Insourcing and Outsourcing Family Office Functions

Selecting External Capabilities Through a Comparison of Global Wealth Management Platforms

Executive Summary

When building a family office, keeping every function in-house is not always optimal. Investment management, custody, access to private markets, consolidated reporting, and other functions may be provided by external financial institutions and specialist firms.

At the same time, the more functions are outsourced, the more the family needs governance capabilities to determine its investment policy, risk tolerance, succession policy, and other matters, and to select and oversee multiple external providers.

Using publicly available information from global financial institutions with different business models as case studies, this article considers the design of a modern family office not by asking which financial institution is superior, but by asking what the family should retain and what it should outsource.

Must a Family Office Keep Every Function In-House?

Building a Single Family Office (SFO) often brings to mind hiring specialist personnel such as a Chief Investment Officer (CIO), portfolio managers, investment analysts, and administration and compliance professionals, and developing the necessary capabilities internally.

In practice, however, a family office does not necessarily need to keep every function in-house.

Particularly in investment-related areas, a family can combine private banks (PBs), External Asset Managers (EAMs), asset managers (AMs), custodians, and specialist private markets managers to access highly specialized capabilities without creating an excessively large internal organization.

The first step is therefore to distinguish among:

① Functions the family should retain② Functions that can be outsourced③ Functions the family should oversee even when outsourced

These are three distinct categories.

Investment objectives, risk tolerance, long-term asset allocation policy, succession policy, and similar matters inherently belong to the family's own decision-making.

By contrast, there may be scope to use external specialist firms for individual product selection, trade execution, investment research, custody, consolidated reporting, and other functions.

The key is not to confuse outsourcing with relinquishing decision-making.

[Figure 1] Breakdown of Family Office Functions

FAMILYPurpose, Values, and Succession Policy↓GOVERNANCE FUNCTIONFinal Decision-Making and Oversight↓RETAIN IN-HOUSEInvestment Objectives • Risk Tolerance • Asset Allocation PolicySuccession Policy • External Provider Selection and OversightOUTSOURCEInvestment Management • Investment Research • Trade ExecutionCustody • Consolidated Reporting • Private MarketsADVISER SUPPORTTax • Legal • Trusts and Succession • Corporate Administration

Figure 1: Prepared by FOPAJ

The Choice Is No Longer Simply PB or EAM

Traditionally, wealthy families commonly placed their assets with a particular PB and administered them primarily through a relationship manager employed by that bank.

With the EAM model discussed in the previous article, assets remain with a bank or other custodian while the investment management and advisory functions are placed outside the bank.

In current family office practice, however, the available options can no longer be understood through a simple PB-versus-EAM dichotomy.

One reason is that global financial groups increasingly provide services across traditional industry boundaries.

For example, some models are built around an asset management company but also provide wealth management and multi-custody capabilities.

There are also PBs owned by a family that provide long-term investment management and services for financial intermediaries.

Some groups combine multiple capabilities, including private banking, asset management, alternative investments, custody, and asset services.

Family office practitioners should therefore evaluate financial institutions not solely by their traditional business category, but by asking:

Which specific capabilities can be obtained from the external provider?

This is the relevant perspective.

New Challenges Created by Outsourcing

Although this model offers benefits, it also creates new challenges.

The first question is who maintains an overview of the whole.

Using multiple PBs, EAMs, asset managers, and other providers may reduce dependence on a single financial institution. At the same time, it can become more difficult to understand duplicate positions in the same security, currency exposures, liquidity, private markets allocations, borrowing, and other matters across the family's assets as a whole.

The second challenge is conflicts of interest.

Terms such as "independent" and "open architecture" do not by themselves establish neutrality. The fee structure and product selection process must be reviewed, including proprietary products, third-party products, transaction fees, and investment management fees.

The third challenge is total cost.

The evaluation should use Total Cost of Ownership (TCO), including not only external managers' management fees but also custody, transactions, foreign exchange, funds, private markets, reporting, fund structures, and other costs.

Greater outsourcing does not therefore necessarily reduce the role of the family office.

Rather, its role may shift:

From an organization that manages assets itself to one that selects, integrates, and oversees multiple external providers.

This may become the family office's central role.

Criteria for Comparing External Platforms

At a minimum, external providers should be evaluated from the following perspectives.

① Ownership structure and governance  ② Investment management capabilities  ③ Custody options  ④ Substance of open architecture  ⑤ Private markets capabilities  ⑥ Consolidated reporting  ⑦ Connections with external professional advisers  ⑧ Fee structure and conflicts of interest  ⑨ Total cost

More importantly, selection should begin with:

What the family needs, rather than what the financial institution can provide.

That is the appropriate starting point.

How, then, do global financial institutions actually combine these capabilities?

The following sections compare publicly available information from three firms with different business models.