It’s an eternal question for institutional investors: should they employ portfolio managers or outsource to external fund firms? And this is increasingly becoming a consideration for Asia's growing family office segment.
One Hong Kong-based senior executive at a European single-family office (SFO) believes FOs with $100 million or more in assets under management can and should be employing their own investment professionals.
“If you have $100 million or more in wealth, you have enough money to hire someone or a small team who can work for you full time,” said the executive, who asked not to be named.
Following the general rule of thumb on calculating spend on investment resources, he noted that 1% of a $100 million FO’s total net worth comes to $1 million, “enough to hire three very good professionals to be fully dedicated to your portfolio”.
“If you were to put that $100 million with a private bank, you wouldn’t have three guys working for you alone,” he added. “It would be one guy with, say, 10 portfolios of $100 million each. So your portfolio would get 30 times more attention if you hire your own team.”
As for private banks’ portfolio managers, added the FO executive, they are incentivised to bring in and retain client assets, but performance comes secondary. A private banker, for example, gets part of a fee for bringing in assets of around $1 billion and and the rest of the fee if the client keeps the asset for one to two years with the bank, he noted.
He argued that private banking should be a performance-driven business, rather like how funds are structured. “If you put $20 million with a private bank and they make a 10% return on it, I’m happy to give them part of that performance, but I don’t want to pay them a management fee for very limited performance.
“If private banks mismanage wealth, they should be penalised – but that’s not how it currently works, to my knowledge. Some banks are recognising that – but if they don’t, why even use them?”
However, Mark Smallwood, Asia-Pacific head of franchise development and strategic initiatives at Deutsche Asset & Wealth Management, takes a different view.
Most SFOs don’t have sufficient size to afford even a small investment team, he said. The best managers are unlikely to want to join an family office with a $100 million portfolio, argued Smallwood, and even larger FOs may struggle to bring in the best talent.
“How are you going to take on two or three really top-notch portfolio managers to work for your $500 million family office and make it really cost-effective to run? You’re much better off going to third-party managers accessible through a global custodian such as a private bank, so you can hire and fire managers based on what you want them to achieve and their performance.”
Being a manager of managers or asset allocator is a much safer bet than hiring people in-house at a family office, added Smallwood. “The moment you end up being responsible for the detailed decisions, you risk coming into conflict with the family. Then if you under-perform, it’s your fault. So the optimum is to be the CIO or asset allocator and consequently the manager of the managers.”