Can the family investment office work in Asia?

The substance and style the Asian family investment office assumes in this region will be an important factor in how much substantial private wealth is transferred back into the general economy and society through philanthropy and investments. The family office concept is rooted in the North American and European cultural, economic and investment experiences. How are banks resolving these contradictions to make the concept work in the Asia where management and investment styles are relatively new and changing?

 The UBS/Campden Research Asia-Pacific Family Office Survey 2012 underscores the size and growth of the boom in Asia-Pacific wealth over the last 30 years. In China, the number of billionaires has gone from virtually zero 10 years ago to nearly 150 in 2011- the second highest number in the world after the US.

 The appearance of a growing need for establishing and running family offices to manage vast assets is fuelling a drive by numerous private banks and financial advisors to advance this form of investment management in Asia. But, is it suitable for Asian culture and economics and what adaptations are needed to make it work?

 Although no exact numbers exist on the amount of assets controlled by Asian families or the number of family offices, major banks have characterised them through contextual sources. Coutts estimates that over every year about $20trn of wealth has been transferred internationally with about 25% entering Asia ex-Japan. Nick Pollard, CEO of Coutts Asia, says: “In Asia, two-thirds of wealth is held by people between 31-55 years old. There is a pressing issue on how to handle wealth transfer to the next generation.”

 The UBS/Campden survey says anecdotal evidence suggests there are likely to be at least 100 with about half of them in the developed markets of Australia and Japan. However, this represents a small part of the total global number of family offices, which is estimated to be at least 2000.  The most basic issue of moving towards setting up a family office setup requires advice and trust from financial advisors. Pollard adds: “We must earn the privilege of being allowed into personal, family situations. Being relevant in this space is vital. Frankly, lawyers are good at this, bankers are not.”

 The UBS/Campden survey shows that “the number of single family offices in the region is completely in reverse proportion with the number of ultra-high net worth individuals and billionaires in Asia-Pacific.” There lies the opportunity to help these families and individuals to establish a formal investment structure around their assets.

 One of the worst dilemmas that Asian private banks have caused for themselves is their propensity to be more focused on selling financial products to all of their clients instead of providing long term advice. Pollard says: “Most Asian wealth management models are based on brokerage not banking. More than 70% of wealth planning fails because it cannot keep up with changing conditions. This includes managing wealth to transcend generations. I tell clients to start thinking now about long term structures like a family office because the situation doesn’t improve over time.”

 The UBS/Campden study shows the existence of family offices in the region stretches back more than 30 years, but most were established in the last 20 years. More than 80% of family offices in Asia-Pacific are likely to still be connected to the primary business where the money was first made. There is no typical family office style or structure. While their portfolio strategies can be characterised according to net worth, there are many areas that are unique such as family personalities, cultures, business styles, services and social attitudes. So perhaps the best way to engage clients is to inform and offer them a platform to learn about how family offices work around the world.

 The European-style family investment office model, or any hybrid versions, is an unworkable business model for wealthy Asians, according to Eduardo Leemann, CEO of Falcon Bank. Falcon is owned by the sovereign wealth fund of the emirate of Abu Dhabi. “The family office is more suitable when the current generation of wealth is several generations removed from the original founders.”

 A persistent, institutional focus on selling products to Asian rather than offering financial advice is causing clients to turn away from traditional private banking, Leemann adds. “Many private banks have become generic, acting as a sales and product platform. High net worth Asian clients are clearly telling us they don’t want to be sold a steady stream of products that don’t help them. The hybrid family office being touted by some banks is troubled by conflicts of interest that cannot be resolved within a universal bank structure.”

 Leemann adds family offices work best outside of banks, which imply a substantial infrastructure needs to be built to manage a large fund size. Most of the new family wealth in Asia faces a more immediate problem of being very “undiversified.” Most of it is tied up in a listed or unlisted company or property investments, he adds. “People in that position seek advice that brings liquidity to their main family investment.”

 Perhaps a focus on innovative financial structures, which Leemann described as, “basically private equity like transactions designed for founders and entrepreneurs” will help them achieve practical goals by giving them real flexibility in wealth planning and diversification.”

Whatever form the family investment office takes in Asia, it will probably be driven by customised, practical and innovative solutions that are needed in these changing markets.