1. Introduction
Banking remains as fundamental a part of family office operations today as it was for prior generations, except with new contours and opportunities. Challenging macroeconomic conditions and disruptive market forces combine to pressure family offices to adapt their strategies across the range of their assets and operations. These factors also impact banks and their front offices‘ tailor services to optimise their business models. Private banking sits at the intersection of established practices going back decades and adaptation to new realities. Staying the course risks being left behind, but inertia is powerful within banks and family offices. Routine, caution, and due diligence temper rapid change. Private banking still rests on building trusted partnerships.
Banking is an operational area where family offices encounter a particularly strong matrix of national and supranational regulations. Banking services vary across locations due to law and market imperatives as well as traditions, as do the banking needs of family offices. Most family offices maintain multiple banking relationships to meet the breadth of their needs, often spread across multiple jurisdictions for global access to growth opportunities.
The management structure of family offices also impacts banking needs. Lightly staffed single-family offices tend to work with local and global banks for distinct services, while maintaining a strong, foundational relationship with a local bank. Partnering with a local bank to transact in local currency, build trust for flexibility in lending terms, and engage in local investing opportunities, which provides a strong base to then work with larger banking providers for global access to investments. Fully staffed single-family offices and multi-family offices might have the internal capacity to primarily rely on banks for transactions, preferring to keep wealth management and a range of other services in-house.
At Simple, we used six family office use cases to organise our understanding of their distinct banking needs. The two biggest determinants of banking practices within these six use cases are the complexity of asset structure and internal management capacity.
About the Authors
David Struthers
Research LeadDavid Struthers is the research and technical report writer at Simple.
Connect with David Struthers
Francois Botha
Founder & CEOFrancois believes that the next generation of family leaders need new, simple tools and trusted experts with a fresh outlook.
Connect with Francois Botha
Top Private Banking Needs
- Custody
- Transactions
- Credit
- Trust and fiduciary services
- Unified reporting and treasury
Top Private Banking Pain Points
- Compliance
- Lending
- Difficulty comparing prices and services across banks
- Regulatory changes
Top Private Banking Opportunities
- Integration of digital services
- Opening banking architecture and APIs
- Unified treasury
2. Family Office Operations and Management Structure
Family offices vary greatly in their internal operational capacity and management structure. While a small single family office might handle its affairs with a staff of one or two employees supplemented by trusted advisors, large commercial multi-family offices bring value to families through their operational capacity. Traditionally, a downside of MFOs has been a lack of tailored wealth management services, but this has now changed at many MFOs. A key downside of SFOs is operational costs. One way to control expenses is to use external advisors and, possibly, private banking providers to meet the spectrum of needs. Private banking services overlap substantially with the in-house expertise of the most robust family offices. Cataloguing family office management tasks, internal capacity, and management structures clarifies the intersection of family office capacity and private banking
Internal capacity and outsourcing
All family offices need banks, but their service requirements vary greatly. With a purposeful management strategy comes the need for knowledge experts. Likewise, back-office tasks and legal matters need attention whether the capacity is found internally or externally in the family office. Family offices with younger generations moving to the front are often less attached to individual banks than prior family office principles, even if the banking relationships are longstanding. This trend increases resistance to paying for the traditional full-service private banking model by many next-generation FOs. Many prefer less personal contact, and more digital interactions, for a lower cost. Another factor in family office operations comes in the form of staff costs. The inflation pressures in global markets also impact family office budgets as increasing salaries to retain talent is a necessity.
If building internal capacity is not possible or desired, UHNWI and single family offices have the choice of joining an MFO to meet the spectrum of their needs or piecing together a group of advisors, often drawing on private banking services to complete their operational model. For this reason, lightly staffed SFOs tend to rely on private banking services more than MFOs and the best-in-class SFOs. For example, some large FOs have built out their internal capacity to the extent that they hold their own capital licences. In this case, wealth management is fully handled internally, but even the most capable family offices lack the custodian and payment service infrastructure of banks.
The biggest market gap is meeting the needs of families on the middle to lower end of the wealth spectrum, families that need services, but lack the means or desire to staff up into a full-service SFO. Here, private banking and/or MFOs have the greatest relevance.
