American family offices eye Europe

American multifamily offices are beginning to venture into the lucrative European wealth market, but the unanswered question is whether the invasion will be welcomed or shunned.

According to a new report by Boston-based consulting firm Celent LLC, the family office market in Europe “is still underexploited,” serving fewer than one in five Europeans with investible assets of more than $10 million. What’s more, the report noted, there are about 28,500 of these ultrahigh-net-worth individuals in Europe, whose collective wealth totals $3.3 trillion.

Such a mouthwatering market opportunity has understandably attracted the attention of American family offices.

Most notable to date has been New York-based Rockefeller & Co. Inc., one of the largest American family offices, which administers about $30 billion of assets. In an eyebrow-raising deal in June, the firm’s parent company, Rockefeller Financial Services Inc., sold a 37% stake of itself to Paris-based Société Générale, the second-largest bank in France.

As a result of its new affiliation, Rockefeller & Co. is “taking a hard look” at opening offices in London and Switzerland next year, said James McDonald, president and chief executive of the multifamily office.

Other American multifamily offices, including GenSpring International LLC and Highmount Capital LLC, also are looking to establish a beachhead in Europe. To accommodate this flurry of interest, the Chicago-based Family Office Exchange, a leading industry peer group association, just doubled the staff of its London office.

The U.S. firms are optimistic that their brand of wide-ranging personal services, planning and open architecture will be well-received in Europe.

“Our only source of income is the client. In Europe, there are firms who agree to share income with a bank [in return for selling their product]. We don’t believe in that at all,” said Santiago Ulloa, president and chief executive of Palm Beach Gardens, Fla.-based GenSpring.

And according to Family Office Exchange president John Benevides, Europeans have become “more open to inquiring about a [family office’s] ability to offer integrated services, advice, execution and open product access.”

But other observers are more skeptical.

“I’m not sure there’s a particular need for American family offices in Europe,” said John Paredes, a New York-based analyst for Celent and co-author of “The European Family Office Market: Where is the Opportunity?”

“There’s a question of whether they can set themselves up to have enough local flavor and expertise,” he said.

Mr. Paredes and other market observers note that Europe, and particularly Switzerland, has a rich tradition of private banking that has served wealthy families for centuries.

“Setting up a family office in Switzerland is like trying to go into France and sell wine,” he said.

To be sure, American family offices hoping to enter the European market have no illusions.

“The growth prospects look appealing, but there are challenges,” said Steven Hoch, a partner at Highmount Capital, which is based in Boston and New York.

“You need insiders to get the right contacts,” he said. “You can’t go cold-calling; you must have referrals. It’s a long process.”

Moreover, American-style multifamily offices are “an entirely new concept” in Europe, Mr. Benevides said.

“The market has to understand the concept first,” he said. “We’re just in that stage right now.”

American family offices, Mr. Benevides said, offer not only financial, estate and tax planning but family governance and legacy planning in addition to investment advisory services.

“Americans are more open to sharing information,” he said. “But this is a new concept in a market where clients are less predisposed to sharing as quickly or as deeply as Americans.”

These privacy concerns have been heightened by more-stringent U.S. laws related to compliance and disclosure enacted after Sept. 11, 2001, including the USA Patriot Act.

“They are a huge, huge concern,” Mr. Benevides said.

“Wealthy clients are very private, and [U.S. regulations] can be a little intimidating,” Mr. Hoch said.

“A lot of foreigners are leery of doing business directly with a U.S. firm,” he said. “The key for a firm like us is to have a separate presence outside the U.S.”

Indeed, market observers are paying close attention to the Rockefeller deal with SocGen as a possible blueprint for conquering the U.S. market.

“We’ll have to see how they draw on each other’s expertise,” Mr. Paredes said.

“Rockefeller has extensive experience dealing with the highest caliber of private clients who want the most discretion for longer than anyone else,” he said. “SocGen brings a universal bank’s capital markets expertise that Rockefeller couldn’t get to the same extent with a smaller entity.”

In fact, Mr. McDonald acknowledged, “it would have taken us decades to build out to get the point where SocGen is in terms of location, global contacts and licenses.”

In addition to SocGen’s “connections with potential clients and professionals,” he noted that Rockefeller was extremely impressed with the French bank’s “well-known expertise in structured products.”

For clients able to invest in high-risk instruments such as derivatives and futures, Mr. McDonald said, SocGen’s market expertise will be “very helpful going forward.”

SocGen’s structured products would indeed “put some heavy octane in [Rockefeller’s] tank,” Mr. Benevides said.

Nonetheless, many in the wealth management and family office businesses wonder why Rockefeller made the deal with SocGen on the heels of the trading scandal disclosed in January that resulted in a $7 billion loss for the French bank.

“You have to wonder about the risk management issues,” said one rival executive, who asked not to be identified.

When the question was posed to Mr. McDonald, he responded that Rockefeller “studied [the issue] very hard” before finalizing the deal.

“On virtually all levels of potential problems, SocGen held up extremely well. In terms of risk control around subprime collateralized debt obligations and other areas, SocGen has done better than the vast majority of banks and security firms in Europe,” Mr. McDonald said.

“It is very noteworthy that SocGen was able to replenish all its capital in one single right offering, which was very different from organizations who had to continually raise capital,” he said.

On the other side of the table, Rockefeller offers a well-established firm synonymous with wealth, its Rockefeller IT Solutions division, which offers a software platform to support the complex account needs of ultrahigh-net-worth clients, and clients for whom $30 million or more in investible assets isn’t unusual.

And Rockefeller and other American firms are convinced that a new generation of wealthy Europeans may be growing tired of a European private-banking model that promotes in-house products and advisers who are given incentives by the money managers whose products they sell.

“It’s a conflict of interest, that’s the main difference,” said Mr. Ulloa, who hopes to open a GenSpring office in Spain by the end of the year.

“The younger generation wants to be more international,” said Mr. Hoch, who said Highmount is pursuing efforts to “build up a physical presence on the continent and in London” through joint ventures and strategic alliances.

E-mail Charles Paikert at [email protected].