Ultra Wealthy in Hong Kong

Ultra high net worth individuals: Mega-rich prefer to be members of an exclusive club
By Florian Gimbel

Published: December 8 2006 12:25 | Last updated: December 8 2006 12:25

Asian private banking tends to be highly profitable because clients are willing to believe they are members of an exclusive club.

Yet some want to be more equal than others – a trend that has not been lost on banks that service the ultra-wealthy.

Industry giants such as UBS, HSBC and Citigroup have been seeking to woo high-end private banking clients – ranging from entrepreneurs with $100m of assets to billionaire tycoons – by establishing dedicated teams of specialist bankers.

These clients may be a boon for the corporate finance departments of big groups because of the investment needs of their family companies. But as private banking clients, they can be a mixed blessing because of their bargaining power.

Typically, Asia’s super-rich set up companies, known as family offices, run by investment specialists who act as advisers and gatekeepers. They oversee the family’s multiple private banking relationships, which often include a mix of US and European banks as well as US brokers for aggressive trading strategies.

But unlike their counterparts in the US and Europe, ultra-wealthy Asians have balked at the idea of joining multiple family offices designed to help rich families share the cost of sophisticated investment management and back-office administration.

This reflects the fact that Asia’s mega-wealth is still in the hands of the “first generation”, the larger-than-life entrepreneurs who are fiercely competitive and deeply suspicious of their fellow tycoons.

“A family office is so personal it is hard to share it with others,” says Kathryn Shih, head of the Asian operation of UBS Wealth Management. “These businesses are run in the style of the owners and even that changes periodically.”

Fleming Family & Partners, the company launched by the UK banking dynasty, is seeking to change these perceptions. The firm, which has recently launched a Hong Kong office, is hoping to carve out a profitable niche by focusing on what it sees as truly independent advice.

“The size of many banking institutions means that, however hard they may try, they face conflicts of interest between their private banking arm and their product manufacturing business,” says Lucy Sutro, head of Fleming Family’s Hong Kong operation. “Most clients in this region have multiple private banking relationships. We will help clients assess what performance they get from their banks.”

HSBC, one of Asia’s biggest private banks, has implicitly recognised the need for greater transparency by launching a separately incorporated family office service firm. David Cripps, who leads the one-year-old venture, insists there is no sharing of client information with HSBC private bankers.

“By providing strategic asset allocation advice, we can correct imbalances and overlaps in a client’s overall portfolio,” says Mr Cripps. “We are here to provide a value-added service, but we are not set up as a profit centre within the group.”

Companies such as Citigroup, which counts a large number of Asia’s wealthiest tycoons and families among its clients, are unimpressed by the new kids on the block.

“In highly developed markets such as Hong Kong, people care about value for money,” says Kaven Leung, head of the north Asia operation of Citigroup Private Bank. “So long as the selection of the products and services is objective and valuable to clients, there will be demand regardless of whether the provider is a family office or mega-wealth team at a bank.”

A powerful weapon in the hands of the big banks, however, is their ability to offer ultra-wealthy families a chance to co-invest with the bank in sought-after private equity deals.

“Because we are taking the same risk as the clients, they know we will be objective in evaluating the opportunity,” says Mr Leung. “Above all, by co-investing with us, clients are benefiting from our due diligence and risk management expertise.”

Still, while groups such as UBS and Citigroup are happy to share some of the risk with their best clients, others believe big banks no longer have exclusive access to the best private equity deals. “Being big is not necessarily an advantage when it comes to some of the most attractive investment opportunities such as private equity, where you can invest only a limited amount,” says Philippe Damas, global head of the private banking at ING. “Moreover, big banks are no longer the first point of call for private equity deals, because everybody is chasing the best deals.”

Another potential problem for Asia’s largest private banks is the growing perception that they may be spreading themselves too thinly. Ultra-wealthy families may start to worry about banks that move too far into the affluent mass market to sustain high profit growth rates.

“I recently met two big Hong Kong clients who said: ‘please stay focused on your segment’,” says Jes Staley, global head of private banking at JP Morgan, which caters to extremely wealthy entrepreneurs and families.

Indeed, whatever they may do to woo Asia’s super-rich, banks will have to make sure they remain the kind of club that clients would actually want to join.
Copyright The Financial Times Limited 2008