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Asset structure
Asset structure varies widely across the range of family offices. An FO with a deep history and a fully diversified portfolio across asset classes and geography sits at one end of the spectrum, while an entrepreneur recently experiencing a liquidity event rests at the other end. The six types of family offices draw together groups with similar organisational structures that are often created to manage different asset structures. A family office with deep ties to real estate needs the internal capacity specific to that type of asset. A technology startup founder’s asset structure is different from a German mittelstand (a privately held firm) or a multigenerational family office. The source of wealth or asset structure does not determine family office structure, rather family offices develop around managing wealth and may change through diversification strategies or generational transition.
Other differences relate to how actively the assets are managed and the regulatory environment impacting family office governance. For example, many family offices in Europe have structures of wealth that can not be easily moved as trusts are often locked into national jurisdictions. This has been compounded by banking disruptions in Luxembourg and, to a lesser extent, in Switzerland. Banking services must be matched with each family office’s asset structure.
3. Private Banking Services
The “private” in private banking means that products and services for UHNWI and family offices are delivered on a personal basis. This is often through a personal relationship manager at the bank that acts as a single point of contact to a bank with siloed operational departments. Private banking may include wealth management and asset management, but it is primarily designed to offer bespoke services developed in cooperation with clients. Banks offer many services, which means taking stock of FO needs and internal capacity is the prefered place to begin evaluating current banking relationships and seeking new ones.
Private banking may include the following types of services:
- Favourable interest rates and account fees
- Financial planning
- Wealth management
- Lending, usually for homes, cars, boats, or aeroplanes
- Trusts, fiduciary, and estate planning
- Tax planning
- Personal credit lines
Banks also provide custody and control access to transaction infrastructure.
Vaults and Pipes
The two most basic banking functions are custody and transactions. The need for custody is probably as old as wealth itself. Of course, custodians have moved beyond the physical vaults of yesteryear, but the concept remains similar. Custodians function as trusted keepers of securities and provide the means of deposit, transfer, and withdrawal. They can have primarily local reach in a single currency or be large global institutions with branches spread around the world. Crucially for many family offices, banks control access to the infrastructure facilitating transactions. Indeed, transactions are the banking service most commonly used by family offices. While the rise of Fintechs and blockchain technology has the potential to reshape the banking sector’s most basic functions, the current state of affairs indicates that change is still in the future, at least for most family offices.
Investment opportunities and deal flows
At the opposite end of the spectrum of banking services from baseline infrastructure is preferential access to direct private equity and/or venture capital investments and funds. Our research indicates that the direct investments of the majority of family offices do not come from their banks. Rather, they are sourced from their own networks and internal expertise. Banks are still involved in the process, however, providing the regulated vehicles to complete transactions. A further consideration for family offices is that banks often do not view PE or VC investments as assets they can collateralise, similar to listed investments when making lending decisions.
Regional considerations
There are many regional variations in banking services attributable to a combination of regulatory regimes and client preferences. One example is that clients in Asia are particularly interested in yield-generating opportunities because of this strategy’s favourable tax benefits in many countries in the region. Multiple banking relationships are common in the region with a focus on transactions in local banks in home currency and then turning to the large players for global access.
In Australia, banking is dominated by large retail banks; there is not a separate private banking sector there like in other locations. This creates product-centric offerings and increases the transaction-focus of family office bank use that also sees them use banks for hedging and lending. The large global players are predominantly located in Singapore with relationship managers in Australia guiding access to global markets with managed funds, research, and related services. This trend takes shape in Europe with family offices having banking relationships in their home country and then turning to Switzerland, Lichtenstein, or Luxembourg for further services. In the United States, some family offices find privileged access to investments through their private banks.
4. The State of Play
Banks compete for business from family offices in a market environment with strong commoditising pressures upon even their most bespoke products and services. Banks also compete against private wealth management advisors, specialised law offices, and other independent advisors catering to family offices. Further, family offices retain the option of expanding their internal capabilities or extending their reliance upon external advisors to fulfil many of the needs that private banking is designed to meet. The flexibility of family offices contrasts the predominantly corporate structures of banks, which often sees family offices hiring former bank employees when bringing on key staff.
Family office approaches to banking vary as do their experiences and ability to negotiate for the best possible service across markets. One of the biggest difficulties for family offices optimising their banking relationships is directly comparing competing banks across products and prices. However, the fact remains that the higher the AUM, the more power that brings to the negotiating table and the more access to preferential services. Yet, all family offices benefit from forming strong banking relationships that increase trust and the flexibility of banks when creating service packages and lending terms. Trust and understanding are especially helpful if a family holds a large percentage of their assets in a business before an exit or has a similar asset structure.
