Private banking: Regaining trust, restoring returns

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By:
Helen Avery
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The financial crisis proved almost as tough for wealth managers as it did for investment bankers. They have worked hard to redeem reputations and improve services. The heads of the world’s eight leading private banks tell Helen Avery how they are giving clients the returns they expect.

Private Banking and Wealth Management Survey 2011

Press release

Features

Private banks rebuild trust and sharpen their focus

The ins and outs of open architecture

Model portfolios – a private banking solution?

Regaining trust, restoring returns

Brazil’s private banks compete head-on for risk-averse clients

Private banks set Russian growth agenda

Wealth managers chase India’s burgeoning rich

Foreign and local banks battle for China’s golden generation

The Survey
Full results index
Methodology

Participants

  • Walter Berchtold, CEO of private banking at Credit Suisse(CS, WB)
  • Douglas Wurth, CEO JPMorgan International Private Bank(JPM, DW)
  • Sallie Krawcheck, President, Bank of America Global Wealth and Investment Management (BoA, SK)
  • Jacques d’Estais, CEO, BNP Paribas Wealth Management(BNP, JE)
  • Chris Meares, CEO, HSBC Private Bank (HSBC, CM)
  • Jane Fraser, CEO, Citi Private Bank (Citi, JF)
  • Pierre de Weck, head of Private Wealth Management,Deutsche Bank (Deutsche, PW)
  • Juerg Zeltner, CEO of UBS’s wealth management division(UBS, JZ)
What were the biggest challenges in the private banking industry in 2010?



BoA, SK Even though much of the world wealth that was lost in 2008/09 (with the exception of real estate) was recouped by 2010 and many of the investment indices have returned to pre-downturn levels, there has been a sea-change from the client’s perspective. Clients have a lower tolerance for risk. For many, wealth management is no longer a spectator sport and they want to be more directly involved in the process, or at least feel they can be, should they want to. Uncertainty for most of the year around important tax and estate planning issues caused clients to put off decision-making about charitable giving, gifting, investing and estate planning.

JPM, DW The biggest challenges were increasing transparency around investment decisions and achieving superior returns in challenging and uncertain markets. Recruiting and training talent to execute on aggressive growth agendas is also a challenge faced across the industry.

CS, WB Client activity was more subdued than in 2009 and this impacted revenues in the private banking industry, especially in the low interest rate environment. Regulatory developments also presented challenges and have continued to do so.

Citi, JF Regaining clients’ trust. The industry did not serve clients effectively through the crisis; there is a relationship that needs to be rebuilt there. We moved our bankers away from formulaic compensation packages and moved to a model of entirely open architecture.

HSBC, CM Low interest rates were a challenge, both for cash-rich clients, who were getting disappointing deposit rates, and for banks, experiencing margin compression. That’s going to continue in 2011, although now inflation is beginning to rear its head, which will start pushing up interest rates.

Also there is still a lot of uncertainty around the eurozone and global economic growth that is still constraining risk-appetite of investors.

UBS, JZ Having only just emerged from the turmoil of the recent financial crisis, clients are becoming more and more demanding. Generating positive performance is an enormous challenge. Getting there will likely require frequent changes in the way an investment portfolio is managed. Strategies such as buy-and-hold are often not a viable option, as the focus shifts to regularly updating risk profiles and actively aligning investments to market conditions.

BNP, JE Market uncertainty and volatility created challenges around how to best manage clients assets, and there was strong pressure on economics with declining revenue margins. High regulatory oversight, particularly on offshore centres, also proved challenging.

Deutsche, PW 2010 was clearly a less difficult year than 2009, and we saw a recovery in assets and margins. However, it was challenging to convince our clients that it was the right time and environment to increase risk taking. The forex environment was also difficult to navigate. The cost of hedging forex has never been so low, but there were enormous fluctuations in exchange rates that needed to be managed.

What will be the biggest challenges for the industry in 2011?

