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Private banks are withering…family offices don’t require their services and pinching their best staff

Private banks are withering on the vine as European family offices take back control of their own affairs.

According to McKinsey & Co, the management consultant, a third of European booking centres run by private banks are losing money. Falling revenues and high costs have become entrenched, making private banks intensely vulnerable to the Covid pandemic. 

Clients are sacking their relationship managers and the private banking model is collapsing. Which provides family offices with a perfect opportunity to hire decent people – Mark Somers

Profit margins are at a twelve-year low, making cross-subsidies between booking centres hard to justify. Low interest rates are reducing their income. Swiss banks are suffering particularly badly following their loss of tax secrecy.

McKinsey says private banks have relied on rising markets to make headway and failed to achieve efficiencies. They are set to suffer “prolonged stress.”

Some digital services have been introduced, to reduce costs and deal with the pandemic. But a lack of face time between bank and client can destroy relationships, particularly when personnel changes and returns dip.

One analyst said: “A client with a personal relationship with an adviser is unlikely to react well when he is suddenly asked to deal with a 25-year-old through a screen.” 

Analysis by behaviour scientist Daniel Kahneman once discovered that poor performance data was routinely overlooked in the wealth sector, in favour of relationships. This is no longer the case.

According to McKinsey’s survey, a quarter of clients were not contacted by their banks during lockdown. A third of clients were unhappy with the quality of response. A fifth moved their assets to another bank.

Over the years, family offices have become increasingly disinterested in private banks but the situation has reached breaking point, putting aside the provision of loans and corporate advice. 

They are starting to use third-party digital services with transactions and record-keeping previously left with a private bank relationship manager. 

Family offices have seized the opportunity to hire investment, analytical and support staff to drive returns following problems with the advisory community.

The growing popularity of direct investing and venture capital is a factor, as well as disillusion with returns. Cheap passive funds have generally tended to outperform active managers, partly due to their exposure to tech stocks.

To hire high-calibre staff, competitive bonus and long-term investment plans are being offered by family offices to lure talent, according to recruitment firm Agreus.

According to London-based recruitment consultant Tanya Lutyens of Lutyens Advisory: “This is a trend which has been underway for some time and I would definitely say it has accelerated. 

“Covid-19 is the only latest challenge for relationship managers at some private banks who need to deal with multiple client lines and reporting structures, plus cost pressures. 

“This increases the relative attraction of working for family offices, who have been seeking to upgrade their talent pool for some while. Push and pull factors are working together.”

Mark Somers of London-based Somers Partnership has spent 20 years learning to be sceptical about private bankers.

“The calibre of staff employed by private bankers is highly questionable.  I would call 80% of them lawn-mowers and 10% well-poisoners, with the remaining 10% rain-makers, who can be really good. Now private bank profits are dropping and booking centres are losing money, the lawnmowers and well poisoners have been found out. 

“Clients are sacking their relationship managers and the private banking model is collapsing. Which provides family offices with a perfect opportunity to hire decent people.”

Multi-family offices often hire from banks, as well as single-family offices. Recent moves include Martin Ash who has gone to Plurimi Wealth from Credit Suisse. Nancy Curtin has just joined Alvarium from Close Brothers.  

Philip Bickerton who has just left JP Morgan to become chief investment officer at Tony Weldon’s Denlow Private Trust, a single-family office. 

Single-family offices can take a broader approach to hiring, taking on investment bankers and asset managers, as well as private bankers. Agreus confirms that family offices tend to cast their net wide.

US family offices have led the way in professionalising the management of family offices, as they have grown and become more influential in the capital markets. 

Global executive search firm Spencer Stewart notes the growing complexity of their businesses. It cites Kathryn McCarthy, director of the Rockefeller Trust Company: “Families are looking for leaders with more of a business mentality — they need someone who can run the family office like a business because there are a lot of dollars flowing out.”

Which was precisely why the Rockefeller family turned to Greg Fleming, Morgan Stanley’s former head of asset and wealth management, in 2018 to develop its Rothschild Capital Management wealth advisory business.

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3 responses to “Private banks are withering…family offices don’t require their services and pinching their best staff

  1. This is an important observation. I find that the current crisis is calling on the multiple services, financial and non-financial, of the family office to serve the family. Their ability to deal personally with the family and develop and act upon new directions is the essence of resilience, that is one of the ways that family offices from an important resource for families.

    1. I agree completely Dennis with your point about ‘resilience’ being one of the differentiating factors for single family offices compared against other approaches – it is one of the themes highlighted by quotes from our family office clients in our recently published Family Office careers book ‘How to Work for a Billionaire’ http://www.somerspartnership.com

  2. Mark, this is indeed an important observation and a valuable one.

    Sometimes, professional advisors tend to forget that the people behind a family office are just that: “people”, with feelings and emotions, and that they should be treated as such. They have a past and they think long-term.

    For most, money (and making more money) is not an end in itself, it is just a means to an end. Their values system, is very strong and trumps any short termism.

    This is why they are so “resilient” and successful.

    The proliferation of family offices is the ultimate proof that families in business are currently actively engaging in a major “transformation” exercise. Many are “institutionalizing” their approach to business/wealth and to decision-making, and the fact that they are inviting former bankers to join their “inner sanctum” is additional proof that they are gradually moving towards an “idea meritocracy”, a concept coined by Ray Dalio.

    The world has not been created in one day, and I predict that while these developments have indeed been a salutary step forward in the life cycle of family offices, the next decade will see the rise of a new breed of family officers and private bankers, with higher EQ and deeper understanding of social sciences.

    Walid@walidchiniara.com

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