Choosing the right custodian and custody arrangement for your clients is one of the biggest decisions a multi-family office will make.
There are no hard and fast rules for multi-family offices when it comes to opening an omnibus custody account – where client assets are pooled – or opting for third-party segregated custody, when clients are directed to open individual accounts directly with a preferred custodian.
Much will depend on your assets under management and the types of clients you look after, alongside other requirements. If your clients are sophisticated, professional investors, who require tailored value-add services, such as currency hedging, credit, or perhaps U.S. clients with bespoke reporting needs, then a segregated arrangement might make more sense.
Similarly, clients investing in hedge funds and private equity may be better suited to segregated accounts. Under the omnibus model, once client assets are pooled there is less flexibility to tailor services similar to those mentioned above for the individual client.
Five things to consider when choosing a custodian
When seeking a custodian to safeguard client assets, a good starting point is to make sure you feel confident the firm has the experience and capabilities to meet your requirements.
Here are a few points to consider:
- Are you comfortable with the custodian's reputation and credit rating?
- Does the custodian have appropriate capabilities and in-house expertise to meet your requirements?
- How robust are its operational procedures? Are systems and controls in place to help safeguard assets?
- Does your custodian meet your global jurisdictional needs?
- How committed is the custodian to the segregated client custody model given that it is time-consuming to move client assets to another provider?
To get the most out of your custody arrangement, it's worth thinking about how you wish to grow your business. Likewise, where does your multi-family office add the most value for customers? With this in mind, consider how your custody arrangement could complement, or even enhance, the services you offer.
The segregated route
Multi-family offices typically use third-party segregated custody accounts in the early stages of their business life. As the company starts to build assets, the main priority will be to focus on core capabilities, such as investment management or wealth planning.
The segregated custody model can free up time to focus on the needs of clients and build assets under management, while leveraging the balance sheet strength of the custodian.
On a segregated basis, the custodian has responsibility for holding client assets from a regulatory perspective. This offers both capital allocation and regulatory oversight benefits.
“Smaller multi-family offices may prefer to contract on a segregated basis, simply because they don't have the infrastructure to support omnibus custody or can amortise the higher cost of entry to this model," says Edmund Holzapfel, a director at RBC Wealth Management in London.
“They do not need to hold client money and may not require complex middle office software for reporting, instead leveraging the custodian's platform for this obligation. The custodian provides the report in the client's name, telling the client and investment manager how many assets each client holds, with a portfolio valuation per client."
Even larger asset managers opt for segregated custody in certain circumstances.
“Some of the biggest multi-family offices have not moved to the omnibus model because their clients appreciate the complementary, value-added services that segregation provides. For example, cost-effective securities-backed lending," says Stuart Mauger, a director at RBC Wealth Management in Guernsey.
Others may have grown their assets with teams hired from different custodian banks and therefore prefer to maintain their long-standing relationships by continuing to partner with those firms.
Another drawback associated with segregated accounts is the multi-family office has to undertake a larger number of reconciliations. This can be a timely process that requires internal resources, especially when working with multiple custodians. The option of consolidating segregated custodians or changing to an omnibus model then becomes a consideration.
The omnibus model
A multi-family office will need to be authorised by their regulator to hold client assets and will have to meet and adhere to increased regulatory obligations and costs. Anti-money laundering checks and client on-boarding fall firmly to the multi-family office rather than the custodian, with the benefit of adhering to their home market regulations rather than those of the third-party custodian.
Another advantage of the omnibus model is it drives operational efficiencies by creating economies of scale. A multi-family office can set up an omnibus account with a custodian, pooling client assets together. This allows the investment manager to trade more efficiently for underlying clients.
For any multi-family office considering the switch from segregated to omnibus custody, there are a number of points to consider. First, the shift to the omnibus model will incur costs. This is because the investment manager needs to develop internal resources and infrastructure to support the omnibus arrangement.
As client assets are combined in one custody account, the multi-family office is responsible for breaking down the assets at a client level to see individual holdings, known as books and records. They also need to provide performance reporting, risk analytics and benchmark reporting and valuations, but added to this will be responsibility for tax and the regulatory reporting to clients, such as those covered by Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA).
Middle office software can facilitate this. While more staff will be required to implement and manage the software, it's likely fewer operational staff will be needed to manage the relationship with the custodian because of the efficiencies of the omnibus account.
There is, however, a level where the savings gained from lower-cost omnibus custody justifies these operational investments. Much depends on the infrastructure and resources that are already in place at the multi-family office. For a company with more than £1 billion in assets under management and growing headcount, the prospect of expanding the internal operations team could be seen as a long-term investment for the business.
“If a multi-family office has 50 staff, the prospect of taking on a project team will have less of an impact," Holzapfel says.
The hybrid approach
Adopting a hybrid model can allow a multi-family office to benefit from the operational efficiencies of pooling retail client assets, while segregated accounts can be used for families with more complex requirements.
“If a multi-family office has 200 accounts that are of a certain size and their focus is on investment performance, they can pool these through omnibus custody. At the same time, they can run segregated accounts for any clients who want value-add services," Mauger says.
The hybrid model can also cater to multi-family offices with clients from different jurisdictions. This approach is taken because some jurisdictions require the custodian to segregate assets at a client level to meet regulatory requirements.
Business evolution has more than one path?
There isn't a one-size-fits-all solution when it comes to picking the right custody model for your business. Selecting a custodian that can offer you flexibility, but also stability, is crucial.
If you are considering changing from segregated to omnibus custody, make sure your multi-family office has reached critical mass, can continue to service its clients' wider financial needs and is ready to take on the requisite regulatory responsibility.