Middle East private banking debate: How to get your relationships right
Both local and international players are trying to break into a growing onshore private banking market in the Middle East. In the second part of Euromoney’s roundtable on this market, participants discuss how they are managing to attract and retain relationship managers, how they intend to grow their businesses, and how best to advise clients on risk.
• The cost of RMs is more expensive in the Middle East than in Europe
• When looking at risk, clients need to think more about preserving wealth than about generating income
• Can local banks and international banks ever compete fairly?
• Moving from cash to investments will be a growth strategy
RB, Majlis Last month we talked about how relationship managers can be key when offering an integrated approach in the Middle East. We estimate that 70% of relationship managers who leave their employers are able to take some of their clients with them. So let’s talk about incentive structures, how to retain relationship managers and how to retain clients.
BD, Credit Suisse Whether clients stay depends on the institution and on the relationship manager. I disagree that 70% of relationship managers take their clients with them. If a relationship manager is exceptional, it’s a different case. Those RMs are authentic, the clients trust them and they know the business very well. They don’t need an infrastructure to act as an integrated banker; they make the integration. But apart from these exceptional cases, clients usually stay with us if a relationship manager leaves.
HZ, NCB And those exceptional relationship managers are taken care of. At NCB we know them by name and everybody from the chairman, the chief executive officer and the business heads down is taking care of those people in order to keep them. They are well paid, well trained and well treated within the organization.
RB, Majlis What additional training do relationship managers need to go after clients in the non-resident Indian [NRI] market? Is it as simple as giving an Indian, who knows the Indian market, a card? Is it just about the ability to communicate well or is it the level of sophistication of the relationship manager, and is that changing?
BD, Credit Suisse Training is key. If you want to be successful, you need to be well trained. That is why I am a big believer in segmentation. High-net-worth individuals with €5 million often prefer a standardized, very professional and high-quality service. They don’t want things to be complicated. But if you are talking to an ultra-high-net-worth client with very sophisticated needs, the RM needs to understand investment banking.
RB, Majlis Let’s talk about talent acquisition. Other than taking care of those who are in-house, what do you do? Do you train up or do you try to hire seasoned professionals?
MS, HSBC Both. Development is critically important. You have hungry younger bankers who are financially literate and analytical and need to learn the client acquisition and development skills. For the more seasoned bankers, it is about training them to think through the issues that their clients are facing and to understand the product solutions. It is about continuous development of talent supported by selective external hiring.
RB, Majlis How do you measure the success of a relationship manager? Clearly, there is the assets-under-management metric. What other key metrics do you use to serve as guides? Is it the ability to cross-sell? Is it the length of the relationship? Is it the ability to bring in investment banking revenue?
GD, ENBD One of the important things, particularly when our base is in retail banking, is that there are so many products that are just left out by RMs. Private bankers don’t like selling insurance policies, yet the jumbo life policy is a core product in the NRI market. They don’t like selling a car insurance policy, but who else is the client going to visit to insure his Porsche and Mercedes? The banker may not have to do it himself, but could bring the whole bank in. One of the problems you have with bringing talent in is that sometimes they will say: "At Credit Suisse, I did it this way and I used to sell these products." You have to say: "Well, yes, okay, but we are not Credit Suisse. We are something different, we have a great proposition in this direction and perhaps Credit Suisse didn’t have the same traction in the local market as us." So it is very important that the talent that comes in is flexible, and for us, one element of that flexibility is cross-selling.
BD, Credit Suisse If you have a truly integrated bank, every product should generate revenue. At the end of the day, you also want a profitable RM, so you will look at his revenues and costs, not just the annual compensation. I also want to ensure that an RM is a good team player, which means he will be able to generate revenues from across the bank.
RB, Majlis Let’s talk about the yield cycle of a relationship manager. A talented relationship manager is attempting to do the right thing by the client, and it may take three months, six months, nine months, a year, 18 months in certain cases. If you are marking him on the market, so to speak, how long does he have to deliver?
HZ, NCB It depends on the relationship manager. Some of them grow assets under management immediately after joining, and they start making money for the bank.
RB, Majlis Let’s talk about the investment in those people too, because that has an impact on how much of a runway they have to pay off that investment. What percentage of total compensation goes into the training and development of your senior relationship managers to make sure they keep up with the times? Then, at the other end of that barbell, where you have a recent graduate, how much is the bank willing to invest as a percentage of total compensation?
