Private banking savours a vintage era

Private banking has enjoyed a renaissance in the last few years. The rich have indeed been getting richer, thanks to resurgent economic growth worldwide, but also due to unprecedented demographic changes. The implications for wealth management businesses are far reaching and long term. Caroline Allen talked to businesses targeting different points on the wealth spectrum.
Private banking is buzzing. The industry is flourishing with quiet confidence, and a widening range of players want a part of it. Brokers, asset managers, tax and legal advisors, consultants and niche managers are all hoping to appeal to the rising number of wealthy worldwide.

"The industry is maturing, like a great wine," says Jeremy Marshall, CEO of Credit Suisse's private banking business in the UK. It is not a business that can deliver rapid results, but those players with a strong brand are about to enjoy a vintage generation. "The business is coming onshore, from its historical position offshore, and that means more transparency. It's also becoming more professional, and that is an excellent trend. No-one thinks anymore that it's about securing opera tickets for a client, or walking their dog. It is about delivering professional advice and solutions to your clients."

Surveys shows that high net worth individuals' assets have been growing at around 6% annually, against global economic growth of 3%. On top of that, the largest inter-generational transfer of wealth in history is underway. The post World War Two Baby Boomers are handing on to Generation Y, the healthiest, wealthiest and most demanding age set ever to inherit.

The attraction of private banking goes well beyond its exclusive cachet, although that remains. Notes Marshall, who has clocked up 20 years in the business: "Analysts are finally starting to realize just how valuable private banking franchises are, and how the revenue stream is considerably less volatile than investment banking, and therefore highly valued."

Pierre Mathé, global head of private banking at Société Générale, set about building a global franchise from 1998. The rapid growth of SG Private Banking is based on the implementation in every entity of a client centric business model supported by a strong financial planning expertise and a wide range of innovative products in a full open architecture environment. To appreciate the results of this strategy, Pierre Mathé identifies three critical factors: growth of net new assets under management, gross margins and a flawless client retention rate

SECURING MARKET SHARE

So popular has the sector become the terms private banking, asset management, and wealth management are being used interchangeably as units re-brand to try to secure market share. For Eric Barnett, MD of SG Hambro, part of Société Générale's SG Private Banking unit, that is an indication of the intense interest in the industry.

Barriers to entry have been relatively low, although they are now rising, and while a 200-year old 'brand patina' is nice to have, it is not essential if you can truly deliver, and meet the expectations of your new clients. "We are definitely a private bank, that is we provide banking services, in the wider context of wealth management. We think of asset management as focusing on institutions, while wealth managers serve individuals or private interests. It is still a very fragmented business worldwide, but we like that, it represents an opportunity."

In such buoyant times, M&A activity should be rife. There have been surges (notably when UBS started re-organising its subsidiaries in 2003). Each announcement came with claims that a shake-down would follow. But it hasn't, at least not in the way expected. SG's Mathé says: "Acquisitions in private banking are an extremely hazardous venture. Firstly, what you are buying is essentially goodwill, so you have to be sure you can retain that, and price it correctly. Then there is the question of cultures, and private banking has a very special one that doesn't work like investment or retail banking."

Joint ventures are another option, but as the market becomes more competitive, that is seen as a diluted offering, unless it opens a specialist market. Where acquired firms are left to get on with their business, they are the envy of banks which are not. Hugh Titcomb, chief executive officer at Ansbacher, now a fully owned subsidiary of Qatar National Bank, has felt free to build a strong franchise in a focused way. He calls it "getting properly organised" and in the process he has disposed of a clutch of marginal businesses, with which, however, he retains friendly connections.

Ansbacher, a 110-year old institution with roots in commercial banking, is using its shareholders' connections to grow its global network of clients. As leading Qatari figures expand their investments worldwide, Ansbacher is alongside them. The bank's other strong card is its presence in the superyacht market. Ansbacher provides the finance on craft worth $10 million-plus and through its subsidiary Sarnia Yachts, arranges corporate ownership, and registration services for the luxury yacht sector. This affords access to the kinds of clients many other players hope their occasional sports sponsorship deals might secure them.

Among those staking a claim in what several executives admit is something of a gold rush, there are stockbrokers like Brewin Dolphin, asset managers like GAM, Newton and Mercury, investment banks like Morgan Stanley and JPMorgan, and a scattering of boutiques. And there are also those offering support services for product providers.