Deutsche, PW The investment environment remains challenging. The outlook for returns on equities is quite good, but potential returns on fixed income have largely evaporated. We have a looming eurozone crisis that could turn into a broader European banking crisis, so it’s not going to be straightforward.

JPM, DW The challenge is that many high-net-worth individuals are still in defence mode following the crisis. So, they may be sitting on the sidelines in cash. While that may seem safe and sound, they are basically betting against every other market and asset class in the world and, more importantly, they are getting paid essentially zero for this effort.

Citi, JF From a client perspective, it will be managing the volatility across the global markets. The developed markets and developing markets have very different growth rates, capital flows and risks. That will take some navigating to preserve wealth, but will also produce a lot of investment opportunities.

For private bankers the challenge will be advising clients on when to sell and when to buy. Buying and holding is not going to work in this global economy for the next few years. Bankers will need to be on top of offering investment advice.

UBS, JZ The challenge facing wealth management in the future will be to find a way to generate added value for clients without relying on the natural growth of the financial markets. At the end of the day, clients’ confidence in their bank is inextricably linked with their expectation of seeing more money in their account at the end of the year. In 2011, regulatory changes will carry on and banks will have to continue to adapt their cross-border business. Strict cost discipline will also remain essential in the industry.

CS, WB Regulatory developments will remain a key focus for the industry this year. Creating even greater value for our clients and improving investment performance relative to our peers will be two of the biggest challenges.

HSBC, CM Competition is increasing. Private banking as an industry is deemed very attractive in a Basle III world. Most financial institutions want to be in this business, so competition and hiring will offer some challenges. And a lot of banks that were not historically in Asia and the Middle East are now trying to build businesses there. We’ve been there a long time, but will be impacted as more firms are pushing for the same business. Margins will be under pressure.

Sallie Krawcheck, President, Bank of America Global Wealth and Investment Management (BoA, SK)

"Clients have a lower tolerance for risk. For many, wealth management is no longer a spectator sport and they want to be more directly involved in the process"

Sallie Krawcheck, Bank of America


BoA, SK The biggest challenges in 2011 will be continuing to address client unease over uncertainty about the US and global economy, geopolitical risk, inflation, potential political gridlock, the deficit ceiling and policy decisions to reduce the deficit. It’s a more complex environment due to growing interdependencies. Technology investments will also be key as we continue to enhance the experience our clients have with us and the ways in which they access their accounts.


BNP, JE Capturing the number of growth opportunities out there. We expecting higher growth in Asia, excluding Japan, and emerging markets. And there is still a lot of untapped potential. Only 50% to 60% of high-net-worth liquid assets are managed by private banks. It will also be a year for optimizing our operational set up and cost base.

What will be the drivers of revenue growth in 2011 for your organization?


Deutsche, PW In 2011, we expect a more normal asset allocation. At present, cash and fixed income are accounting for 50% of our client assets and our revenues will increase considerably as clients return to riskier assets. Lending to high-net-worth and ultra-high-net-worth clients should also increase, which will meaningfully contribute to our revenue growth. From a regional perspective, growth in assets will come predominantly from Asia-Pacific, the Middle East, Latin America and Russia. The acquisition of Sal Oppenheim should help us to grow our revenues in the Germany also.

BNP, JE For BNP Paribas it will be from net new assets and clients, particularly in the domestic markets and in Asia. Credit offerings and a growing deposit base will also drive our revenues. In credit offerings, we are targeting double-digit revenue growth.

Citi, JF Regionally, Asia, parts of Latin America and parts of Africa will be driving revenue growth as new wealth is created and new clients emerge, and current clients increase assets.

A huge opportunity for us, not just in 2011, but over the next few years is the shift in wealth from the baby boomers to their children. We estimate $5 trillion in assets will be passed down over the next 10 years. The generation that inherits that money is likely to be looking for a different service proposition from a private bank. They will likely want something more fresh and relevant, and more transparent. That means those assets will be looking for a new home. There are only a few private banks in the world that can offer that; it’s an exciting opportunity for us all.

