Private Banking vs Multi-Family Offices: Which is Right for HNWIs in Singapore?

Private Banking vs Multi-Family Offices: Which is Right for HNWIs in Singapore?

A Comprehensive Comparison

Singapore is a leading global financial hub attracting high net worth individuals (HNWIs) worldwide. As a result, the city-state has a thriving financial services industry, providing a range of options to HNWIs seeking to manage their wealth. Two popular options are private banking and multi-family offices (MFOs). In this article, we will explore the differences between these two options, their advantages and disadvantages, and help HNWIs in Singapore decide which option may be better suited for them.

Private Banking

Private banking is a wealth management service offered by banks and financial institutions to high net worth individuals. Private banks provide a range of services, including investment management, tax planning, estate planning, and risk management. Private banking clients typically have a minimum investable asset of at least SGD 1 million.

Advantages of Private Banking:

One of the key benefits of private banking is access to a range of investment products and services. Private banks offer clients a variety of investment options, including stocks, bonds, and alternative investments like hedge funds and private equity. Private banking clients also have access to the bank’s in-house research team’s investment research and analysis, which can be helpful for HNWIs who lack the time or expertise to manage their investments themselves.

Private banks also offer clients additional services, such as concierge services and exclusive event access.

Disadvantages of Private Banking:

One of the main drawbacks of private banking is the high fees. Private banks generally charge management fees ranging from 1% to 2% of assets under management, in addition to performance fees on investment gains. These fees can be significantly higher than those charged by other investment managers, such as robo-advisors or exchange-traded funds (ETFs).

Another disadvantage of private banking is the lack of transparency and potential conflicts of interest due to commissions. Private banks are incentivised to sell their own products, often with high upfront and management fees, which can eat into client portfolio returns. This can make it challenging for clients to fully understand the costs associated with their investments and potentially lead to long-term losses.

Multi-Family Office

A multi-family office (MFO) is a boutique wealth management service that provides financial advice and investment management services to multiple families.

Advantages of Multi-Family Offices:

One of the main advantages of MFOs is the level of customization and flexibility they provide. Unlike private banks, which typically offer pre-packaged investment products, MFOs work with each client to develop a personalized investment strategy that meets their unique financial goals and risk tolerance. MFOs also have the flexibility to invest in a broader range of assets, including direct investments in private companies or real estate.

Another significant advantage is the rise of independent-fee structured family offices, which means the family office only earns from the client directly and not through commission or kickbacks from any one service provider. This keeps the alignment of interest with the client at the center and also means the only way for independent family offices to earn more is to grow their clients’ assets under management (AUM) through stable and consistent returns.

MFOs also provide personalized service, with a select number of experienced investment professionals who manage each client directly, understand their financial goals and develop a customized investment strategy to meet those goals. Additionally, MFOs focus on wealth preservation, typically taking a long-term view of investments and aiming to preserve and grow wealth for future generations. This can be particularly appealing to HNWIs looking to pass on their wealth to their children or grandchildren.

Disadvantages of Multi-Family Offices:

One of the main drawbacks of MFOs is their limited scale. As MFOs are typically smaller and more specialized than private banks, they may have fewer resources and capabilities. This can restrict their access to research and investment opportunities, as well as their ability to provide additional services such as concierge services or exclusive event access, compared to private banks.

Choosing between Private Banking and MFOs for HNWIs in Singapore:

The decision between private banking and MFOs depends on the specific needs and preferences of each HNWI. Here are some factors to consider:

Investment Objectives and Risk Tolerance:

Private banks and MFOs have varying investment strategies and risk profiles. HNWIs should consider their investment objectives and risk tolerance when deciding between these two options. Private banks may be more suitable for those who prefer traditional investment approaches with access to a range of investment products and services. In contrast, MFOs may be better suited for those seeking a more customized and flexible investment approach.

Additional Services:

Private banks typically offer a range of additional services, such as concierge services and exclusive access to events and experiences. HNWIs who value these additional services may prefer private banking. However, MFOs may be more appropriate for those primarily focused on investment and wealth management, as well as generational legacy building.

Fees:

Private banks usually follow a commission fee structure, while independent-fee structured MFOs would only charge the client directly. This affects the incentives of which products to introduce to the client and potential conflicts of interest. Both models can be profitable in the long-term, so it depends on the client’s comfort level or familiarity with working with each.

