Family offices wake up to custody
Before large banks started going bust and top-performing hedge funds were revealed as giant pyramid schemes, few wealthy investors gave a second thought to the custody of their assets.
Custody – essentially the safekeeping and administration of securities – was something your bank or asset manager took care of for a minimal fee.
The danger of ignoring custody was highlighted by Bernard Madoff ’s alleged hedge fund scam. For many of the institutions that decided not to channel assets to Madoff , the fact he insisted on his own firm being custodian of funds was a warning signal that something was awry.
Even before Madoff ’s alleged Ponzi scheme was uncovered, clients of some of Wall Street’s largest broker-dealers realised in the wake of Lehman Brothers’ collapse that retaining their wealth manager as their custodian was a risky business.
Having a separate asset manager and custodian bank gives an extra layer of protection against fraud or the collapse of an institution responsible for investments. Because the assets are held for safekeeping by the custodian, not the manager, they are kept at arm’s length and off the custody bank’s balance sheet.
The custodian will also ensure transactions are settled and that money is deposited or paid accordingly. It is a dull, low-margin business but a necessary one.
REPORTING Rupert Phelps, director of family office services at Bank of New York Mellon, says: “In Europe, custody tends to be bundled with asset management. In the US, it is much better understood that you should make a separate decision regarding asset management, banking and custody.”
At the very top of the wealth pyramid, for the family offices with hundreds of millions to invest, there is another pressing reason to take custody more seriously: reporting. The extreme volatility of the past year, not to mention the blow-ups, has underlined for many ultrawealthy investors the importance of having a clear view of market exposures at all times.
Andreas Sutter, chief operating offi cer at Pictet’s family offi ce, says: “When I started at Pictet seven years ago we had perhaps one or two meetings a year when questions about reporting would be asked. These days, virtually every prospective client asks about it.”
The big problem for family offices is that their investments tend to be spread between numerous managers or banks while many of their holdings will be in illiquid, non-financial assets – from businesses, to real estate, art or yachts.
Getting a consolidated view of their holdings is therefore diffi cult. “The holy grail is to have a single screen overview of everything,” says Phelps.
He claims this is something Bank of New York Mellon can offer through its Workbench online reporting platform. A single screen gives a family office a visual overview of its entire portfolio, with the option to then drill down to individual managers, portfolios and even trades.
“Having worked in a single family office where we didn’t have this, I can tell you we would tear our hair out over Excel spreadsheets,” says Phelps.
Other banks off ering family office services are pushing similar online platforms, including Northern Trust and Lombard Odier. Other banks that offer consolidated reporting services for family offices suggest that while an online system looks attractive, the quality of the data is not as robust as it might appear. HSBC
Private Bank provides consolidated reports on a monthly basis to 15 of its family office clients. Dana Tabbara, head of family offi ce advisory at HSBC, says: “It’s not a real-time system because we can’t get the information on a realtime basis. Much of the data has to be gathered from other banks and advisers and entered manually.”
Sutter agrees. “The flow of information from many hedge funds or private equity firms isn’t good enough to enable daily or weekly reporting.”
CUSTODY AND REPORTING FOR FAMILY OFFICES
Bank of New York Mellon Platform: Workbench, part of the bank’s family offi ce services division. Services: A secure online platform developed from the bank’s institutional global custody reporting platform. Consolidates data across banks and managers, including non-fi nancial assets. Includes 500 pre-set reporting options with others added on request. Users can drill down to see individual trades. Front page includes market data feeds which can be customised. A secure messaging system is included. Charges: Five to seven basis points for standard portfolios, up to 16bp for more complex structures. Clients: 220 families globally with at least $100m in assets. Conditions: 50% or more of assets must be held in global custody at the bank. Contact: Rupert Phelps, London
HSBC Private Bank Platform: WealthVision, part of the family offi ce consolidation and advisory service. Services: Consolidated reporting for assets held across different institutions, including non-fi nancial assets such as art, real estate and businesses. Tailor-made reports off ered monthly. No online access. Family office also offers advice on asset allocation, legal aff airs and family governance. Charges: Pricing in basis points although very large accounts may negotiate a flat fee. Clients: Fifteen families with at least $100m in assets. The intention is to add no more than five or six a year. Conditions: None Contact: Dana Tabbara, Zurich
Lombard Odier Platform: G2 – the reporting and portfolio management system used internally at the Swiss private bank. Services: Online, consolidated reporting for portfolios held in custody internally and externally. Portfolio management and trade execution platform also included, with trades executed via the Lombard Odier trading desk. Charges: A typical fee for assets held in custody by Lombard Odier would be fi ve basis points. Charges for assets held externally would depend on the size of portfolio and its complexity. Clients: The bank has 100 ultra-wealthy global custody clients with at least Sfr100m. Conditions: Clients need at least 50% of assets held in global custody by Lombard Odier. Contact: Christophe Gabriel, Geneva Northern Trust Platform: WealthPassport – a version of the bank’s institutional global custody reporting platform. Services: Online reporting off ered to global custody clients, although information from other custodians can be included as well as valuations for non-financial assets. The system can be made available to third-party advisers, such as accountants. Specialist consultants provide training and support. Charges: Depend on size and complexity of portfolio. Clients: 400 family relationships globally, three-quarters in the US. Clients in Europe, Middle East and Africa require $200m. Conditions: Part of global custody service. Contact: Clare Flanagan, London
Pictet & Cie Platform: Family offi ce virtual custody / Star e-banking Services: Virtual custody provides consolidated data across banks and asset managers as part of its family offi ce service with monthly or quarterly reports. Off ers single-page wealth summary as well as detailed breakdowns on a bank, manager or asset class basis. No online access. Ultra-high net worth clients will shortly have online access to the bank’s e-Star reporting platform to get detailed daily reports on assets held by Pictet. Charges: Included in the annual fee for family offi ce services, with pricing done on a relationship basis. Client base: Ten clients in the family offi ce use the two year-old service. Minimum assets for the family offi ce are $100m but the “virtual custody” service is targeted at those with at least $300m. Contact: Andreas Sutter, Geneva
del.icio.us
Digg
Newsvine
reddit
StumbleUpon