HSBC, CM The growth markets of Asia, Latin America and the Middle East will be regional revenue drivers. We’ve also seen a return in appetite for leverage among some clients that will assist revenues. After two years of low interest rates, clients are realizing they are going to have to take risks if they want to make returns. Unless there are some major shocks, the return in risk appetite should help to drive revenue growth.

UBS, JZ We are striving to substantially increase the number of investment ideas and services to clients, thus increasing our share of wallet. In brokerage and core advisory, mandates, lending and pricing discipline, we see key gross margin drivers. In terms of the client advisor profile, UBS sees a clear shift from asset gathering towards holistic investment management.

BoA, SK The drivers of revenue will be gaining deeper, stronger relationships with existing clients across divisions and increasing our share of their assets. There also are significant pending wealth transfer activities expected through 2017 – sales of businesses are estimated at $3.7 trillion; inter-generational wealth transfer around $2.7 trillion, and roll-over assets at around $1.5 trillion.

Douglas Wurth, CEO JPMorgan International Private Bank(JPM, DW)

"The biggest driver [of revenue growth] is client confidence – to the extent we can be of value to the client, revenues will take care of themselves"

Douglas Wurth, JPMorgan

JPM, DW From a product perspective, we would expect growth to come from credit in this low interest rate environment and alternatives, given their historical outperformance and an increasing appetite among clients. More broadly, revenue growth will be driven by the significant investment we’re making to increase our footprint globally and to bolster our presence in mature markets. But candidly, the biggest driver is client confidence – to the extent we can be of value to the client, revenues will take care of themselves.


From a product perspective, we would expect growth to come from credit in this low interest rate environment and alternatives, given their historical outperformance and an increasing appetite among clients. More broadly, revenue growth will be driven by the significant investment we’re making to increase our footprint globally and to bolster our presence in mature markets. But candidly, the biggest driver is client confidence – to the extent we can be of value to the client, revenues will take care of themselves.

CS, WB The ultra-high-net-worth segment and wealth from the emerging markets will remain important drivers of revenue growth. And in the current environment, optimizing risks and returns presents a big revenue opportunity.

What are some of the investment themes you and your clients are looking at this year?


Citi, JF There will be a huge flow of assets into Asia, some into Brazil and Peru and Colombia as people look for yield. It’s not just China and India, but places like Indonesia, Taiwan and Korea.

Inflation and disinflation in different parts of the world will also be a theme. It’s a good time to buy inflation products before the price goes up.

The US dollar is likely to depreciate further and there will be pressure on the euro. As such, forex hedging will be important this year as clients try to preserve wealth. Distressed assets are still a theme, be that commercial and residential real estate in the US, or just commercial real estate in the UK. We feel bullish on US equities, and there is opportunity in Japan as that is undervalued.

Walter Berchtold, CEO of private banking at Credit Suisse(CS, WB)

"Many of our clients not only require traditional private banking services but also want specialized solutions that can only be supplied using the market access and expertise of an investment bank"

Walter Berchtold, Credit Suisse

CS, WB In 2011 we should be prepared for market conditions that are volatile but, on balance, reasonably favourable. With economic growth picking up further, especially in the US, and corporate profits quite strong, equities should produce good returns. Interest rates are very likely to remain low in the advanced economies through most, if not all, of 2011, which is supportive for stocks and for commodities. There are two main risks: one is the still not resolved issue of sovereign debt in a number of European countries, and the other is the risk of inflation in emerging markets. The former will also have a big impact on currencies. If the European debt issue is defused, we think the euro will stage a comeback against the US dollar, the Swiss franc and other currencies, but if the crisis persists, the euro will stay weak.


HSBC, CM Searching for yield and return will be a big theme. Investors will be looking for equities that pay decent dividends. In fixed income there will be some caution around sovereign debt in light of inflation, but we expect interest in emerging market credits. Inflation will make real estate and commodities more attractive to investors. We also expect clients to be trading quite actively this year as market volatility will still be high.

