Family Offices in Asia:

Does Asia’s Ultra Rich Families Need The Less Glitzy ­Services of a Family Office ?

William Chan
Chairman and CEO
The Stamford Management Group and Family Office Stamford Privee

Evolution of The Concept of Wealth ­Management
Since the concept of ‘High Net Worth’ (HNW) Banking took shape in Asia in the late 80s, Private banking as a concept and enterprise has taken a large and progressive evolution through various market upheavals; like in the US recession in 1990, the Gulf War, the Asian crises of the mid 90s, the Technology bubble contagion from the US, the Asian troubles of the Bird flu, SARS, emerging market upheavals, and the recent TARP, PIIGS and other unsavory market terminologies.
Every good and robust system that survives any testing has to be lauded. But like everything else in life, the ­challenge is really in assessing the ­representation of market practitioners of what that system can offer, and the commensurate expectations that such high net worth clients, as a function of that ­representation, draw from this ­system. This is what market professio­nals would call the Actual to Expected (AE) analysis. I think nowhere else in the volatility continuum described has this system and the whole “Wall Street way of life’ been tested more rigorously than during the most recent global crises in 2008 and 2009, when the world experienced the unthinkable the actual collapse of the largest financial institutions and Investment banks like Bear Stearns and Lehman Brothers and the near total failure of the entire financial world and her markets as we know it. One can surmise, and actual surveys have reported; that the greatest ­dichotomy of AE has indelibly and ­irreversibly taken placed in the estimate of clients and what the financial ­in­stitutions themselves perceive the value that they can (or still able to) offer to their clients.

The Family Office concepts never really quite jump into the wealth ­ma­nagement world in any tangible ­fashion. It has been more a natural part of that evolution where astute and ­discerning wealthy families and oligarchs decided to realize their more personal or even spiritual goals of “Prosperity with Purpose” without knowingly embracing the ‘family office’ definition and concept of the West. Many are just fragmented and disorganized approaches to charitable works and philanthropy among their community and translating their desire for doing more with their money. As such the entire premise on which the notion and awareness of Family Office as a concept is perceived and practiced ­differ in many ways from their Western counterparts and will continue to differ in the evolution of itself in the future. And certainly the Family Office will struggle to be ‘mainstream’ wealth management in Asia.


The Trouble With The System
The end result suffered in the past two years by private banks and mainstream financial institution can simply be put as a crisis of confidence. This lost of trust and faith in very broad terms is suffered in two parts:
a.    The general lost of trust and faith in the advisor/ financial institution -and how the latter is to re-establish it with hurt clients
b.    The general lost of faith or impasse with regards to the general investment climate and stability.

Optimistically, part (b) seems to be a possible self-healing process; if the recent near V shaped recovery and the general mood of prosperity in Asia is anything to go by. It is also along the same vein here that financial institutions would very naturally throw their weight in Asia post-Lehman to capture and optimize on such a possibility. However it is what has happened and is still happening in part (a) that is really troubling. This is so because the ­business of investing is a complex one. And in that, there is a strong ingrained ­inability all these years for financial ­institutions to align their interest (of making client fees and commissions  which really is the bottom line of the Bank or financial institution) to drive sales with that of the clients’, which is really to get objective and impartial ­advice on what to do with their wealth (The most classic case would be the Goldman Sach/ Paulson saga). On close inspection of this inability to align interest, many institutions have boasted a possible ‘open architecture’ approach and try to work around this with what is essentially a better fee-sharing ­approach and the relevant waiver or risk-sharing approach to legal ­obligations to clients in an effort to fit into what in my eyes is a clear cut chasm ­between what a HNWI is perceived to be delegating to their advisors and ­financial institutions and what he is ­actually getting involved in. Because the banking model is largely based on a product approach rather than a holistic planning approach, clients have little control over the willy-nilly manner in which their investments are planned out (this is more so on the left side of the chart in Fig 2 than the right side).

To be fair to the clients, the whole private banking outfit has a lot of draw and prestige, it has a lot of glitzy and sexy-appeal, and the ‘bling’ of big global names is hard to deny. However to us as a family office, what is so sexy about the arduous work involved in wealth management? Admittedly or otherwise, would the banks be surreptitiously relying more on part (b) to gloss over the poor situations of part (a) going forward in this ‘market ­reco­very’ and the perceptions (expectations) thereof? The proof is to be had in the continuous assurance of ­actual performance into the future. However what needs to be made clear is the fact that international banks and global ­financial institutions do have the size, scale, sophistication and infrastructure to be able to service large clients on those terms and are useful for the ­families with significant wealth. They do make first class service providers.

The whole chasm or space that the Family Office should be able to fill is in the missing link that an independent-interface-process on the hardware (products, structures and service providers) and the software side (in house or HNWI or families due ­diligence/research engines, risk ma­nagement, long term plan matching, ­allocation, supervision and reporting) should perform before engaging the superstructures and bulge brackets of the banks and financial institutions.