SEI is one of the consultancies that has moved into that space. It has just announced a deal with HSBC Private Bank to provide a dedicated wealth management platform to handle customer relationship queries and to satisfy regulatory and reporting demands. "The sector is growing at a pace where traditional resources just can't keep up," says Brandan Sharett, senior vice president and managing director at SEI Global Private Banking. "The complexity of even existing clients' needs has grown as well. They are looking for more value-added investment advice."

He feels future winners among private banks must follow other parts of the financial services industry and institutionalise their back office operations. "There is a lot they have to stop doing. The client-facing part of the process is obviously critical, but they have to be best of breed in all fields – products, advice and infrastructure." He points to how brokers, masters in the customer relationship management universe, are already eroding private banks' share of wallet with systems that clients can access and monitor for themselves.

On the service side, he believes it is independent financial ad¬visers (IFAs) who are making the running. "This is about deciding if you are a manufacturer or a distributor. The IFA declares and commits. They are distributors. The conflict of interest issue is not going to go away. Look at the class action lawsuits in the US on pushing products, and the impact of MiFID (the EU's Markets in Financial Instruments Directive) here. Independence resonates with clients, but especially the younger generation, who are invariably far more knowledgeable investors."

Todd Ruppert, president and CEO of T Rowe Price Global Investment Services, makes a wider point about perpetuating a successful business model: "Private banking is a lot more than just investment management. We are not a private bank, but it applies as much to us as it does to the investment management part of a private bank.

"Asset management is first a profession, with a business wrapped round it. If you do not diligently and consistently focus first on those factors that will enable the profession to perpetuate itself, you set in motion the eventual loss, decay and possible destruction of the business. An integrity-driven organisation, rather than a distribution-driven organisation, is better placed to serve the profession."

Although the biggest players are global, Credit Suisse's Marshall points out that national distinctions remain, due mainly to varying tax and regulatory systems. However, where regulators are collaborating, there are significant implications in the long run for a more homogenous industry.

In Europe, MiFID is due to come onstream in early 2007 and according to most consultants, many firms are still largely unprepared. The stringent requirements suggest that only those with substantial resources are going to be able to meet all compliance demands.
Open architecture, a mantra in the industry, is widely considered to be the future. SG's Mathe warns: "The clients are wise to that now. We have funds research centres worldwide looking at funds, structured products and hedge funds. For instance, they have looked at 15,000 products this year and selected 340. Twenty of them were SG products. That is what open architecture is about."

Globally, there are clearly different business models. The big US banks' private banking operations are more linked to an equity and brokerage culture familiar at home, but they realise the value of the European approach. "The US does not have the sophistication and the brand recognition we see in Europe, they are very interested in how it is done," comments SEI's Sharrett. "But Europe has issues over implementation where they could learn from the US."
In the US, it is the most focused firms that are doing best. They know what type of client they want to appeal to, and they don't try to serve everyone in all fields. "Look at Wilmington Trust and Philadelphia-based Glenmead — they are clear and disciplined about their core competencies and how those fit into their business models," explains Sharrett.

Where, on the scale between the mass affluent client, who has a portfolio of maybe less than one million, and the family office, a mini institution running several hundred million, do you pitch your stand? Basic fees are undoubtedly higher at the lower end of the scale, and there is greater volume. At the top, there is relentless pressure on fees, and the client is typically far more demanding, not only in terms of more complex product, but service overall. Most private banks value a few well connected names on their client list, but realise that this strata may not be the most profitable.

"This is a critical strategic question, because wherever you choose to be, you better be able to provide the necessary service," says Heinrich Adami, managing director of Pictet. His target is mandates of five million upwards. The "million" always refers to investible assets. "If a small firm is highly specialised, it can probably survive. At the top end, the bigger the fortune, the more confined the number of private banks likely to be considered. Inbetween it is becoming extremely competitive. Mid-tier generalists without world class expertise are going to find it tough."

Private bankers are far too discreet to be rude about each other, but they make the point that clients should be certain they are not dealing with "a Ford Mondeo in a Jaguar skin". Some clients may set great store by the brand name, but from the business point of view, the bank needs to understand exactly what resources it has, to be able to deploy them best. Global banks with strong databases and low marginal costs will have a different proposition from a niche advisor.