Case Study

Lee, a pharmaceutical company founder who recently sold his company for a substantial sum, seeks a wealth management solution to manage and grow his assets for retirement. He’s interested in investing in tech startups for their growth potential and values supporting sustainable and socially responsible companies.

After speaking with a private banker, Lee finds out that the bank offers a range of investment products, including access to hedge funds and private equity. However, he is concerned that the bank’s investment options may not align with his values, and he is not completely comfortable with the high fees and commission structure charged by private banks.

Similarly, Lee meets with a multi-family office that specializes in investing in tech startups and socially responsible companies. The MFO has a team of experienced investment professionals who work with each client to develop a personalized investment strategy that meets their unique financial goals and risk tolerance. The MFO also has a network of contacts within the tech industry, which can provide Lee with exclusive access to investment opportunities.

The MFO also offers additional services, such as estate planning and philanthropic giving advice, which aligns with Lee’s values and long-term goals. He likes the level of customization and personalized service that the MFO provides, and he feels more comfortable with their transparent fee structure although he understands that some of the services he requires would be outsourced by the family office due to their smaller scale.

Wrap Up

In summary, private banking and multi-family offices are both popular options for HNWIs managing their wealth in Singapore. Private banking offers a range of investment products and personalized services, while MFOs provide customization and focus on wealth preservation. However, both options come with high fees and potential drawbacks, such as lack of transparency and limited resources.

When deciding between private banking and MFOs, HNWIs should consider their investable asset size, investment objectives and risk tolerance, additional services, and fees. It is crucial to carefully research and compare different private banks and MFOs before making a decision. Ultimately, the best choice for each HNWI will depend on their individual needs and preferences. By carefully weighing the advantages and disadvantages of each option, HNWIs can make an informed decision and select a wealth management service that meets their unique financial goals and objectives.

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FAQ

1. What are private banks in Singapore?

A: Private banking is a wealth management service offered by banks and financial institutions to high net worth individuals. Private banks provide a range of services, including investment management, tax planning, estate planning, and risk management.

2. What are multi-family offices (MFO) in Singapore?

A: A multi-family office (MFO) is a boutique wealth management service that provides financial advice and investment management services to multiple families.

3. What are the advantages of private banking?

A: One of the key benefits of private banking is access to a range of investment products and services. Private banks offer clients a variety of investment options, including stocks, bonds, and alternative investments like hedge funds and private equity. Private banking clients also have access to the bank’s in-house research team’s investment research and analysis, which can be helpful for HNWIs who lack the time or expertise to manage their investments themselves. Private banks also offer clients additional services, such as concierge services and exclusive event access.

4. What are the disadvantages of private banking?

A: One of the main drawbacks of private banking is the high fees. Private banks generally charge management fees ranging from 1% to 2% of assets under management, in addition to performance fees on investment gains. These fees can be significantly higher than those charged by other investment managers, such as robo-advisors or exchange-traded funds (ETFs). Another disadvantage of private banking is the lack of transparency and potential conflicts of interest due to commissions.

5. What are the advantages of multi-family offices?

A: One of the main advantages of MFOs is the level of customization and flexibility they provide. Unlike private banks, which typically offer pre-packaged investment products, MFOs work with each client to develop a personalized investment strategy that meets their unique financial goals and risk tolerance. MFOs also have the flexibility to invest in a broader range of assets, including direct investments in private companies or real estate. Additionally, MFOs focus on wealth preservation, typically taking a long-term view of investments and aiming to preserve and grow wealth for future generations.

6. What are the disadvantages of multi-family offices?

A: One of the main drawbacks of MFOs is their limited scale. As MFOs are typically smaller and more specialized than private banks, they may have fewer resources and capabilities. This can restrict their access to research and investment opportunities, as well as their ability to provide additional services such as concierge services or exclusive event access, compared to private banks.

7. How do HNWIs in Singapore decide between private banking and multi-family offices?

A: The decision between private banking and MFOs depends on the specific needs and preferences of each HNWI. Factors to consider include investment objectives and risk tolerance, additional services, and fees. Private banks may be more suitable for those who prefer traditional investment approaches with access to a range of investment products and services. In contrast, multi-family offices may be better suited for those seeking a more customized and flexible investment approach. Private banks typically offer a range of additional services, such as concierge services and exclusive access to events and experiences, while multi-family offices may be more appropriate for those primarily focused on investment and wealth management, as well as generational legacy building. The fee structure is also a crucial factor, as private banks follow a commission fee structure, while independent-fee structured MFOs would only charge the client directly.

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