Business

Private banks fail to crack the family office world

Less than three in ten family offices access services offered by private banks, according to a survey by US-based custodian BNY Mellon Wealth Management.

BNY says: “Private banking has yet to mark a breakthrough in terms of widespread adoption among the global family office community.”

Few would disagree. One remuneration consultant said the number of family offices retaining private banks for a full suite of services could be as low as one in ten.

Family offices often find that private banks are behind the curve in terms of finding venture capital opportunities, with VC managers now established as fund providers. 

“They tend to use them to gain access to loans and investment banking,” he said. Large family offices expect to access investment banking services direct and often co-invest with their peers. Barclays private bank recently closed its family office division because it failed to gain traction in the sector. 

In 2020, a third of private bank booking centres were losing money, according to McKinsey & Co. Last year it reported an improvement of 2%, but private banks and advisers continue to be forced into cost savings and mergers. 

Core research has become centralised around model portfolios, diluting the value of advice and leading to an over-cautious approach, for fear of losing more business.

Around 68% of BNY respondents who do not use a private bank say they are highly unlikely to change their stance. A further 25% of non-users are ambivalent on the idea. No more than 7% of non-clients are likely to start retaining them. 

According to the survey, those family offices that do use private banks tend to use them to access capital markets, cash management and credit. Nearly 80% of them intend to stay loyal, although 17% say they are only “somewhat likely” to stay on and 3% are preparing to stop doing so. 

Families are particularly reluctant to pay fees to private banks to manage their money. One of the key reasons for starting a family office has been to achieve a better, more Family offices diversified, return, outsourcing where needed.

Family offices often find that private banks are behind the curve in terms of finding venture capital opportunities, with VC managers now established as fund providers. 

According to one intermediary: “I would say a third of wealth advisers have left the industry in recent years. I tend to contact families directly.”

Private banks also tend to take a conservative approach to advising clients. For example, they have been slow to embrace cryptocurrencies.

In May 2020 Goldman Sachs’ wealth team said bitcoin was not a suitable investment for its wealthy clients. In 2021, UBS chief executive Ralph Hamers called bitcoin a doubtful asset and Jamie Dimon, chief executive of JP Morgan Chase, called it “worthless”.

Families in the BNY survey concede that crypto has offered a volatile ride. But overall crypto performance has been highly satisfactory in recent years. 

Goldman Sachs has warmed to it. JP Morgan and UBS have found ways to get involved. But private banks were on the back foot for a long time.

The BNY Mellon survey found that 77% of family offices now have some involvement in crypto. Two-thirds of active investors plan to increase their holdings within two years. Nearly 70% see crypto as an important investment trend and 45% cite interest in the sector from Next Gen family leaders.

According to the BNY survey, 60% of family offices concede it is tough to hire non-family executives. But they are determined to plough on. Approaching 45% of family offices plan to hire new executives and 70% express a willingness to pay above the market rate to hire the right people.

Rather than using traditional private bank infrastructure, or Excel sheets, family offices are increasingly using tech-driven data analysis through the likes of Addepar, Altoo and Landytech. BNY says family offices can show interest in private banks, provided they offer access to up-to-date technology as well as competitive loan rates. 

Eton Solutions has gone a step further by developing cloud-based AI systems. It has identified 270 areas, such as payments, custody and tax, where priorities can be flagged up and put into action. Over time, it wants to develop systems where AI can help family offices make decisions by suggesting options, based on data, as opposed to the subjective decision-making for which private banks are renowned.

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