GD, ENBD Look at the graduate training programme of many of the big banks: it’s fantastic. You always put [the trainees] on an MBA course for about a year. When they come out, they have a lot of knowledge in their businesses and they go into your business running strongly. But the only formal training that I have consistently seen over the past four or five years is in anti-money-laundering, because it is a regulatory requirement. Over and above that, there are product teachings that you could call training, but for actual formal training (negotiating skills, selling skills, upscaling people so that they can be more effective in their jobs, which is what most industries commit to), I find the financial-services industry pretty poor.
RB, Majlis Let’s move on to what investors want. How has their view of risk has changed? So perhaps, Ihab, we will start with you and talk, from your family-office and family-business perspective, about lessons learned from the years building up to the correction and how that’s affected your assessment of risk.
IES, Sukoon When we look at risk, we look at political, economic, family, industrial, portfolio and currency risk, and we look at the sustainability of the business and growth behind it. We looked at it internationally and locally during the crisis. There were days when we didn’t know which bank was going to fall or which country was going to fall, and which currency we should hold. We diversified so much that it became very difficult to manage, but we protected a huge amount of assets, because as one goes up, the other one goes down. Then, when things started to stabilize, we evaluated the risk we were exposed to, whether it was regional risk, event risk or financial instability. I never looked at revenue. I was looking at purchasing power and value, and what makes the business steady. I focused on the business that we were running and I tried to shrink it when the market was down.
RB, Majlis [As a family-office investor] you need to be an economist, a banker, a financier, a foreign-currency expert. You need all these skills to come to a solution, or talk to the right people. It must be very challenging to the structure and personnel of your family office. Not only do you have to delineate what the risks are, but then you have to try to quantify, qualify and synthesize them. How do you manage all of that in order to come to a decision pre-investment and continue to monitor it post-investment?
IES, Sukoon I usually invest my family money, but when it comes to other people’s money, it becomes much harder work. People’s expectations in these markets are different, and that is a challenge we all face. How my family will evaluate the risk is normal business for me. You go down and you go up, and losing money is OK, but you also make money. It is part of doing business. It used to be simple, but now the rules of investing have changed. Everything we studied is not there: the magic numbers whereby the markets do ‘this’ if the interest rate goes down, or they do ‘that’ if it goes up – well, those numbers are no longer there.
RB, Majlis Were your and your family members’ expectations too high? Are you under pressure to over-reach and make money fast?
IES, Sukoon That is a very good question, because shareholders or family members look only at income, and I don’t look at income, I look at wealth. If you are looking at growth or looking at prevention of losing the asset itself, especially in this environment, you don’t look at the income being generated. Banks, however, focus on income. They come and tell you: "We are going to generate this for you, this is the investment, and we have studied it."
RB, Majlis Gary, given the concerns often identified by senior members of family offices, how do you inform your clients of the risks they should be mindful of without overwhelming them?
GD, ENBD I find with most investors it’s trying to identify how much risk they need to take rather than what they wish to take. Over the past 10 years, people were taking inappropriate amounts of risk in the ambition of hitting 20% returns, because that seemed to be easily achieved. So I often say to people: "Why don’t you just maintain your real wealth and your real spending power?" If you have some sense of the inflation rate of their lifestyle, then you have some sense of what would be a baseline approach to the amount of risk that they need to take. I think attitudes have changed but, unfortunately, in the previous decade you found that people always took more risk than they needed to. It ended up exaggerating returns both on the upside and the downside, so that they ended up with 50% of their wealth left rather than 100%. For me, the conversation should be around what the client really needs to achieve. Whether it’s an investment, a private equity deal, or a hedge fund, what do you really need to achieve to maintain your aspirations? If you match your risk-taking to your real needs, then you can get a sensible conversation going.
GA-R, Eastgate I think what usually helps to take the emotion out is to have a disciplined and structured approach to decision-making as opposed to a gambling or betting approach. If you have defined your needs and your tolerance to risk, there are ways to reach these decisions in a structured way by proper asset allocation, approaching it in the right way to choose the best product within each asset class, and monitoring these things.
RB, Majlis Let’s pick up a little bit on discipline. This is why clients hire an external adviser – to impose a process. But [in recent years] many of those experts then said to the client: "Here is your diversified portfolio. These are uncorrelated returns." There was very little concern about tail risk, and then the market blew up, and what was supposedly a diversified portfolio wasn’t at all.
MS, HSBC I don’t fully agree with that in every case. If there was rigour in the analysis of fundamentals and investors held their nerve, returns through the period were acceptable.
RB, Majlis How would you expect your client to have discipline when the industry continually bombards them with news on what is hot and how they should be making returns?
MS, HSBC You can be bombarded by this wave of information, but if you are working with an adviser who is very convinced of their argument and can point to a track record, they can still deliver on returns. Conviction is incredibly important, and if your adviser wavers every time there is a news flash, then inevitably you are not going to be given good advice.