The three most common in-house capabilities of family offices across size and type are strategic asset allocation, risk management, and financial accounting and reporting. These services form the backbone of family offices across their range of organisations. Other services most often completed internally include portfolio administration, accounting, philanthropy, and succession planning. The remainder of the services that banks provide in their private banking offerings overlaps with the comprehensive services of multi-family offices or a large single family office.
One consistent finding came through in our research across family office size, structure, and location: the best way to get the most out of banking relationships is to clearly identify needs and then determine each bank’s ability to meet those needs. This approach has led many family offices to transition from having banks closely integrated into their operations, to keeping them positioned as external service providers.
Taken from the perspective of one large multi-family office, they see themselves as agnostic to the banking products and platforms, providing guidance for client selection, but remaining willing to work with each family’s providers. This MFO’s primary banking needs are the ability to quickly complete transactions for their clients and efficient, consolidated reporting to smooth their operations. They also function as the first contact with banks and other service providers. If a family needs a service, they will go find it. Many MFOs see themselves as the bridge between banks and families.
“One problem is that private bankers have a boss that isn’t the family.” – Multi-family office relationship manager
Family offices need to find the right banking fit in terms of products, performance, values, and personnel. It is a balance of chemistry and competence, highlighting the continued personal character of private banking within a largely numbers-driven industry. After onboarding, consolidated reporting is one key to a productive ongoing partnership for most family offices, especially for large MFOs. The importance of effective digital processes rises with the number of clients and the complexity of the asset structure. Banks do not need to pioneer their own path and create their own technological solutions. There are key external technology providers with ideal solutions for family offices for banks to partner with to bring these services to their clients.
Other family office use cases highlight different experiences. For example, a small SFO with optimised office staff in high-value roles around investment strategy and wealth management paired with outsourced back-office administration is in an ideal position to make banks compete for their business. Many HNWIs and smaller SFOs work with relationship managers at local banks to develop partnerships that are responsive to a wealth level that may not be prioritised at a large global institution. This type of client needs a bank employee, a key contact empowered to advocate for them across the entire bank from bonds to lending who is not constrained by pre-formulated product offerings. When personal lending is important to HNWI and smaller SFOs, banks often require deposits to be collateralised, but lending flexibility is increased through building trusted partnerships.
“Banking is still a relationship between people.”– Family office advisor
Key satisfaction points:
- Tenure of relationship
- Breadth of services
- Worldwide reach
- Flexible credit line
- Responsiveness in listed trades
- Attentiveness to transaction needs
There are many inherent tensions in private banking relationships. Despite efforts by many banks to meet clients on their terms, banking culture, especially in their front offices, remain revenue-focused. One way that private banking clients may notice this most directly is when a bank has an interest in driving sales of a particular product or service. Their product funnel hurts the credibility of banks as neutral brokers to their clients. Commercial MFOs can step in between families and banks to balance personal and business interests. MFOs create margins by providing service for families, banks need volume for their shareholders.
“Competence, professionalism, flawless execution, a strong personal relationship built on trust, access to information, and services” are the keys to a banking relationship. – Single-family office principal
Key desires:
- Better reporting
- The highest level of cybersecurity
- Participation in Open Finance
- App-based payment approval
- Granular technology tools to export into tracking software
- Automatic exchange of information
- Improvements in transaction management
5. The State of Fintech
A recent family office report noted that two of the most interesting investment opportunities to family offices are digital transformation and fintech. Another report found that 60% of European family offices thought that fintech firms would eventually replace traditional banks. So it should not be surprising that fintech investments are enabling firms to provide innovative new solutions. Currently, the broadest rate of adoption of financial technologies is in payment and transaction platforms that automate and ease processes.
While it is clear that many family offices are interested in fintechs as investments and to smooth their operations, our research indicates that most family offices across size and location remain cautious in their adoption of new technologies and new categories of service providers. For example, one MFO based in the United States that is forward-looking in their management style, service offerings, and client relationships is quite old-line in their custody and transaction requirements. All of their accounts are held in USD, they run transfers through ACH, check requests, and wire transfers for security. They find that most new financial solutions are not yet structured for family offices, while still demanding the latest technology and integrations for consolidated reporting and client relationships.
