How to choose a family office bank

Cutting out the middle-man

Prior to the popularisation of the family office, it was standard practice for ultra-high net worth individuals and families to utilise private and investment banks for the custody of family assets and investment advice. However, the growth of the family office sector has resulted in a significant outflow of family assets from the banking space. This has forced institutions to revise their strategies and service offerings in an attempt to remain relevant to family offices. The redirection of assets is primarily driven by the in-sourcing of capabilities, such as strategic asset allocation, risk management, financial accounting and reporting within the family office structure. The growing importance of philanthropy, effective succession planning and a shift towards direct private equity deals has also highlighted the need for a more specialised approach to servicing the modern family office. Banks have heeded this call and many have now restructured and evolved themselves to become more relationship-driven, offering tailored family office services that are far more differentiated and personalised.

Banks still play an important role

Although the relationship between wealthy families and the banking sector has shifted in recent years, there is still a reliance on banks for a wide range of services.

Modern bank offerings will commonly include custody and lending, access to direct deals and IPOs, corporate fiduciary services and transactional bank accounts. However, servicing family offices requires banks to go above and beyond their normal scope which is why many are now offering bespoke bill-paying services, consolidated reporting, record keeping and facilitating asset sales and acquisitions. Generally, the services offered to a wealthy family office will be customised according to their needs and will be limited only by the capabilities of the banking partner.

Family offices are all unique in terms of their requirements, so due diligence is required on the part of the family office to ensure that their specific requirements are clearly outlined and that the right questions are asked of a potential banking provider.

Three core considerations when selecting a banking partner

The specific services that a family office needs from a banking provider will be determined largely by its internal management capacity and the complexity of its asset structure. As a primary step in the bank selection process, a bank’s core competencies should then be reviewed.

Internal management capacity

Robust family offices normally take responsibility for many operational and strategic areas including financial management, investment management, strategic planning, administrative support and advisory services. Within each of these operational areas, there are many sub-sets and it is important to detail what responsibilities and services remain in-house or need to be outsourced.

Asset structure

The complexity of a family office’s asset structure has a direct impact on the breadth and depth of banking services required. An established family office that has built a diverse portfolio of investments across different asset classes and geographies will have different service requirements for a family that has suddenly come into serious wealth.

Core competencies of banking provider

During the initial evaluation of banking providers, the tough questions need to be asked upfront to avoid issues down the line. At the very least, a bank needs to demonstrate a successful track record in servicing family offices and should have a dedicated family office team with the required skills and credentials. It is also important to understand what functions are in-house versus external. Performance checks and a review of AUM trends can also be helpful. Other core competencies to evaluate could include a bank’s risk-management processes, reputational scores relating to customer service levels and transparency, as well as a bank’s digital infrastructure and global reach.

Regulations impacting the banking space: AML and KYC

Within the financial services sector, customer screening and the prevention of illicit activity have been deemed vital to the security of businesses, customers and nations as a whole.

AML or Anti-money Laundering refers to the mandatory steps financial institutions must take to prevent criminals from depositing or transferring funds that come from illicit activity. The primary intent of AML regulations is to prevent terrorist financing and organized crime.

KYC or Know Your Customer refers to the checks that a company has to perform to confirm the identity of a customer. The intent of this regulation is to ensure that clients who potentially pose a risk to a business are either prevented from doing so, or easily identified. KYC regulation is intended to support the overarching intent of AML.

As regulation becomes more strict everyone should be prepared for any KYC & AML processes that the bank might need. This is also relevant for investments, for example when investing into funds. Being prepared for this process will ensure that eventual onboarding with a specific bank can run a lot smoother.

The bank strikes back

When it comes to investing, many family offices see banks as unnecessary intermediaries and are choosing to employ specialist advisors who identify and facilitate direct investment opportunities that are aligned with the family’s long-term agenda. However, banks are responding by investing heavily behind personalised family office services and, in some cases, offer superior expertise within the asset management space. Therefore, an open mind is required when evaluating the capabilities within the family office space versus what is available from banking partners.