RB, Majlis How do you keep your client disciplined? After all, it is his or her money.
GA-R, Eastgate Sometimes illiquidity forces discipline. It forces a long-term view. It is usually seen as a constraint, a negative, but sometimes it becomes a virtue. How did families make their money? Through direct investments in operating companies. They went through their ups and downs, and eventually, they made a lot of wealth. If you look at specific asset classes, it was extremely expensive to sell your private equity on the secondary market in 2008/09, but two years down the road, people are saying: "It was not that bad, actually. We are glad we didn’t get out at that time."
BD, Credit Suisse I agree. The problem is that it is not so simple. In 2003, diversification did not work out. Everything went down together. In 2008, when everybody said "diversification doesn’t work", diversification worked out, so, while many markets went down, emerging markets went up. Diversification was fantastic, but nobody believed in it any more. I believe people turn to you not only for risk and return but also for solutions. Some clients look for emerging high-yield bonds to finance their acquisitions. Others come to you because they want to speculate. If you want to do advisory and sales, you have to do it in an appropriate way and in a suitable manner.
IES, Sukoon That’s what I meant when I said I look at banks in a different format. This bank has certain things that it knows about, and another bank has a different type of offering. That is why you need to be with different banks for different things for different customers.
RB, Majlis How long-term is the view of the average Middle Eastern investor?
GD, ENBD We always have this dilemma. I sit there with a strategic hat on and receive back the client form that asks them what view they are taking. They typically answer three or five years. Then you go to your strategic asset allocation crew and they take a 25-year expectation and a correlation matrix built off 15 years of data. Now if you had actually used the three-year correlation and matched the three-year time horizon, you wouldn’t be in anything but cash and bonds. There is this mismatch between the theory and how long the client can actually go.
RB, Majlis Stijn, how does this idea that some risk isn’t quantifiable affect the way you as a law firm structure the advice you give?
SJ, Loyens & Loeff Initially, people come for tax advice, and that is just about earning money on their investments. If one can structure the investment in a more tax-efficient manner, then the internal rate of return will go up. More recently, however, people’s focus has been more on preserving their wealth. If they invest in mines in Africa, agricultural land in South America, infrastructure in Indonesia, or the telecom sector in south Asia, then the structuring of their investments becomes more a risk-protection measure against nationalization than a tax-planning exercise. People don’t come to me asking what stocks to buy. They just say: "I want high yield. I’m going to take risk. I’m going to go into emerging, less stable markets, but is there a way I can protect myself from a legal perspective?" Where tax efficiency was about profits and IRRs, now we see tax efficiency combined with protection management. The trick is to find the optimal combination.
RB, Majlis Any example you can give specific to this region?
SJ, Loyens & Loeff In this region, in particular, people are willing to invest in countries with less stable governments. On a change of government, king or ruler, there is an increasing risk of nationalizations in these countries. If the new ruler says from today "all oil assets are the country’s" or "all telephone licences are the government’s", then you have just lost everything. If you look at emerging markets elsewhere, Venezuelan oil offers a clear example. Investors found that if they structured their Venezuelan assets properly, investments would not only be providing for tax-efficient repatriation of funds, but they would simultaneously be protected against nationalization without entitlement to a proper compensation. Now, at the family level, you see the same questions, albeit maybe on a slightly smaller scale, when investing abroad. At the top end of the family structure, there is protection against dilution. If a father dies and he has two spouses and multiple children and grandchildren, and some of them have been married to other families, is there a way I can protect myself against unwanted influence on my family conglomerate? Yes, there is. Clearly, there are trust structures, but these require the third-party involvement of a trustee. But there are other ways to separate economic entitlement from legal ownership, while remaining in full control without the involvement of external parties. There are all kinds of instruments you can use, but it is still fairly new in this region.
RB, Majlis Let’s talk a bit about the future. There are arguments for the development of boutiques that are independent and don’t create any product. They claim they are in the best position to give independent, trustworthy advice. On the other hand, the larger banks say that, by being integrated, they give clients access to better solutions, and they have an open-architecture platform that adds some level of independence. Which do you think will work in the Middle East?
MS, HSBC I would put it another way and look at what value an integrated operation can deliver. If we look at the turbulence of the last few months, the benefit that our clients saw in Egypt was that we became the only major bank that functioned. So it wasn’t just that they were looking and saying: "What are you doing in your private bank?", but rather they were saying: "You were the bank that opened when you could. You were the bank that ensured my staff’s salaries were paid and that I was able to make whatever transfers I could." This reinforced the trust our clients have in us. We did exactly the same in Bahrain. We were the functioning bank, so, to an extent, the goodwill benefit is that crisis equals opportunity. The boutique can clearly never deliver that level of service, but it is what clients need and value in times of difficulty.