We have a big alternatives business that continues to be attractive for wealthier clients. Real estate is a source of yield and we have done some interesting real estate club deals. Private equity is also coming back, although that tends to be in special situations with houses with a solid track record.

JPM, DW Asia equities are likely to see solid upside in the coming year, albeit with a fair amount of volatility.

Improving US economic conditions have reduced uncertainty in the outlook and investors are likely to pursue US equities based on cheap valuations and improving fundamentals. The strong position of corporate balance sheets in the US provides a backdrop for credit spreads to remain firm. Investors are likely, however, to reduce large overweights in this space as both corporates and high yield approach fair value.

In alternatives, M&A-focused managers should perform well as strong cash balances are supportive of an increase in transactions; in private equity we are returning to more traditional leveraged buyout and growth equity managers. We are also focused on funds that can take advantage of dislocations in European credit markets, including distressed corporate loans and non-performing residential mortgages. The world’s unresolved global imbalances will continue to weigh on markets in 2011 and that could result in volatility in equity, commodity, interest rates and FX markets. We would recommend holding macro hedge funds to help stabilize the portfolio in such environments.

UBS, JZ Equities are well positioned; within those we continue to favour exposure to southeast Asia and emerging markets as well as equities from regions, countries, sectors, companies that are profiting from the boom there. Investors looking for protection against currency and inflation risks should favour commodities. The picture for hedge funds remains bright, especially within global macro and event-driven strategies. We expect also to see inflows in private equities; though in the latter the window of opportunities is closing, with high prices already reflecting the favourable environment.

BoA, SK Emerging markets have become the new engines of global growth, but there is a great deal of uncertainty in the global economy and political climate. In 2011, we think that the cyclical bull market in equities will continue and that both US and emerging market equities will outperform. Corporate equity has really replaced real estate equity, which was such a big driver of wealth; but those days are over. Both municipal and corporate bonds should deliver positive returns.

Jacques d’Estais, CEO, BNP Paribas Wealth Management(BNP, JE)

"Key talent is still looking to join institutions with strong brands that were not damaged in the crisis"

Jacques d’Estais, BNP Paribas

BNP, JE For those looking to remain defensive, it will be high and safe dividend yield stocks and lower rated corporate bonds over government bonds. Clients looking for growth will be best placed in investments in Asia ex-Japan. In equities, it will be companies with a strong brand franchise, as well as this trend towards healthy living, so companies in food and wellness and health care, consumption patterns and life insurance. In between those two lie emerging market bonds in local currencies and oil companies.


Deutsche, PW Equity markets, and particularly emerging market equities, look highly attractive this year. It’s been a difficult decade investing in securities and our clients are looking at real assets too. Real estate and infrastructure for example are gaining interest, as valuations have come off their highs.

What are your organization’s expansion plans?


JPM, DW In the US, our expansion efforts are focused principally in Florida and the West Coast. Internationally, we are expanding our presence in Brazil and Eastern Europe, with a concentrated focus on China and India. We are looking to increase our talent by 10% to 15% globally next year, and much more in our international regions.

CS, WB From a regional perspective, our main focus will be on growth in Asia, the Middle East, Eastern Europe and Latin America. And we see many opportunities to bring our comprehensive offering to entrepreneurs, especially in Western Europe. We plan to recruit people globally in 2011 – mainly in the Middle East, Latin America and Asia. In Europe, our focus will be on increasing efficiency.

Citi, JF Asia and Latin America will see continued expansion for us – particularly Asia where the number of clients is growing considerably. We went from 450 bankers to 550 bankers last year globally, and expect to hire another 300 bankers over the next three years.

HSBC, CM We opened a new business in Israel in 2010, but we won’t be opening in more new countries as we are where we want to be. We will be hiring, however. The main focus will remain on hires who cover the faster growing regions, such as Asia, Latin America and the Middle East. We announced in the middle of 2010 that we would add 500 relationship managers over the next three years.

