Before the move to develop its wealth business in 2006, Barclays’ offering consisted of a handful of disconnected international businesses dotted around Hong Kong, Geneva and Monaco, and a UK presence that was seen to cater predominantly to the mass affluent.
Since then, however, the business has evolved into a global competitor that targets clients with more than $5 million in assets, and in some regions more than $10 million. It now has a presence in 20 countries, and has risen to become ranked the 10th-best global private bank in the Euromoney private banking survey.
Its ability to reinvent itself as a global wealth manager was born of a big investment in the business – an expensive undertaking that Barclays has remained committed to in spite of the downturn. Some £350 million ($545 million) is to be invested over five years, frontloaded in 2010, 2011 and this year as part of Project Gamma. Two-thirds of the investment is dedicated to building infrastructure and the remainder to adding staff.
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Tom Kalaris, Barclays Wealth |
Tom Kalaris, chief executive of Barclays Wealth, who was appointed to head the expansion of the business in 2006, says that it was crucial to the entire Barclays franchise, and a natural progression for the firm. “Wealth management is the highest-returning industry in financial services in terms of the return on equity, and in a world where capital is very expensive it is a business that returns well. When we hit the sweet spot, we deal with a client who works with the corporate bank, the investment bank, perhaps some retail banking, and the wealth management business. In a universal bank, if you can marry these parts to provide innovative solutions to client problems, in the long term it is the best model to serve the client and it is profitable for the entire organization.” Net income has increased from £911 million in 2005 to £1.3 billion for the first three quarters of 2011. This 2011 performance puts Barclays Wealth in the top quartile of its peers based on year-on-year revenue growth. “The heavy investment we have made, combined with dislocated markets impacting asset and revenue growth, naturally skews profitability, but we expect to see this pick up a little in 2012, and then in 2013 and 2014 you should see accelerating profits before tax,” says Kalaris.
In an industry that is dominated by private banks that have been operating for decades – in some cases, centuries – differentiation is crucial for a new entrant. For Barclays that differentiation lies in the deeply engrained culture of using quantitative analysis. Barclays Capital is known for its ability to structure and trade complex products. Barclays Global Investors, which was sold to BlackRock, was regarded as a home to mathematics whizzes and rocket scientists. If Barclays is the maths geek of the financial services industry, its private wealth operation is no exception.
In 2006, Barclays Wealth began introducing behavioural finance as part of its portfolio construction. Late that year it started developing a financial personality assessment to gauge how clients would respond to movements in their portfolios and enable its advisers to prevent buy-at-the-top, sell-at-the-bottom reactions. Clients have the option of filling out a six-minute survey of about 35 questions.
It sounds like a gimmick, but Barclays Wealth has pulled apart 40 years of analysis of behavioural finance in its bid to better ensure its clients are in the correct portfolios. Daniel Egan, head of behavioural finance, Americas, says: “Academic behavioural finance looks for evidence of emotional trading and where biases emerge on average. That evidence suggests 1.2% [in returns] is lost a year due to emotional reactions and cognitive biases. We’ve tried to refine that analysis and identify what the individual client might lose, rather than the average – that could be as much as 7%.”
Egan says the firm looked at all the industry and academic questionnaires that seek to identify where behaviour could affect a portfolio. “We came up with 500 candidate questions, and we ran surveys in Hong Kong, Dubai, India, East Asia, the UK and the US until we finally found what the exact dimensions driving the behaviour of clients were, and managed to condense that to the current survey. It’s about discovering how a client trades off risk and return. Whether they enjoy that level? How composed are they? How engaged do they want to be? How confident in their choices are they? What level of engagement do they want? Do they believe in investment skill?”
Only then is a portfolio designed specific to the clients’ profile, either selecting one of several strategic asset allocations or a tactical asset allocation for a more engaged client.
The value of the survey is not just in getting the risk/return profile correct. The questionnaire follow-up discussion opens up a conversation with the relationship manager, giving the client an opportunity to delve even deeper into what they want from the portfolio. “It used to take years to have this kind of insight into what a client really needs and wants,” says Egan. “Often you would have to go through a crisis with them before you understood how they react. The survey enables us to get that understanding from day one. Clients stay with you if they know you understand them, and this is a way for us not just to improve their returns, but to let them know that they are at the centre of the decisions being made.”
