Stephen Diggle, who co-founded a hedge fund that made $2.7 billion for investors in 2007 and 2008, set up a family office to manage the millions in fees he earned instead of entrusting his wealth to private bankers.
“It was fairly demonstrably clear that there was a very significant problem of alignment of interests by private banks and their customers,” said the 47-year-old founder of Vulpes Investment Management, whose Singapore-based family office has invested in hotels in Japan and farms in Uruguay. “They ceased to be custodians of people’s money and they became salesmen.”
Asia’s wealthiest investors, whose ranks are swelling as the region’s economic growth outperforms the rest of the world, are turning to family offices to maintain control of their money after the collapse of Lehman Brothers Holdings Inc. in 2008 made them more risk averse.
“Private banks try to sell you everything and not necessarily what’s best for your family office or for yourself,” said Clinton Ang, managing director of Singapore-based wine and spirits distributor Hock Tong Bee Pte, who is among those preferring to manage his family’s wealth himself. “If sophisticated investors haven’t already learnt the lessons of the past crisis, with the impending crisis that is on the horizon they’d better.”
The MSCI World Index has tumbled 17 percent from this year’s high in May and is trading close to a one-year low after Standard & Poor’s stripped the U.S. of its AAA credit rating in August and Europe’s debt crisis deepened.
“Markets go up and markets go down,” said Tan Su Shan, head of wealth management of Singapore-based DBS Group Holdings Ltd., Southeast Asia’s biggest bank. “It’s easy enough for clients to point the finger at the banker when things go wrong. What about when things go up? There are always two sides to the story.”
DBS attracted more than S$2 billion ($1.6 billion) in net new money in August, Tan said. The bank’s wealth-management unit turned bearish two months ago and “took money off the table for clients” invested in equities, Tan said.
About 90 percent of Ang’s family’s investable assets of almost S$100 million are in cash after he sold from October through March its investments in stocks, bonds and most property assets, said the 38-year-old, who describes himself a follower of Templeton Asset Management’s Mark Mobius.
Family offices are typically tailored to the families’ investment and personal needs, and often include estate planning, philanthropy and lifestyle management such as maintaining homes and yachts. Private wealth managers, who generally work for global investment banks, rely on fees and commissions from managing their clients’ money.
Most family offices in Asia are more defensive in their investment strategy and tend to hire a “generalist” to manage their wealth, rather than specialists such as former hedge fund managers, said William Chan, chief executive officer of Singapore-based Stamford Privee, which manages his family’s wealth and that of two others. Such managers may cost a family office between $300,000 and $400,000 a year, while specialists would be more expensive, Chan said, citing U.S. surveys.
Wealthy families tend to choose investment professionals they had previous dealings with, such as a private banker, as their office manager, said Chan. Others may select an ex-investment banker who advised them on transactions such as an initial public offering of their company, he said.
“Being the trusted adviser is key,” Chan said. “Failure to retain talent in a buoyant market will usually be the cause of the office’s failure. Right hires are managers who have a strong streak of loyalty to the family and who will not be easily swayed by other offers.”
Wealth in Asia, excluding Japan, is expected to rise at about double the global rate of almost 6 percent through the next five years, the Boston Consulting Group said in a May 31 report. Singapore will become the world’s top wealth management center by 2013, overtaking Switzerland and London, according to a PricewaterhouseCoopers LLP study published in June.
The region also is attracting overseas family offices. Tano Capital, the financial adviser of the founders of Franklin Templeton Investments, and London-based Alta Advisers Ltd., the family office of Swedish billionaire Hans Rausing, have opened units in Singapore.
“Anecdotally, we are seeing more European family offices making enquiries about setting up their Asian headquarters to participate in the Asian growth story,” said Amy Lo, head of ultra-high net worth in Asia-Pacific at UBS AG’s wealth management business.
About 62 percent of U.S.-based family offices surveyed this year said they were considering increasing allocations to Asian markets outside Japan, according to Family Office Exchange. The median family office reported 12 percent annual pretax portfolio return in 2010 and families are expecting a median return of 8 percent this year, according to the Chicago-based organization, which represents 350 families worldwide.
Singapore’s central bank will require banks from Jan. 1 to advise inexperienced investors on the suitability of products they wish to buy.
“The Lehman crisis was a learning experience for most private banks and private bankers,” said DBS’s Tan. “You cannot sell products that don’t fit the clients’ risk profile and investment objectives.” The Monetary Authority of Singapore’s rules serve “as a protection from hopefully mis-selling from the bankers to the clients.”