UBS, JZ Asia represents a third of the global market capitalization; in absolute terms this represents a $6.5 trillion market opportunity. We already have 20% of all of our assets coming from that region, and our aspiration is to grow more than twice as fast as the market over time. The emerging markets will become a $1 trillion market opportunity in the years to come, and again 20% of our invested assets are already in these regions. There we aim to grow much faster than the market, and we are going to grow our onshore Brazilian presence. This year we want to create around 220 new positions for investment advisors globally (with over half of them in Asia).

BoA, SK We continue to invest in key markets across the US, and we are aggressively hiring in these areas. We are likely to grow globally where we already have a presence, particularly as emerging market economies continue to produce more of the world’s ultra wealthy clients.

BNP, JE 2010 was dominated by the integration of Fortis, and we were able to leverage and improve our business models in France, Italy and Belgium. We also grew in Asia-Pacific. This year we expect more of the same and will be making selective external recruitments in the domestic markets and in Asia.

Deutsche, PW We’re pretty much done on the acquisition front for a while and we are still aligning Sal Oppenheim. Elsewhere we have organic investments, predominantly dedicated to fostering growth in Asia, Latin America, the Middle East and Russia.

What are the hiring challenges in the industry?


BNP, JE Recruitment activity is picking up for sure, certainly in Europe. It is in the emerging markets that we are seeing more competition for all positions, not just relationship managers, and compensation is becoming extremely competitive in the high-growth regions. The key is to be more creative, not just on compensation and incentive structures but also on the diversity of people to attract. Key talent is still looking to join institutions with strong brands that were not damaged in the crisis and those with a global reach so we are in a good position.

Deutsche, PW We have been increasing our relationship management force in Asia and have found that if you do this steadily, and are not over ambitious, it is achievable. Markets such as the Middle East and Russia are more challenging as it is difficult to find seasoned professionals who fit with the firm’s culture. In terms of compensation, the industry has not really been hiring over the last two to three years. It started again in 2010, but as the industry recovers, we expect the competition for resources to intensify this year and next.

JPM, DW The war for talent is a big issue. Compensation levels are definitely competitive, and we recognize what the market is demanding. But my experience has been that an individual stays with an organization not just because of compensation, but also based on the quality of solutions that they can deliver to clients, the integrity of the firm and the firm’s commitment to their professional development.

BoA, SK Competition for the top people is fierce in the private banking industry because the ideal candidate is someone who is highly seasoned and can understand the complex range of sophisticated financial needs that the ultra-high-net-worth have, particularly in the areas of specialty tax and estate planning, debt finance for such things as art collections, mega yachts and management of specialty assets such as timberland or oil and gas properties. There is also a softer side of private banking, and it is extremely important to have people who understand issues around family dynamics and personal goals and values.

"The industry did not serve clients effectively through the crisis, and there is a relationship that needs to be rebuilt there"

Jane Fraser, Citi

Jane Fraser, CEO, Citi Private Bank (Citi, JF)
Citi, JF We’re fortunate in that Citi is an attractive place to come and work. There will be a war for talent in Asia I expect, but so far we haven’t witnessed it. We also grow a lot of our talent. The commercial bank, corporate bank and consumer bank are all sources we can tap into.


CS, WB We are also focusing on developing our own talent within the bank. Many of our clients not only require traditional private banking services but also want specialized solutions that can only be supplied using the market access and expertise of an investment bank. We are therefore particularly interested in investment bankers and corporate bankers who we can train to become skilled relationship managers; individuals who can successfully tap into the entrepreneur market are clearly in demand.

HSBC, CM It is getting tougher for the reasons I mentioned earlier. There has been quite a shift towards more fixed compensation after a long period where the focus was entirely on variable pay. It means fixed costs have increased.

Is the lending environment back to normal for high-net-worth clients?