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Greg Davies, Barclays Wealth |
AFTER ROLLING OUT THE SURVEY in the UK five years ago, Barclays Wealth now offers it to all its clients globally. “It’s been a big effort and has taken a lot of time and resources in building the online tools and embedding them into the IT systems around the globe and training bankers on how to make this work,” says Greg Davies, who heads behavioural finance globally at Barclays Wealth. “We have early evidence that clients that follow this process are in more stable and diversified allocation and are not jumping in and out, costing them money,” says Davies. He believes the wealth management industry as a whole will have to start including behavioural finance in its modelling. “Classical finance says ‘Here are a bunch of mathematical tools that tell me how to put a portfolio together that is efficient assuming investors are rational’. It is the industry washing its hands of a major component of investing – it’s not just about models, it is also about the decisions that get made.” The type of clients that Barclays Wealth is pursuing calls for this extra level of consideration in portfolio construction. While there had been initial consideration of the mass-affluent segment, the model the firm settled on was one targeting only high-net-worth and ultra-high-net-worth individuals. In the US, the threshold is $10 million in investable assets, in the UK it is £500,000, and in Asia it is $5 million. The ultra-high-net-worth sector is typically dominated by single-family offices and JPMorgan, Citi, Credit Suisse, UBS and Goldman Sachs among the banks. However, Barclays Wealth has managed to nudge its way in.
Stefanie Drews heads the ultra-high-net-worth and family offices business in the UK and EMEA, having joined from Morgan Stanley in December 2010. “Of the 310 pitches in the last 12 months to ultra-high-net-worth individuals and family offices, we have only a 9% loss rate,” she says. Barclays Wealth has 1,500 ultra-high-net-worth clients in the UK and EMEA – a quarter of whom are in the UK. One of its selling points to clients is its Strategic Solutions Group. Within it is an investment club open only to the wealthiest clients. It matches clients with each other for off-market transactions and gives them access to proprietary deals. “We have 34 deals in the club, and added 147 clients last year alone because they wanted access to those opportunities,” says Drews.
There is no doubt also that the strength of Barclays Capital has helped attract clients in the top wealth bracket. In complex structuring around risk management, for example, Drews says Barclays Wealth wins business over its peers. “Barclays Capital is a partner of ours and is fully integrated when it comes to managing risk for the ultra-high-net-worth client. We use their quantitative analysis and risk tools for complex portfolios. The greater the level of complexity, the higher the likelihood we will win business.”
Ultra-high-net-worth clients also have access to Barclays Capital’s traders, leveraged finance and capital markets teams. “We can give them access to our own institutional calibre products, grant credit across a variety of collateral; provide leveraged finance for portfolios or for financing corporate jets,” says Kalaris. “And that is now across jurisdictions, and the level and quality of service is consistent.”
BARCLAYS’ INVESTMENT BANKING business has certainly given it a leg-up in developing a wealth management business in the US. It inherited a presence in the US with the acquisition of Lehman Brothers in 2008. That business was essentially a brokerage firm for individuals with more than $5 million. Mitch Cox, head of Americas, was brought from Merrill Lynch in late 2009 to rethink the model and develop the business so that it was aligned with Barclays Wealth’s full-service approach to wealth management.
Rather than closing the doors on the few hundred brokers within Lehman’s brokerage, Cox took on the task of using the expanding wealth management platform as a way to convince them to take a different approach to investing – turning the broker-client relationship into one more akin to an investment adviser and client.
Cox says: “Not only have we had to convince investment representatives that there is a better way to invest but we have had to build them offerings – such as developing a financial plan, talking about the structure of their wealth, philanthropy, wealth transfer, tax efficiency and discretionary portfolio management.” In 2010, Barclays Wealth in the US opened a national trust company and began offering custom credit solutions. Last year it launched discretionary portfolio management and residential mortgages tailored to the needs of high-net-worth individuals.
Andrew Tinney, COO of Barclays Wealth, adds: “We are still in the early days of establishing loan and deposit books in the US, but when we look at what we can offer on the investment side and project forward, coupled with use of our balance sheet, we think we have a highly competitive offering.”
It has been a case of educating the largely transactionally focused broker-dominated workforce. “We’ve had turnover as it’s not the model for everyone, but we have been taking the guidable brokers and helping them turn increasingly into wealth managers, and we have been hiring more from the wealth management industry,” says Cox. Hires have come from the private banks at JPMorgan, UBS and Credit Suisse, for example.
The firm now has 250 investment representatives in 12 offices across the US. The threshold for clients has also been increased to $10 million. Cox says it is positioning itself as a boutique wealth manager, competing with banks such as JPMorgan and Citi, rather than the brokerage-driven models of Morgan Stanley Smith Barney or Bank of America Merrill Lynch.
It’s a lofty ambition to compete with such domestic stalwarts, and Barclays’ challenge in the US will be educating the industry about its reinvention and building on the brand. To some extent the fact that the brand is relatively new is a positive, says Cox. “We have the benefit of being a new name with little history in this wealth management market, but equally we are only beginning to be a more common name among high-net-worth clients.”
