The Great Debate: Do SFOs need wealth managers?


Geoffroy Dedieu gives his personal view on the merits of wealth managers.


Having worked on the “sell” side of the wealth management industry and now on the “buy” side with a single family office, I cannot but lament the return of bad industry habits and lingo that blurs the discussion. Most articles written about Ultra-High-Net-Worth (UHNW) families and single family offices represent the sell side’s view of our needs. Multi Family Offices (MFOs) and banks communicate about what we want and what we need, often pretending to do this in our name.

In fact, the current wave of wealth management mergers probably has little to do with improving quality of offer or service levels to us. At the heart of most wealth management mergers was and still is AUM grab: more Assets Under Management. There is a notion that a bank or MFO needs a bigger AUM stockpile. We, the clients, are being piled-up. Indeed, the tendency to sub-contract the actual investment management work is coming back. It used to be funds-of-funds before the Great Recession; these days it’s MFOs acting as “asset allocators”. Now there is one term to study carefully: what is an asset allocator? A firm that allocates clients’ assets to be managed by other firms? Then why do we need the allocator in the first instance?

We are told, as a given truth, that UHNW families and SFOs cannot manage their own funds or their own portfolios. That truth in return is usually based on two sub-revelations: (1) to invest in stocks, bonds, funds and other financial assets requires knowledge of them all and that cannot be done unless you have a team of at least 20 or 50 investment employees; and (2) an SFO or UHNW cannot build such capabilities because they cannot hire and retain such people or acquire the necessary IT platforms.

Firstly, a proper portfolio management process, such as can be defined at a single family office, does not require a systematic review of the entire universe of securities, because that is impossible. We only need to analyse a few potential picks, whether stocks, bonds or funds. Most portfolio management processes nowadays are a mix of top-down and bottom-up approaches.

By the time we have gone through our Strategic Asset Allocation, Tactical Asset Allocation, allowed risk limits and increasingly, our ESG requirements, the population of securities we actually need to analyse in-depth is fairly small. In the case of SFOs with low risk tolerance, the number of picks will be further reduced due to lower portfolio rotation and higher proportion of bonds held to maturity.

As to whether we can hire the right people and set up an adequate operational platform, I believe an SFO can be set up from as little AUM as $50m. Our cost analysis shows that when the SFO really drives costs down throughout the value-chain, possibly down to each security line, the savings will pay for the hiring of talent. It is then only a question of defining the mix of skills required and working with specialised head-hunters. Each SFO needs a business plan, which should amongst other things highlight the organisational structure, the talents to be hired, the cost structure of the office, and the costs of managing the assets down to the lowest possible level.

Wealth Management players clamour within all media that UHNW families should not try to handle their own wealth as it is too expensive. This is simply inaccurate provided the SFO’s expense is compensated with cost reduction. Therefore a UHNW family needs to compute their total portfolio management costs and actively drive these costs down. In most instances the first step – getting cost data from banks, MFOs and fund managers – will make the family and the young SFO feel like pulling teeth.

Understandably, the industry is not in a rush to educate its clients on the total cost of wealth management and ways to reduce them. Most industry players do not disclose total expense ratios (TER), or not down to the security line. The inflamed debates around TER and why it should be disclosed and how far it should go is an illustration of this point. In this industry, costs are other people’s money, i.e. ours. Additionally, if I may ask: what is the typical cost breakdown at a Private Bank (PB) or MFO? Reading the press, it would seem like those industry players are able to deliver better services to us because they focus on building their research capabilities and operational platforms. Yet my recollection of a typical cost breakdown in PB (and I would venture to think that many MFOs may be rather similar) was that the largest cost pool was dedicated to “hunters”, otherwise better known as client relationship managers. So the main cost driver is the front office, not research or the back-office.

If your main cost driver is Sales & Marketing, do not tell us that mergers are meant to improve quality of service. Inversely, SFOs do not need to spend any money at all on hunters or any kind of sales efforts.All our efforts are geared towards delivering services to the family.

The message at conferences and in the specialised media, comparing SFO’s ability to set up proper IT and Ops with MFOs/banks is the same. Apparently we simply cannot do it right. Yet, most MFOs and PB’s have horrendous IT platforms. PB’s in particular still operate largely on 1980s code, with black screens, green cursors and no mice. Banks are regularly fined by the regulators over this issue.

Banks’ legacy systems are hugely complex and piled up over 30 years (where complexity theory needs to be applied). The reasons for this terrible state of play are complex: strong internal resistance to change; entrenched vested interests; lack of top management IT skills; short-term focus and lack of political will to fix the situation. Likewise several MFOs, who are much smaller and more recently created, use Microsoft Excel to prepare client statements; imagine the compliance, auditing and business-continuity risks associated with that.

An SFO can buy an off-the-shelf industry-standard IT platform. There are several reliable server-based software solutions dedicated to SFOs and private funds. It costs a little money but a UHNW family is perfectly able to invest in a robust platform coded in the 21st Century.

I doubt very much that the current merger wave will serve UHNW clients. These deals are driven by ego, AUM grab and the need to pay client-hunters higher-and-higher bonuses. As far as the needs of UHNW families and single-family offices are concerned, what we need is: full cost transparency, quasi-institutional service levels, in-depth & accurate risk metrics, and real time online access. Try to explain that to your mergers.