The most fascinating part of the global financial services industry today is private banking. It’s a market that is already huge, with $30 trillion in customer assets, yet still fast growing at between 6% and 7% a year. It is fragmented. The global leader, UBS, has between 3% and 4% share and the top 10 have amassed only 14% of the market between them. It is highly remunerative. The world’s 8 million or more individuals fortunate enough to have at least $1 million in liquid financial assets pay the banking industry roughly $250 billion in management and advisory fees each year to look after this wealth.
So it’s no wonder that all manner of asset managers, commercial and retail banks, investment banks and broker-dealers are figuring out the best way to wrest control of this market from the traditional private banks. These, notably the Swiss private partnerships and smaller quoted banks, have been stymied in recent years by the increasing costs of regulatory compliance, the exposure of mediocre returns from their in-house investment management, the high IT costs of establishing ready access to best-of-breed third-party investment products, and their lack of global scale in a market whose fastest growing segments include Asia and the Middle East.
The traditional Swiss private banks are losing their customers’ assets and those international banks with stronger brands and better products, salivating at the opportunity, are writing their business plans for acquisition-led growth and hiring sprees.
Because many of the targets are small in market value and even assets under management, the gathering pace of M&A activity is easy to miss. There were more than 40 M&A deals involving private banks in the first half of this year, a big increase on 2004, when there was a considerable rise in numbers of deals.
It’s worth asking, however, whether the global banks with big brands will successfully attract and retain the best private bankers who are the key to winning and keeping client assets. Many good private bankers dislike working for very large banks. They feel that bankers cannot forge long-lasting relationships with wealthy families because the banks will regularly impose customer segmentation based on location, size of account or client profile – insisting that bankers hand their clients over to others because this suits the banks’ own ever-changing management matrices.
And the private bankers are poor relations. None of the big, global banks focuses just on private banking and none is run by a career private banker. Indeed, few even of the private banking divisions inside the global banks are run by career private bankers.
Even worse, good private bankers are hugely suspicious of banks that boast about the strength of their products. The bankers deduce, often correctly, that the banks see them merely as an additional distribution channel on which to foist discretionary accounts that the banks will churn, or questionable funds or structured products that the banks are struggling to sell to institutional investors.
Good private bankers know how to play this game. They’ll shift enough of the in-house dross to keep management off their backs and strive to put their clients into enough good positions to keep them satisfied and allow the bankers to meet their own gaze in the mirror. But the mid-30s rising star does not want to make his or her key career move to somewhere where this game – and coping with in-house bureaucracy – takes up most of the day.
It’s clear that private banking is a hugely attractive area of the financial markets now up for grabs. It’s far less clear which business models or which banks are likely to emerge in the next five years and succeed. But Euromoney will offer a few suggestions in its annual ranking of the best private banks in January.