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Didier von Daeniken, Barclays Wealth |
IN BUILDING ITS GLOBAL REACH, Barclays Wealth hired Didier von Daeniken in Asia in 2007. It was seen as a coup: von Daeniken was the former co-head of private banking in Asia-Pacific and head of private banking for southeast Asia and Australasia at Credit Suisse. Rather than opening a blanket attack in a region where growth is almost a given, von Daeniken says Barclays Wealth chose to focus on Greater China, Indonesia and India, which it identified as high-growth markets. The decision was also made to go against the traditional employee structure by hiring predominantly senior bankers. At the end of 2008, 16% of its Asian bankers were managing directors or directors, 37% were vice-presidents and 47% were assistant vice-presidents. Von Daeniken says that by the end of 2012, 60% of its Asian private bankers will be managing directors or directors.
“In Asia we serve clients with more than $5 million in investable assets with us, so it is important that we have highly experienced senior bankers,” says von Daeniken. “We want bankers who have been through financial crises, who have seen volatility and clients’ moods changing, and understand the value of our behavioural finance capabilities.”
The new recruits came from various financial institutions, including UBS, Credit Suisse, HSBC and Goldman Sachs. Barclays Wealth now has more than 100 bankers across the region and plans to increase this number by 50% by 2014, the majority in 2012.
The firm has had particular success with Indian clients – both in the non-resident Indian (NRI) segment, and onshore in India for residents. In 2009, Barclays Wealth had just a small number of bankers covering non-resident Indians out of Singapore. Now it has 40 bankers in Singapore and Hong Kong dedicated to the segment, and assets and revenues for its NRI business have quadrupled.
In 2008, Barclays Wealth started to build its platform to serve clients onshore in India. Revenues grew close to 40% in its India onshore operations last year, and the asset base by almost 50%. In this year’s Euromoney private banking survey, Barclays Wealth ranked fifth for best private bank in India. It’s a big achievement in such a short time, up from 18th in 2010 and 11th in 2011.
| Barclays builds wealth |
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| Source: Barclays Wealth |
Von Daeniken attributes some of its success in its India onshore operations to the fact that it has managed to build a comprehensive offering to clients. Barclays Wealth offers investments like its peers, but also credit solutions, helping India’s entrepreneurs monetize their holdings. It is also one of the few global banks to have a wealth advisory offering in India, handling succession planning, trust structures, escrow funds, and legal and tax advice.
“High-net-worth clients in India need these aspects of wealth advisory. From a jurisdictional standpoint their needs can be quite complex. They may have real estate in the UK, an investment in Indonesia and their business in India,” says von Daeniken. “No one else offers that combination of advisory solutions, leverage as well as fiduciary services.”
In India, Barclays Wealth has now broken even, and the plan is to stick with its five onshore locations in Bangalore, Chennai, Delhi, Kolkata and Mumbai, increase by 15% its headcount of bankers, and maintain the growth rates in revenues and assets. “By the end of 2012 we want to be the top global player in India,” says von Daeniken. “We don’t want to be in competition with the local players, but where we do fit in is as a full-service wealth manager that can advise the increasing high-net-worth population that wants a bank with global experience.”
Barclays Wealth has also had success in Africa. It ranks second this year in the continent, up from fourth last year. Client assets in the region grew 19% over 2011 for both Absa Wealth, its onshore South African business, and its offshore business services in Botswana, Zambia, Kenya, Tanzania, Nigeria and Ghana.
WHILE ITS GLOBAL GROWTH strategy appears to be bearing fruit, surprisingly Barclays has dropped down the rankings in its home turf of the UK in this year’s survey. It ranks fifth this year after a longstanding residency in first place. Kalaris says he finds the results unusual given the growth in the UK client base. UK income since 2009 has grown more than 25%. “The big change is that we are focusing on high-net-worth and ultra-high-net-worth individuals, and we are winning the game there and gaining share,” he says.
While clients are clearly engaging with Barclays Wealth and signing up to its creative portfolio construction and investment banking prowess, it seems that the rest of the global private banking industry is unaware. Several heads of private banks have said they thought that Barclays was focusing on the mass-affluent sector in the UK and was a high-end broker in the US. Perhaps Barclays might have reinvented itself so much that it needs to educate the industry on its new identity. As Tinney points out: “By the end of the Gamma investment programme, nothing we offer from the first point of client service and interaction will be the same as when we started building out in 2006.”
On the other hand, keeping the competition in the dark a little longer might work in Barclays’ favour.
