The rise of Asian family offices reflects not just the greater economic prosperity of the region, but also a need for expertise in running these organizations.
Though COVID-19 has brought hardship to many in the region, and while economic recoveries of Asian countries will vary in terms of reaching pre-pandemic levels, the continent remains on a long-term, upward economic trajectory.
According to a McKinsey report, total Asian wealth management revenue reached $90 billion at the end of 2019. Pre-pandemic, the number was expected to increase by $70 billion by 2025. In a COVID-19 world, that 2025 number has been revised to increase by $25 million in a “muted recovery” scenario. Meanwhile, total investor wealth levels should return to historical growth rates by 2023.
Furthermore, pre-pandemic commentary from Anurag Mahesh, head of UBS bank’s family office operations in Asia, should still hold true relative to the rest of the world:
“The number of family offices being set up in Asia far outpaces” the rest of the world, said Mahesh, “Wealth here is getting more and more sophisticated and being created at a rather unprecedented pace.”
The super wealthy in Asia are increasingly looking for more complex, global investments at a time when a record number of patriarchs cede control to the next generation, according to Bloomberg.
The reason for starting a family office (FO) is simple: to maintain and grow the family’s wealth for future generations. To achieve these objectives, FOs will hire the best wealth managers available.
Finding the top wealth managers in the region won’t be easy; family offices in Asia might find themselves in bidding wars for the best talent. For example, in Hong Kong and Singapore, competing firms on average are willing to offer wealth managers pay increases of 30% or more to switch companies, according to Bloomberg.
The driving factor behind the talent war in Asia is that the continent added almost 2,000 millionaires every day in 2017, according to Capgemini. The supply of wealth managing talent to match the rapidly rising number of wealthy people has not kept up, though.
“For a huge market like this, (the number of licensed relationship managers) is certainly not enough. That’s why we are seeing a talent war,” stated Amy Lo, a 30-year industry and head of Hong Kong’s Private Wealth Management Association. “It won’t be easy to retain people when they can easily get a 20 to 30 percent premium and an upgrade in title.”
Though these studies and comments came prior to the pandemic, and while COVID-19 has tempered this growth, the long-term picture points to a rise in demand for talent.
If the demand for wealth management talent is any indication of what’s to come, then demand for middle- and back-office experts should follow.
After all, setting up a family office cannot be reduced to simply the hiring of investment advisers. Family offices need qualified portfolio accounting specialists who can run their reconciliation and performance reports, among other operational services required.
When high- and ultra-high net worth individuals choose to set up a family office, it’s with a vision of wealth generation and/or preservation, but likely there is less or no strategy for their middle- and back-office.
“It’s not just about the resulting (investment) performance, but also all the admin, operation, people and resources you require to execute the chosen strategy.”
Further supporting concern over a talent shortage across the financial industry is PwC’s 19th Annual Global CEO Survey (2016), in which 70% of financial services CEOs see limited availability of skills as threats to growth, up from 56% in 2011.
In addition, our previous blogs have highlighted the need for the financial services industry to attract young talent, including solutions for hiring beyond physical proximity to the office.
When considering the relatively new the concept of the family office to Asia, combined with the existing wealth management talent shortages in the region and the rapid growth in the number of FOs, it is likely that family offices in Asia will find themselves competing, paying a premium for investment and operations services.
Outsourcing could be a way to get around these challenges.
It’s one thing for the high- and ultra-high-net worth to know what they want out of the family office, but it’s a lot harder implementing the steps to achieve the goals, especially if they lack experience in the investment management space.
Without experience, doing things on one’s own can prove costly and inefficient. “Experimenting” with new hires, attempting to implement new technology or running the portfolio accounting software on one’s own, and even hiring family members to handle work beyond their capabilities are all ways that things can go wrong for FOs.
When the in-house talent is hard to find, family offices in Asia can explore the OCIO (Outsourced Chief Investment Officer) path. Though a relatively new phenomenon in Asia, the OCIO is there for firms that want some or all of their assets managed or invested by third-party experts.
Learn more about the benefits of an OCIO.
As for operations and technology, outsourcing gives family offices access to these areas of talent.
Firms like Empaxis, that originally started out of a multi-family office, understand what it takes to serve a family office’s operation. Whether it’s expertise in portfolio accounting, maintaining data accuracy and quality controls, or upgrading family offices’ technology to a cloud-based turnkey solution, a firm like Empaxis helps.
As mentioned earlier, Asian family offices might have to pay a premium for in-house talent, or but outsourcing provides a way to access talent and cut costs.
Because the third parties have devoted resources to perfecting their skill in a given area, they find ways to make the processes more efficient and drive down costs, then pass the savins on to their clients.
With outsourcing, family offices are paying strictly for labor costs; they’re not having to pay for benefits, perks, sick-leave or vacation days associated with in-house hires.
Thus, for a family office to try and set everything up on their own can be ineffective and a waste of resources. Outsourcing can help help prevent those situations.
When it comes to outsourcing, family offices are strictly paying for labor, and they pay for the labor as they need it.
Working with a third party makes it easier for FOs to ramp up or down their operations. When things get busier or slower, the outsourcing provider adjusts staffing needs accordingly, as they already have the trained backups to perform the work and can be used and set aside at any time.
In contrast, in-house hiring can be tricky because family offices must deal with “flood” and “drought” periods. Floods occur when the workload exceeds staff capacity, and droughts occur when there’s not enough to work go around, and in those cases, underutilized staff is kept around until the next rainy season.
Granted, it’s hard to predict how much in-house labor is needed, but employee idle time can be a waste of resources, and outsourcing may help solve this issue.
In addition to labor, the services provider may have the technology that family offices need to scale. A turnkey asset management platform, as mentioned above, is one of those areas where family offices can benefit.
As Asian family offices continue growing in number, the demand for talent to serve these organizations will increase, but currently the growth in talent has not kept pace with the proliferation of FOs.
As a result, family offices are faced with paying a premium for top talent along with the challenges of setting up an operation from scratch.
Doing everything on one’s own while lacking the experience can be a costly endeavor, and outsourcing can help reduce these risks.
Outsourcing companies that serve family offices have the resources, talent, and flexibility to run the middle- and back-offices in a low-cost and efficient manner, and the new Asian family offices may benefit from the help of such experts.