The mid tier is precisely where a clutch of venerable British private banks now sit. Some still offer a doorman in top hat and tails to welcome gentlemen (few women attend). But what one executive called "banking artisanale" – firms with a craft, or handmade style - could be in danger of going the way of the quill pen. The new generation of clients is more likely to interact online. It is not that they are not interested, but they have better things to do than attend the office of their banker.

Segmenting clients by background as well as asset level is a new refinement (see accompanying story). While some firms might comb celebrity lists for stars of field or screen to add sparkle to their client list, the numbers look decidedly dowdy next to the pickings available right on bankers' doorsteps: their own colleagues. "With 3,000 people getting bonuses of £1 million-plus in the City of London last year, why do I want to trawl the Premier League for a few footballers?" comments one banker. Entrepreneurs are also on the private banker's A-List, especially if there is time to build a relationship before they make their fortune. Then there is the referral potential.

However, the days are gone when a good relationship would guarantee loyalty. "Clients have complicated needs and want more information faster than ever before," states Adami. "The key to retaining them is performance. With decent performance and a good relationship, you can hold the client. But with a good relationship and only average performance you are in danger of losing them."

SG's Mathé agrees: "You have to ensure there is no gap between the promise and the reality. This is when many clients experience a reality check. The presentations are flawless, the figures impressive. But consider an entrepreneur who might sell his business after 30 or 40 years, and the next year his private banker says, 'Sorry, we lost 10% of it'. This is no hedge fund manager who may do better next year. It's his life's work."

"He may even have said he accepts risk. But when it happens, it is no use pointing to the tick in the box. You are going to lose this client for sure, and he is not going to keep quiet about his disappointment. It is fine to show net new assets under management, but I want a 100% client retention rate. No names, but some of the more aggressive banks fail to address this point. Long term, a bad name is harder to reverse than a market dip."

In the drive for increased market share, capacity or expertise, leadership is critical, and few firms are above naked poaching. Among many recent executive moves, Barclays Wealth Management enticed Ian Ewart away from HSBC bank, while US-based Asset Management Advisors snared Maria Elena Lagomasimo, Michael Zeuner and Michael Holden from JPMorgan Private Bank.

Skilled client advisors command a premium. Banks declare they would rather invest in home-grown talent, but the fact is, in this fast growing market, there is not time enough, nor candidates to hand. "War for talent" is a phrase used by several executives interviewed, and it is no exaggeration.

ATTRIBUTES AND CREDENTIALS

"Banks are looking at universities, other professions, they are getting creative," notes Pictet's Adami. He lists the required attributes: "Advisors have to be technically impeccable and socially talented with a wide network. It is not enough to be a nice guy at the cocktail party. On the other hand, if you have a great technician who is unsociable, the client says 'The guy knows a lot, but I can't stand him'."

Both UBS and Credit Suisse now run their own wealth management academies, both in Singapore, where they are building their foundations for the wealth management region of the future. UBS anticipates training some 5,000 existing and future UBS Wealth Management staff between 2006 and 2010. Liquid assets held by individuals in Asia (excluding Japan) are projected to grow by 9.7% annually between 2005 and 2010, versus a corresponding global growth rate of less than 6%.

Although most big names have global reach, there is a lot to be said for a provincial profile as well. Notes Marshall at Credit Suisse: "There is a lot of money in many countries which is not seated in the capital. In the UK and Europe, Italy and Germany, in particular. These clients want to talk to someone from their local area, so you see some private banks expanding regional office networks."

The list of the world's biggest wealth managers is topped by UBS, consistently. By common consent, UBS spotted the fantastic opportunity in private banking years before anyone else, and went after it with a determination and a war chest no-one has even yet quite managed to match.
Meanwhile, even the biggest names in the business are battling a discreet brain drain as key advisors eschew the big corporate environment for the boutique. Everyone has seen it work for hedge funds, and private banking advisors are doing the same thing.

The management of external advisors is an art, one that appears to sit easier in the Swiss banking culture than the US one, where the big players don't take kindly to employees walking out with a set of client accounts. In theory, Continental Europeans insist the relationship just "evolves" and that in a thriving market, there is room for everyone. In practice, even the biggest players are nervous about allowing access to clients, or even their contact details.

"We try very hard to ensure that the client knows and feels they are dealing with the bank, not an individual," says Mathé. "But in fact a client list is not a golden key as such. If it was, you could buy mailing lists. It's the relationship that counts."

Artickle by the excellent Global Investment Magazine