From the bank side, most are late adopters of new technology, a trend attributable to regulation, security needs, and their corporate structure. This leaves open space for startups to gain market share and blockchain infrastructure companies are making plays towards these opportunities. There are currently fintech firms that allow family offices to increase their independence from banks. The types of fintech that most commonly came up in our research provide the tools to automate reporting, aggregate data through artificial intelligence and machine learning, open banking platforms, and process transactions. Still, it remains difficult for fintech firms to enter the family office space. At this level of service, families require someone to call; a responsible human behind the artificial intelligence if problems arise.
“There is personal service and responsibility.” – Fintech founder
For many fintechs and neobanks it seems the most likely entry point into the family office market will be through partnerships with traditional banks.
6. The Future of Banking
While it is clear that most family offices are relatively cautious when deploying new financial technologies, significant changes are in store for them, especially in custody and how they transact. This section examines the future of banking, by first looking at more immediate changes and then toward a longer time horizon.
In the near term, the global growth of fintech on a mass scale for small transactions and transfers provides clear efficiencies for millions of users. Many family office principals and staff are currently using these services for personal transactions, which will feed into further growth in related technologies within family offices as comfort and trust increase. However, the business models of most fintechs and neobanks depend on scale, which generally is a market force away from serving specialised clients like family offices.
The continued professionalisation of family offices brings increased demands on banks for excellence in service delivery, efficiency, and execution. Changing expectations and the availability of options for trading listed equities reduce the focus on prime brokerage and similar services. The future of retail banking currently taking form is centred around a comprehensive digital transformation of services, user interfaces, custody, and automation. This is being pushed by the broad adoption of fintech services forcing traditional banks to change or get left behind. For example, in 2021, 40% of retail bank clients in the United States banked with a fintech or big tech firm. This is part of a trend toward the disintermediation of banking that will reshape banking services across the spectrum of wealth. Artificial intelligence, connected devices (IoT), and connected trends will result in an invisible banking experience for most clients.
As these changes continue to come online, private banking will also increasingly adopt technologies that integrate reporting and automate processes, which will change the internal operations of banks and family offices. A new generation of wealth owners, many with a background in tech startups or part of a next-gen transition in an established family office, are a driving force in this transition, where private banking services still dominate today. The disintermediation of private banking is currently being pushed by technology companies that provide IT and data aggregation solutions far beyond what banks can offer. This is already producing new private digital banks and the disaggregation of basic custody and credit provisions from investment access and advice. Custody and credit are clear commodities, which drive down costs. Separating services has a side effect of creating pressure to charge based on outcomes, rather than a flat fee for investment advice.
A Simple Take
The Open Wealth Association is leading the way in creating open wealth. One possible future down this path is the convergence of technology that creates an open wealth architecture. The Center for Sustainable Finance and Private Wealth at the University of Zurich is a thought leader on this. This can be achieved through the cooperative development of open APIs across the private banking ecosystem. Another possibility is an expansion of the use of blockchain that will further decentralise financial services and facilitate the self-custody of assets and transactions, not limited to cryptocurrencies. Other outcomes may include linking banks to environmental targets through new tools and metrics.
Currently, the Open Wealth Association is leading the way in creating an open wealth architecture. The Center for Sustainable Finance and Private Wealth at the University of Zurich is a thought leader in linking banks to environmental targets.
7. Conclusion
Relationships are still central to the private banking experience for the family offices that have their operations deeply integrated with banks. Flexibility, service, a successful track record, and trust rise to the front. Other family offices prefer to have a stronger separation between themselves and their banks. In these cases, automation, integration, and consolidated reporting are the key metrics of a successful banking relationship.
Banking, like many other cornerstones of our economy, faces constant pressure from the rise of new technologies. The future of private banking promises new efficiencies for family offices. Due diligence and caution will assure a secure transition.
8. Methods
The findings presented in this report are the result of deploying a grounded theory methodology. We designed and deployed a questionnaire to generate comparative data on key parameters in family office banking relationships. Our early interviews helped us identify key areas of focus for the survey and our subsequent semi-semi-structured interviews allowed us to draw out themes that emerged in the research. Drawn together, this hybrid approach to data acquisition produced broadly generalisable findings on private banking.
