March 2023 was – to say the least – a turbulent month for some key players of the financial industry worldwide. 

The volatility faced by international markets as a result of the collapse of the Silicon Valley and Signature banks as well as the merger of UBS and Credit Suisse is evidence that the old advice “do not put all your eggs in the same basket” remains as relevant as ever.

As way of example, more conservative investors may have been revindicated during the first week of April as the price of gold held above USD 2’000 closing in on all-time highs. On the contrary, investors having USD positions may have suffered a bit since the equity risk premium for US equities is the lowest it has been since 2007. It is a known fact that, generally, there is a low correlation (or even inverse or negative correlation) between different asset classes. In some scenarios, when equities are performing well, bonds, real estate, and commodities might correlate. On the other hand, during a drop in the price of stocks, other asset classes, such as real estate or bonds, may be showing investors above-average returns. Examples like this illustrate the relevance of having in place a diversified portfolio by holding investments in various asset classes.

Times like this demand extra cautiousness from investors, who are forced to review the robustness of their portfolios and rethink their contracts with their current service providers (i.e.: banks, asset managers, etc.).

The discussion regarding the benefits of asset diversification has been on the table for long and most experts and investors agree that diversification transforms regular portfolios into solid, less sensitive to market volatility portfolios, thus significantly reducing risks and minimizing losses. Diversification comes in many ways. As an example, geographic diversification may allow the investor to mitigate foreign exchange rate fluctuations or even protect his portfolio from inflation in one jurisdiction. Furthermore, the allocation of assets in various geographic regions also enables the investor to choose between different legislations, central bank policies and  investor-friendly regulations. Asset diversification can also come from diverse maturity lengths, various industries or different asset classes. 

Although the need and benefits of bank and service provider diversification are unquestionable and cannot be overstated, they have been less discussed until recent years. Not long ago, high-net worth individuals and families used to do business with a single bank which usually operated as a one-stop shop where clients could obtain a variety of services and financial products. Whether this business model was efficient or not is debatable. 

The benefits of setting up a multi-bank arrangement are manifold. For example, diversification of banks and asset managers allow to balance the different performance levels across service providers, thus mitigating the lower performance an asset manager may have at a given point of time. Also, by diversifying banks, fiduciaries and asset managers, clients can select best-in-class service providers according to their field of expertise. As an example, clients may decide to work with one bank for a given product, say bonds, but appoint another service provider for alternative asset classes such as private equity. By doing so, clients can ensure that each service provider is working within its field of expertise and can mitigate any poor performance that same service provider could have due to lack of experience with a given asset class. Overall, by having less dependence on one service provider, a multi-bank set-up provides clients with the opportunity to decide on the exact services to be executed by one provider, which allows the client to better manage the fees. Finally, bank diversification allows clients exposure to a different supervisory and regulatory authority.

Although diversification in all its forms (both from an asset and service provider perspectives) is a powerful tool in the mitigation of risks, if not professionally managed, it can develop into a burdensome exercise. In fact, major risks of over-diversification are those associated to higher management costs and lower returns as well as poor identification of risk clusters across portfolios. 

That is when family offices come in to play. Family offices offer a crucial service for every client operating in a diversified scenario: consolidation. Assisted by the latest technology, these institutions act as a single point of contact between the client and the various service providers, whether they are fiduciaries, asset managers or banks. The opportunity to easily access consolidated information of a client’s wealth, taking into consideration both bankable and non-bankable assets, is an essential aspect of a solid controlling system and an efficient decision-making process. Furthermore, family offices can assist their clients in the professional management of risks through constant monitoring and benchmarking. 

The P&P Family Office can offer the services outlined above and more. The P&P Family Office assists its clients with the consolidation of their wealth, by bringing together information regarding investments held in both Swiss and Liechtenstein banks as well as international banks in other jurisdictions such as the United States, Canada, Singapore or the United Kingdom, amongst others. In fact, consolidation may also help clients to have a clear overview of financial assets held not only in traditional institutions such as banks, but also in other wealth management structures. Thanks to economies of scale, the P&P Family Office can offer their clients institutional fees which significantly reduces costs, even when acting in a multi-bank set-up. In addition, unlike traditional family offices, the P&P Family Office assists its clients in a holistic manner by integrating tax, asset, and risk management without any conflicts of interest since rather than providing any asset management or product related services directly, the P&P Family Office helps its clients in the selection and coordination of best-in-class service providers, thus enhancing transparency and independence.