Key considerations when evaluating a banking partner
Before jumping into an analysis of your bank’s service levels, it is wise to look beyond the scope of your current requirements and view the relationship through a more strategic lens.
Anticipate changes in investment strategy
One of the top priorities for a family office is to build and preserve wealth across generations. This means that investment strategies need to be regularly reviewed in response to emerging risks and opportunities as well as significant shifts in the business, political and regulatory landscape. As an example, if there is an anticipated redirection of investment into a particular emerging industry or an intent to diversify the family office portfolio across multiple geographies, this should be taken into account when evaluating the specific expertise and capabilities of a banking partner.
Optimising the intersection between in-house and outsourced services
It is important to clarify your bank’s scope of responsibility in relation to the services provided by the family office. Equally important is clarifying what future changes may be expected in terms of this dynamic. The intersection between services provided by the family office versus the bank can shift over time due to a number of factors. A key concern for many family offices right now is the increasing cost associated with wages and IT which could trigger some families to downscale their internal management capacity and lean more on outsourced expertise. Banks are investing more heavily in the family office space, offering superior expertise, and bespoke services and raising their game in the philanthropy and private equity space. When evaluating your banking provider, consider how their expertise, services and investment opportunities compare to what other banks are offering and whether they are flexible and capable enough to accommodate new service requirements going forward.
The financial health of your banking partner
From a risk-management perspective, it makes sense to assess the financial status of your banking partner and whether there is a positive or negative trend over time. The most common way to evaluate a bank’s creditworthiness is by verifying the bank’s capital adequacy by referencing the Common Equity Tier1 ratio. The ratio is shown on the balance sheet and is often published on the bank’s website. The higher the value, the greater the bank’s capital strength. It should never dip below 8%.
A robust analysis of a bank’s capital adequacy should also consider other relevant indexes, such as Leverage and Total Capital Ratio as the CET1 ratio does not take into account the bank’s profitability, asset quality, liquidity and management efficiency. A reliable way to assess a bank’s soundness is to verify the rating assigned by Rating Agencies which includes both internal data, like balance sheets, corporate longevity, exposure towards foreign countries etc. as well as external variables like the country GPD, inflation, unemployment rate and political risk.