Leveraging Private Banking in Family Offices
Strategic borrowing can help family office clients meet their unique goals and manage risk.
Now more than ever, strategic borrowing can be a key component in a holistic financial plan. Leverage can help family offices minimize tax implications for clients by avoiding the liquidation of assets while sticking to long-term investment strategies that benefit future generations.
Many family offices find that working with a strong private banking partner, with substantial lending resources and the expertise to deploy leverage, is critical to preserving and growing wealth that spans generations. But private banking for a family office isn’t a cookie cutter exercise; it’s a nuanced service and requires deep knowledge and experience.
“A private banker is an integral member of the family office’s team,” says Regina Burlington, Senior Private Banker and Head of Global Family Office Private Banking at BNY Mellon Wealth Management. “Anticipating potential liquidity needs for family members helps ensure a family’s financing requirements are met in a timely and seamless manner.”
New forces driving credit needs for family office clients
Borrowing behavior is very different for today’s family office client. Requests for lines of credit are often driven by forces beyond the norm just a few years ago. In short, there’s an increased appetite for leverage among family office clients.
“The low-interest rate environment combined with the strong equity markets have created opportunities for families to leverage their portfolio assets, rather than making untimely liquidations,” Burlington says. “Many family offices support multiple generations. This implies increased liquidity scenarios as younger generations purchase homes, raise families and pursue personal investment opportunities and charitable causes.”
Rock bottom rates tend to trigger borrowing, of course. Opportunistic investors take advantage of the positive arbitrage between the loan’s carrying cost and the anticipated investment return. This strategy offers an increase in cash flow, making planning a lot easier, and taking some of the uncertainty and anxiety out of financial planning for the family office.
“At the same time, a family’s investment team may be reluctant to disrupt long-term investment strategies or market holdings,” according to Burlington. “In some cases, leverage can act as bridge financing to effectively move from point A to point B, enabling the family office to maximize tax planning and consider potential asset reallocations.”
“We have conversations every day with families about opportunistic borrowing needs and how they might leverage their assets. That’s not something that happened with regularity a few years ago.”
How private banking helps family offices
Some family offices like to have a third party talk to a family member about matters of finance and fiscal responsibility. Family offices work with Burlington at BNY Mellon Wealth Management to facilitate such conversations.
Discussions with younger generations can touch on the importance of not taking on too much leverage, the value of having a good credit score, the mechanics of compound investing, and why they should stay invested over the long term. Other topics might include the option of taking out a mortgage if taxes and interest expense can be deducted. In short, strategic borrowing may be used to optimize both sides of a family’s balance sheet, which can be particularly important when there are multiple generations to serve.
As families seek greater alpha over the long term to provide more capital for future generations, asset allocations may shift to private equity and other alternative investments that require capital calls. A line of credit can help to bridge these short-term liquidity needs while helping to maintain long-term investment plans and minimize tax implications.
The personal touch matters
Personal service looms large in private banking. Examples range from putting in place lines of credit, to accessing funds internationally, and everything in between. That’s all part of the job for private banking professionals.
That level of service doesn’t go unnoticed by family offices that have successful and demanding clients who encounter many investment opportunities. From that perspective, it helps to work with an experienced private banker with expertise in many different areas of lending.
“Experience shouldn’t be overlooked,” says Burlington. “Whatever experience and expertise a client needs exists within our team, and that’s our biggest value add.”
The Global Family Office group at BNY Mellon Wealth Management understands the unique and evolving challenges that families face, starting with the first liquidity event and creation of the family office and continuing through the transition of the office to future generations. Backed by the institutional resources of BNY Mellon, we are focused on delivering specialized advice and tailored solutions to help family offices and their advisors manage the complexities that exceptional wealth presents.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. The information in this paper is as of November 2021 and is based on sources believed to be reliable but content accuracy is not guaranteed. © 2021 The Bank of New York Mellon Corporation