other wealth management businesses, but will struggle to cope if they cannot build scale, noted private bankers at AsianInvestor’s Fund Selector Forum last month.
Moreover, attracting and paying for strong talent can be an issue for smaller players, said Jimmy Ng, Singapore-based investment director at Swiss private bank Bordier & Cie.
Nevertheless, it is estimated that the family office segment will become a trillion-dollar market in the next few decades, said Henry Chong, CEO of the Fusang family office, a new set-up operating out of Hong Kong and Singapore.
The Asia family enterprise study produced by JP Morgan Private Bank in April last year found that 88% of Asian families are unprepared for the coming generational transfer of wealth.