Citi, JF Clients themselves have taken their lending activity down, but now are returning – albeit to more sensible levels than prior to 2008. Margin lending has picked up, and residential real estate has seen some activity. We are open for business but at responsible levels in responsible areas for our core clients.

HSBC, CM We’ve definitely seen a recovery. A number of clients are using leverage again as it represents a low cost of capital. They seem more confident about the investment picture ahead, but, no, we are not back to 2007 levels.

CS, WB The lending environment has recovered substantially but, no, business has not returned to pre-crisis levels. Where we are active is in margin and structured lending.

JPM, DW We are noticing increased lending interest from our clients. It’s really based on the gradual recovery of the economic environment, risk appetite for investment increasing, and a low interest rate environment across many of the countries. And while 2010 may have set the high water mark for mortgage production, a continued low rate environment for refinancing existing mortgages and a stronger new purchase environment should present big opportunities on this front in 2011.

BoA, SK The ability to underwrite a wide range of credit solutions for clients – from marine lending to commercial loans and jumbo mortgages – can be a critical differentiator in this business. We are fortunate to have one of the world’s best lending franchises at our doorstep, and our clients are enthusiastically tapping that resource.

Pierre de Weck, head of Private Wealth Management,Deutsche Bank (Deutsche, PW)

"The top wealth brackets are most in need of credit services, and we are seeing a lot of demand from that segment again; not just lending against liquid securities, but also against more illiquid assets"

Pierre de Weck, Deutsche Bank


Deutsche, PW Now some players are returning and lending again, we expect there may be pricing pressure over 2011. The top wealth brackets are most in need of credit services, and we are seeing a lot of demand from that segment again; not just lending against liquid securities, but also against more illiquid assets.

Now some players are returning and lending again, we expect there may be pricing pressure over 2011. The top wealth brackets are most in need of credit services, and we are seeing a lot of demand from that segment again; not just lending against liquid securities, but also against more illiquid assets.

BNP, JE We haven’t changed our lending strategy throughout the crisis and finance our clients needs continuously, so it has been normal for us. Now we are looking to further improve our credit offering.

Outside of investments, what products and services are clients showing more interest in?


JPM, DW Clients are increasingly seeking advice around structuring wealth in light of big changes in the regulatory and tax environment, along with the challenges associated with families becoming more global. They are also looking to us for advice and help on how to deal with issues impacting their children.

Citi, JF IPO activity in Asia and in Russia has been plentiful, so we’ve seen a lot of advice needed on what to do once the wealth has been monetized. The trust area is critically important for clients globally. Philanthropy is also a hot topic. The second generation about to inherit is very interested in makings its mark on the world. In Asia, there is certainly a growing conscience.

CS, WB Philanthropy in the emerging markets is certainly becoming an important theme. Our clients know what they want to do with their money but they require assistance in setting up a foundation or structure. We are seeing increasing interest from clients in our holistic advisory approach, which provides solutions from across the integrated bank.

HSBC, CM Advice surrounding succession planning and estate planning has been a key request from clients. In Asia and the Middle East, the post-war generation of entrepreneurs are getting ready to pass their wealth on. It is the first time for them, unlike in the US and the UK where people are more familiar with succession planning, so there is a great interest in advice.

BoA, SK Given the political, fiscal and economic uncertainty out there, our clients are keenly interested in creative estate planning and wealth structuring advice. They’re also looking to better understand geopolitical risk as the world grows smaller, wealthier and potentially more dangerous. We have seen an increase in art investing and investments in specialty asset management including timber, farmland and oil and gas properties.

BNP, JE Credit offerings are seeing more demand, and we are also seeing an emergence of interest in protection and risk management topics such as insurance and the passing on of wealth from one generation to the next.

Deutsche, PW There is a clear trend towards the need for first-class custody services, and there are a limited number of suppliers in that area. In the ultra-high-net-worth segment, there is increasing demand for the comprehensive services that can be offered by a global investment bank.