Noor Quek, previously the head of business development in Southeast Asia at Citigroup’s private-banking unit who now runs Singapore-based family office adviser NQ International Pte, said family offices shouldn’t be seen as a replacement to banks.
“The whole issue is about both working together,” she said. “The bank must be able to understand the client and the client is to understand what the bank can offer. This is not something that happens overnight.”
Some investment banks are now seeking to tap the growth of family offices in the region by setting up units that cater to the independent firms. Credit Suisse Group AG is housing five Asian and European families in Singapore that are seeking to “incubate” their own wealth management firms, said Bernard Fung, head of family office services at the private banking unit. The Zurich-based bank also works with other families in the region seeking to set up their own family offices, he said.
Role to Play
Family offices and private banks are “not mutually exclusive,” said Fung, who previously oversaw the London-based family office of David Sainsbury, the billionaire philanthropist and former chairman of the eponymous supermarket chain. Families that are serious about managing their assets should use “proper systems to measure risk and governance processes,” he said.
“If you’ve got that, then financial institutions can have a role to play within that,” Fung said. “Trust goes both ways.” Part of the wealth of the family offices that Credit Suisse is housing is still managed by the bank, he said.
Zurich-based UBS set up in January a family services unit in Asia, where much of the wealth was created after World War II, which provides non-investment advice such as philanthropy and wealth planning to its richest clients.
“Most families prefer to set up their own family offices with a combination of their own employees and external experts, with specialist skills ranging from accountants to legal and tax advisers to investment professionals,” said Hong Kong-based Lo.
DBS built up its family office advisory business this year, offering services that include advice on private-equity investments and philanthropy. There’s a “huge movement” of family offices creating their own funds and teaming up with other independent firms to co-invest, said Terry Alan Farris, who joined DBS’s private banking unit in January as its Singapore-based head of family office.
Market gains helped boost assets managed by private banks by 11 percent last year with the top 20 in the world overseeing a combined $11.1 trillion, according to London-based Scorpio Partnership. The rate of net new money inflows fell on average by almost 19 percent from 2009 and many banks saw margins squeezed, according to the wealth-management consultancy firm.
There are about 50 established family offices in Asia outside of Japan that are managed professionally, according to Scorpio. Worldwide, there are an estimated 2,500 to 3,500 family offices, said Joseph Reilly, president of the Greenwich, Connecticut-based Family Office Association. The first family office was established in the U.S. by oil baron John D. Rockefeller in 1882 to manage his family’s assets.
GFIA Pte, which advises investors seeking to allocate money to hedge funds and began its wealth-advisory business when it started managing Diggle’s money, is in talks with other prospective clients, said Peter Douglas, the firm’s principal.
As financial institutions curb risk after the collapse of Lehman Brothers triggered the global credit crisis, wealthy families are “stepping into the holes left by the exits of the banks” in making higher-return investments, Douglas said.
“It’s partly the realization of the conflict between private wealth and the financial services industry, and it’s partly because now there’s a lot more opportunity out there for private wealth relative to that available for the financial services industry compared with pre-crisis,” Douglas said.
Diggle’s family office bought farms in Uruguay and Illinois, a kiwi-and-avocado orchard in New Zealand, land in Italy and Bali, boutique hotels in Japan, defensive stocks, gold and “a large portfolio of very high-end wine,” he said. Diggle set up Vulpes in April after closing in March Artradis Fund Management Pte, the hedge fund he co-founded with Richard Magides.
Diggle, who has four children, said he set up the family office with GFIA to put in place the processes and structure to preserve his fortune.
Some family offices cater to more than one family to gain economies of scale. It costs at least $1.5 million a year to run a family office that includes an investment team, and a family will need a minimum of $100 million to justify the expenses, said Chan of Stamford Privee.
Blue Ocean Capital Partners, a unit of Singapore-based private-equity firm Tembusu Partners Pte, plans to set up an office with a U.K.-based family firm this year, said Director Daniel Lin.
Lin, 28, said he and his 54-year-old father, who founded Tembusu Partners, will start by managing the wealth of their family with the help of a chief executive officer. At least two other families have agreed to partner with them later, he said.
“For private banks, because they have certain targets, they need to find something that will give them a financial return pretty quickly,” Lin said. “For us, we’re not in a hurry to make money out of this; we have time to build on the intangibles such as family values and governance.”