Families want to know which ones can keep their holdings out of harm's way. The ongoing and longstanding financial crisis is leading some ultra-high-net-worth families to rethink their custodial relationships, according to WealthTouch, a Denver-based outsourcer to the family-office space.

Families that have upped their sideline reserves in reaction to pronounced market volatility are especially keen to find safe havens for cash. Though this has been a mounting concern since financial-service companies started to wobble under the weight of the subprime crisis in mid 2007, it became more of a priority when Lehman Brothers' collapsed in September 2008, triggered several seismic shifts in investment-bank ownership, and cast a pall across Wall Street that government bailouts have, so far, failed to dispel.

Is it safe?

"We are inundated with custodial migration projects," says Norman Jones, CEO of WealthTouch, a provider of data-aggregation, investment-reporting and expense-management services to about 180 high-wealth families. "Instead of having $100 million on three platforms, families are putting it on six platforms."

In other words, to the extent that they ever embraced it, the financial crisis is prompting some of the family offices WealthTouch works with to move away from the "global custody" concept.

This matters because primacy is vital to custodians, which make money from commissions, interest and, where applicable, investment-product fees. RIAs custody more than three quarters of their clients' assets with their "primary" custodians, according to a recent equity-research report out of Citigroup.

So family-office custody specialists, which aspire to be "sole" rather than just "primary" custodians to the entities they serve, have to demonstrate that they're secure places to store assets.

As Jones puts it: "The question families are asking now is, 'Which custodians are safe?'"

Simple trust

The answer to that one is simple, says Jim McEleney, head of the non-U.S. arm of BNY Mellon Wealth Management 's Family Office Services (FOS). The safe ones are "custodial banks" that segregate "assets away from the bank in trust, not on the balance sheet." The shaky ones, conforming to a "brokerage custody" model, are apt to pledge custody assets as margin -- a dangerous ploy for the assets' owners if the custodian's parent is over-exposed to "toxic" holdings such as subprime-derived securities.

As it happens, BNY Mellon is a custodial bank and its FOS group has seen a significant increase in new assets over the past 15 months, according to McEleney.

Similarly, State Street's Wealth Manager Services "has seen a [sharp] increase in new business from families seeking a safe harbor to consolidate positions with an organization that has global depth and a well capitalized balance sheet," according to Martin Sullivan, the unit's head. "From our vantage point, the benefits of the global custodian model and [the] advantages of holding assets as a trust company appear to be performing exceptionally well -- and families are actively seeking it."

In addition to the security of trust-held custody, McEleney says that simplicity of business model is an attractive feature of BNY Mellon's approach. "Families know that this is the core of our business, that our custody platform is a springboard for managing assets and servicing assets, the two main things we do."

Don't blink

WealthTouch exists in part to provide consolidated, multi-custodial views of its clients' holdings. Obviously then, its clients are apt to have multiple custodians. Many of these families, Jones reiterates, are indeed adding custodians to the mix. But he's reluctant to say that wealthy families outside WealthTouch's client base are rejecting global custody.

Besides that, much of what BNY Mellon and State Street have to say about the benefits of their approaches to global custody makes intrinsic sense to Jones. "State Street, Schwab, some others; they've kept their noses clean; they don't have investment banks, so they're uneffected by the subprime cancer that has infected so many others."

The point is that families are nervous and they're looking for solid custodians to help calm them down. "And," as McEleney puts it, "families are moving fast in this crisis." -FWR

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