Monday, August 07, 2006

Goldman Sachs - Swiss Bankers?

With the reputation of Switzerland as the wealth management capital of the world, will Goldman be successful in its expansion into Europe or will the recent press about bank account secrecy being overturned by legislators in the US turn potential clients off. Heather Timmons discusses the latest expansion plans for Goldman.


Goldman, known for its prowess in trading and investment banking, has been quietly building up its international private banking business.

The firm plans to more than double the amount of private client investment managers that it has outside the United States, said Douglas C. Grip, managing director and head of private wealth management international at Goldman Sachs.

“We’re looking to grow dramatically over the next five years,” he said.

Goldman declined to give exact numbers, but that expansion would mean several hundred managers in Europe alone when it is done. Goldman is starting with a much smaller number of private client managers in the Middle East and Asia, but also has similar growth plans there.

Private banking was once the preserve of the Swiss banks — known as the gnomes of Zurich — and about a third of all private banking assets are still held in Swiss banks. But in recent years, private banking has become a fiercely contested field of battle, as banks seek to attract a growing number of very wealthy people, particularly from quickly expanding economic areas like Asia and the Middle East. The Swiss giants UBS and Credit Suisse are the leaders in managing the money of the wealthy, along with Citigroup, HSBC, Merrill Lynch and Deutsche Bank.
Goldman has far to go — it doesn’t make the list of the top 10 wealth managers, according to a Scorpio Partnership study released in June.

Goldman wants to wrestle market share from them in the future by offering access to its line of financial products, and also to pull in some clients from its corporate banking side, where it may already be giving some of these individuals advice about their corporation’s finances.

The bank is setting its sights high: it is focusing on investors with more than 10 million euros, or about $13 million, in assets to invest. Given that criteria, Goldman’s growth plans make sense: Scorpio Partners estimates that Goldman ranks among the top five managers for individuals with $10 million or more, though the bank has been so quiet about the business that Scorpio says many of the world’s wealthy do not know that Goldman wants to manage their money.

Goldman will reach smaller pocketbooks, too, through new joint ventures with dozens of local banks and family-run investment shops that will sell Goldman Sachs investment products under their own brand names. None of these joint ventures have been announced yet, Mr. Grip said, but there are several in negotiations.

“The industry is in constant change, and the best way to innovate is to combine great raw materials and superior intellect,” he said.

Goldman has expanded its private wealth assets more than 30 percent over the last four years, versus an industry average of growth of about 6.5 to 8 percent in that time, he said.

Despite Goldman’s high profile, people in the industry say the real test will be whether the bank can get its hands on new customers’ assets affordably.

“They certainly don’t have a bad brand name,” said Ray Soudah, the chairman of Millennium Associates, a consulting firm for private banks. The question is whether Goldman can mobilize its new network of private wealth managers to bring in new customers at a “reasonable cost,” he said. A majority of banks that have tried to build their own private banking networks have not succeeded, he said. “Hiring a few guys here and there will have a marginal effect,” Mr. Soudah noted.

To get where it would like to be in private banking, Mr. Grip said Goldman was not ruling out buying a Swiss bank. Goldman opened a Zurich office in 1974 and formed a Swiss private bank in 1992, but has been very quiet about its operations there. Switzerland has more than 300 private banks, and the industry has long been considered ripe for consolidation, but the asking prices are steep.

No matter how Goldman tries to increase its private banking business, it will never be a Swiss bank. And that is important to the wealthy of the Middle East, Russian businessmen and others who are drawn to the Swiss tradition of privacy. They may be worried about United States regulatory oversight, although Goldman says its Swiss bank is regulated by banking authorities in Switzerland.

Still, the potential for international private banking is huge. People are growing wealthier, faster, in areas outside the United States than within it, according to a Merrill Lynch/Cap Gemini study. There are 8.7 million millionaires worldwide, and about 85,400 individuals with net financial assets worth more than $30 million, the study said. The percentage of millionaires grew by double digits in South Africa, India, South Korea and Russia in 2005, the survey said. In North America it grew by 6.9 percent.

Goldman already has some private banking operations, though in its financial results it lumps these assets in with institutional money it manages, so getting a sense of their current size is difficult. In the United States, Goldman operates its private wealth management business through 13 regional offices, which have been undergoing some upheaval of their own, including staffing changes, as the bank revamps the business.

To woo private banking clients, one thing Goldman may need to overcome is its own success in aggressively investing money for the firm itself. Mr. Grip acknowledged the firm’s reputation, but said that Goldman was just as capable of building a portfolio for conservative investors, one that would focus on “sleep-well money.”

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