Deeply- seated within most of the problems that surfaced during 2008 and 2009 in the collapses of bad structures (Bear Sterns, Lehman, mini-bonds etc) and fraudulent products (Madoff, Stanford) have been the ­inability either to have complete disclosures and transparency on fee risks, product and market risks to clients, so that such clients can make the right ­decisions based on all available ­in­formation. However would the client be right to expect that such due ­diligence, research and disclosure ­obligations to fall squarely and only on the shoulders of their bankers or should the clients themselves be blamed for delegating (impliedly or ­directly) the task of such important ­financial forensics and education to their private banks? Will being called a sophisticated investor as a HNWI be sufficient grounds to be able to look at the implications of fine-print and the many nuances of such complex ­financial products? Those moments in time also demonstrate the fact that the glamour of the “Wall Street way-of-life“ just doesn’t cut it. The discipline of wealth management should be an act of simplicity.


Advent the independent ­advisor – Family Office
What the Independent Financial Advisor (IFA) is an answer to the tied agency model is what the Family Office model’s clarion call is to the UHNW family. Both industry practitioners and regulators alike acknowledge the power and importance of some form of ­impartiality throughout the advise-­giving (from retail to sophisticated ­investors) continuum. The very nature and complexities of investing dictate the fact that advice is never really free, and clients should be mature to the ­investment arena in full cognizance that the ‘price of risks’ will always be plucked from somewhere; either paid through the uncompromising blood and tears methodology of self education and be willing to pay for indepen­dent advise or delegating trust to another to do that task ‘for free’ (usually also the marketer of the product). This ­rationale is really to avoid the ­regret of the ‘peanut-monkey’ argument in the rule of life.

To be fair, the service of the Family Office is clearly not for everyone due to the costs burden of having that ­critical interfacing engine (Fig 2 grey segment) in-housed or outsourced to an independent body. Also a Family Office only makes sense at the juncture such significant wealth needs an ­expression of their assets into a multi faceted approach and the fact that wealth is no longer a goal in itself but that the owners are now stewards working with their co-stewards (family office) to obtain the greater good for
a)    Internal benefactors (succession planning) and

b)    External benefactors (philanthropy, foundations – society at large)

Till then, most Asian UHNW families will be outside the need for a family office. Additional benefits (and requisite qualifications of UHNW Families) may include:

1. The need for an expression of the family’s goals and mission into a long term strategic plan and to wrap all investment decisions and actions solely in those terms.
2. Need great assistance by very busy family business- focused oligarchs to move the strategic plan tactically through the periods of volatility and seismic shifts in the marketplace for the long term goal of preserving wealth and legacy into very long term time frames.
3. Optimize the various fee paying structures to the different banking relationships (that may have ­remained opaque or have been ­neglected) via constant negotiations, supervision of asset performance of this product and service providers. (Usually fees saved here would already be a basis to justify fees paid to the Family Office)
4. Unify a consolidated reporting ­platform so that decisions can be based on as much information as possible for a decision, as opposed to knee-jerk reactions due to lack of information and vision.
5. Others.

The business of a Family Office therefore is and should be as boring and as un-sexy as the work of an ­accountant (sorry there is no intention to put down the profession) and the Family Office professionals/ incumbents should not have grandiose plans of prospering outside their defined scope of work. The Family Office works for and answers to the family and no-one else. This clearly aligns the work done with the pursued objectives. The Family Office would then gladly work with the Banks and Financial ­Institutions’ best of breed (the product and service providers in Fig 2) to ­deliver results.


Ethics and Morals
Family Office owners or clients are almost always seeking a goal that is largely spiritual in nature. Here is where most clients may or may not sense ­that a highly professionalized or ­institutio­nalized outfits like Private Banks whose objectivity and obligation are first to their shareholders, to help them translate their spiritual goals long term. Also it does not make it easier when their bankers and advisors therein make ­career transitions into other banks and institutions ever so often. Permanence and stability it seems, is key to properly translate ­vision.

Permanently fixing the problem faced in the chasm seem also to be important in the whole idea of wealth preservation and philanthropy, since technically speaking no family can give or translate their goals confidently if wealth cannot be seen to be protected and preserved. Another observation is the ever increasing moral battle ­between doing good and being known for it; and the obligation to “not let the left hand know what the right hand is doing”. Having a Family Office may be the clearest solution to keep that in check as much as possible.

The Family Office solution is therefore a serious consideration for any Family that has arrived, and can be frank and do not hold the notion of “It will never happen to me” and “never-again” euphoria when it comes to the state of the cyclical market place and recognize the need to simplify.

After all isn’t simplicity the truest form of humility?•

Advising Ultra-Affluent Clients and Family Offices (Wiley Finance) 
The New Family Office: Strategies for Consulting to the Affluent