The rise of family offices in Asia reflects not just the greater economic prosperity of the region, but also a need for expertise in running these organizations.
“The number of family offices being set up in Asia far outpaces” the rest of the world, said Anurag Mahesh, head of UBS bank’s family-office operations in Asia. “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 growing number of family offices in Asia will require investment and middle- and back-office operational expertise, but can the required talent keep up with the demand?
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 the last year, 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.”
If the demand for wealth management talent is any indication of what’s to come, then demand for middle- and back-office operations 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 operations.
“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.
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.
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 industry.
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.
Family offices in Asia might have no choice but to pay a premium for investment adviser talent, but they can access operational talent and cut costs by outsourcing their middle- and back-office functions.
There are outsourcing companies that specialize in serving family offices, and they can run the FOs reconciliation and other reporting requirements at lower costs than if they were to be done in-house.
With operations 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.
As mentioned earlier, the growth of family offices and subsequent talent shortages in Asia will create competition for hiring, a costly affair.
Outsourcing provides family offices a low-cost way to have experts who understand portfolio accounting and the software to run the reports. These firms should have mature processes in place for report generation, data accuracy, quality controls, and protecting personal information.
For a family office to try and set everything up on their own can be ineffective and a waste of resources; outsourcing firms may help prevent those situations.
With outsourcing, family offices are strictly paying for labor, and they pay for the labor as they need it.
Outsourcing 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.
As family offices in Asia continuing 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 operations 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 family offices in Asia may benefit from the help of operational experts.