'Family offices' set up to attract Asia's rich

PUBLISHED : Sunday, 24 September, 2006, 12:00am
UPDATED : Sunday, 24 September, 2006, 12:00am

THE WEALTH OF Asia's high net worth individuals will soar to a combined US$10.6 trillion and outrank the combined riches of high net worth Europeans in the next five years - a prospect that has bankers to the wealthy in the region scrambling to re-engineer their service platforms.

The makeovers, aimed at retaining mandates as the rich grow richer and their interlocking family demands grow more complex, are seeing the launch in Hong Kong of 'family offices'.

HSBC family office services head Agnes Au-Yeung said the concept was just taking off in Hong Kong following on the heels of the United States and Europe.

'Families are now looking for professional and effective asset management in an integrated way. They are also looking for enhanced risk management because, in some cases, we are talking about nest-egg funds,' Ms Au-Yeung said.

'And where they set up trusts or holding companies they are looking for better oversight of these structures. So we are talking about customisation, integrated management, control and risk management.'

The growing wealth of Hong Kong's family dynasties is now being passed to the third generation.

'You must have heard the Chinese saying that wealth does not survive three generations. So, with the help of advisers, families are looking to prove this old saying is nothing but a fallacy,' Ms Au-Yeung said.

Kaven Leung, Citigroup Private Bank managing director and region head for north Asia, said competition for family banking mandates was intense and set to increase.

'The Capgemini report predicted that in the next five years the Middle East and Asia-Pacific will be among the top three fastest-growing regions in high net worth wealth,' he said.

'By 2010, they are expected to account for US$1.8 trillion and US$10.6 trillion respectively, a sum larger than the 2010 projection for Europe.'

Those growth prospects were luring many private banks to the region and, as a result, market share was fragmented.

'Even for the largest players such as Citigroup Private Bank, the market share ranges between 3 per cent and 5 per cent,' Mr Leung said.

Bankers said serving the banking and investment needs of ultra high net worth individuals was a growing challenge in this fragmented environment in which clients could have up to 20 investment portfolios.

The plain vanilla investment advice that the founding fathers of Hong Kong family wealth were content with was no longer a viable service proposition, they said.

On the menu of services today must be advice and execution of tailored structured products, cross-border regulatory compliance and tax reporting, succession planning, and intermediation in family governance issues. Clients now also required advice on 'softer' wealth management issues, Mr Leung said.

Citigroup had set up a family advisory practice 'where experts who specialise in the softer dimensions of wealth management help our clients through some of these complex issues, which can be just as crucial as identifying the best investment opportunities', he said.

Issues that need to be dealt with include raising children amid abundant wealth, finding meaning in wealth, the special problems of second- to third-generation succession, long-term family legacy, resolving family disputes, and issues of ageing and wealth.

UBS Wealth Management regional head of key client segment Henry Hirzel said the re-engineering of traditional private banking models followed on a long tradition of specialisation in the industry.

'Investment professionals have become increasingly specialised, often focusing on a single asset allocation strategy or asset class. Good ones are also in scarce supply and expensive,' Mr Hirzel said.

'As a result, clients are often compelled to employ a large number of specialists with different competencies.'

The alternative approach now being adopted by bankers to serve all but the largest pools of funds was to hire asset allocation strategists, and supplement their services with advice from banks and specialist investment houses for niche investment products.

'This allows the client to get the best of both worlds - allowing the in-house family office manager to focus on the investment strategy and the investment specialists to apply their expertise to manage assets in their niche areas, eventually including manager selection,' he said.

The proposition required a private banking platform with an open architecture and the infrastructure capable of administering and reporting on portfolios managed by different third-party asset managers, he said.

'For example, the UBS global custody platform is equipped with flexible and powerful reporting and risk management tools, which allow the client or family office manager to assess, at the press of a button, his entire portfolio holdings and so determine whether the manager is adhering to the investment mandate.

'The platform allows the family office manager to focus solely on investment strategy and supervision.'

The structure of a family office would typically allow investment specialists to work alongside appointed family members in managing the portfolio and, in some cases, an investment advisory board comprising family and non-family advisers would be established to advise on special strategic investments and provide administrative support for philanthropic foundations, Mr Hirzel said.

'Over the past two or three years, the focus has been on hedge funds and private equity investments,' he said. 'However, given the complexity of analysing an increasingly large number of vehicles, private equity and hedge fund manager selection is now often outsourced to specialists with in-house research capabilities.'

And as they developed this greater specialisation, hired more staff and pursued greater economies of scale, family offices would offer their services to business associates or non-related clients and transform into 'multifamily offices', he said.

Bankers said latecomers to the market in Hong Kong were faced with the greater sophistication and cost of setting up a private banking platform to serve the rich, so they faced a competitive environment.

Desmond Liu, managing director for private banking in north Asia and Greater China at Singapore-based DBS Bank, said: 'It is a game of differentiation whereby those who have been here long enough and have good delivery platforms and brand name will survive and, like ourselves, are making decent money.