RB, Majlis So the boutique private bank will always be a niche player?
MS, HSBC It is a provider of a different set of services. It has a unique footprint that embeds the private bank more into the group.
HZ, NCB I would say local banks take advantage of being fully fledged banks, offering multidimensional products to the client rather than just providing investment solutions. If the global banks operating locally in Saudi Arabia, for example, provide a corporate offering and a retail offering plus a private bank offering, that would be fine and would put the global bank on the same competition level as the local banks.
RB, Majlis So when will the regulatory environment in Saudi allow the global banks to be on an equal footing with the local banks? Is that one year or five years away?
HZ, NCB It depends where the international banks want to play and which segments they want to focus on. We have some international banks focusing on investment banking, some on private banking, others are retail banks and some focus on corporate business. They need to be very specific which segment they are targeting. That is why I say the local banks have an advantage over the international players.
RB, Majlis Can you expand on this role that independent financial advisers play in Saudi? IFAs sometimes have a reputation for being product-pushers rather than truly independent. How does the financial advisory model work in Saudi?
HZ, NCB There are very few of them established in Saudi, acting as intermediaries between banks and family offices. The independent financial adviser has just emerged there, and most of them are ex-bankers. They have a relationship with the clients and a relationship with the banks, so they are playing the intermediary role, but there is a long way to go.
IES, Sukoon I wish integration would happen. One day I will arrive at a bank and the banker will really know everything that I want – and if he doesn’t, he will bring in whoever does know about it.
RB, Majlis Let’s talk about how to grow the business. For example, balance sheets have improved at the banks and you have a lot of capital and a lot of deposits. There is a tension there, though. Do you move that money from cash, where it is helping with your tier 1 capital adequacy, to more products, which might help with your asset-management business? Do you try to migrate depositors into your asset-management business, or do you encourage them to stay as depositors because you can have some financing benefits for your treasury?
HZ, NCB Acquiring new clients is an area that we find very tough in the private banking business, and I would say worldwide, because the private banking business depends on referrals rather than sales approaches. We find that if we redeploy some of the liabilities and cash into investment solutions, that is an area of growth for the bank and for the client as well. After the crisis, clients stayed in cash because of what was happening and the lack of clarity in the investment world. The wealth manager and private banker sit with the client and start an investment dialogue to get to know the client more. What is the client’s appetite? What is the client’s risk profile? Then they come up with a tailor-made solution.
RB, Majlis And for the global players here in the region? How are you growing your business? Through acquisition, products, organic growth?
MS, HSBC The objective is to grow profitably in those markets where we have the deepest relationships and where the bank is embedded. As always, you come back to people. Do we have the right people who can develop the existing client base or are we going on a continuous search for the knight in shining armour who is somehow going to change our fortunes dramatically in a particular country? We are in nearly every country in the region, with commercial banking and global banking and markets capabilities in the majority of sites. It is a question of leveraging these relationships and providing a high level of service and quality products, whether it be in an international booking centre or onshore, and doing so in tandem with where the group wants to be.
IES, Sukoon As an investor and a businessman, I find it interesting how private banks make their revenue. They are making money, but how do they do it?
BD, Credit Suisse I think bank revenues will be increasingly generated from client advisory and that proprietary trading will stop. Clients want to know that their full story is understood and that all their needs can be met. Our holistic advisory approach provides comprehensive solutions tailored to individual needs, based on expertise from across the integrated bank – across different business areas and regions.
RB, Majlis So, Gary, do your expansion plans involve just mining your existing clients, getting them to migrate some cash and deposits into more investments, or do you have a slightly different approach?
GD, ENBD We have talked to clients about withdrawing from cash and putting it into investments, but let’s not forget why the cash is there. Everyone has a balance of precautionary money and I often think the clients are not interested in taking that money and putting it into investments. So we have a starting point with that cash base but really we want to improve our share of the wallet. The strategy of our bank at this stage is two-pronged. One aspect is, as you say and as mentioned by Hazim, that we have 50,000 or 60,000 small and medium-sized enterprise clients. How many of those could be brought onto the private banking platform? It is somewhat untested at this point. We have a large body of corporate clients. Again, those corporates are getting all of their corporate finance needs met but not their private banking needs, so we could address that and achieve tremendous growth off the base we have. The second prong is that we are acquiring bankers and bringing them into the business to upscale, to provide broader offerings to the market.
RB, Majlis Well, gentlemen, this has been an enlightening discussion. Thank you for your willingness to offer insight into the Middle East wealth management and private banking sectors. I wish you continued success.