The good old days when clients used private banks as offshore depositories and happily paid for the privilege are over.
With a renewed emphasis on managing clients’ investments, coupled with efforts to cut costs, a new executive role has emerged at private banks: the chief investment officer. Gone is the old model of client advisers sharing research from a myriad of sources, with country managers creating products hither and thither. Now the CIO coordinates a house macro view for the entire private bank, filtering that view down to client advisers and product development teams.
In 2011, UBS restructured its business and appointed Alex Friedman as the man to oversee a house view. Before joining UBS, Friedman was CFO of the Bill & Melinda Gates Foundation. Deutsche Bank fused its asset management and private banking businesses together and put two co-CIOs in place in September 2012. Credit Suisse merged its asset management and private banking businesses and appointed Michael Strobaek to the new role of CIO in May 2013. Strobaek had spent a large part of his career at UBS, but most recently had been CEO of a Switzerland-based family office.
Juerg Zeltner, chief executive of UBS Wealth Management, says the shift in the industry is that "private banking is moving to a model of investment management for private wealth and away from just collecting funds".
Most of the shifts in model for the larger banks have been around bringing together their asset management and private banking businesses, and putting in place a structure for investment advice.
"For decades we had a buy-and-hold strategy, but that no longer works when markets are driven by central bank policy," Zeltner says. "Clients are still unsure of taking risk, but they don’t want to miss windows of opportunity. The biggest driver to asset protection and growth is in asset allocation. It’s a new world we are in."
With little likelihood of rates rising at any pace, the private banks have had to rethink how they make money as investment advisers. For years they have struggled on how to price advice, but now they have no choice but to try to get it right.
|Juerg Zeltner, chief executive of UBS Wealth Management|
The shift to managing wealth, rather than banking wealth, has opened up the age-old debate over open architecture, and the question of differentiation. If all banks are offering asset-allocation advice and a combination of in-house and external products, where is the added value? As one banker says: "Why is my open-architecture platform better than your open-architecture platform? We all claim we have superior asset allocation and access but that is becoming harder to defend and differentiate. Especially when technology systems can do 75% of what the average wealth manager can do from an asset-allocation standpoint."
There is good logic behind the shift to a centralized view from a global private bank. For one thing, it saves money because it simplifies the process from research and oversight down to product development. Rather than having country teams of investment professionals at the private bank, and having products created to suit every client demand for investments, as well as systems to support both, the whole process becomes streamlined. "If creating one investment view simplifies or business. Moving to one house view is more efficient, reducing the overlap in the people and IT investments required to communicate and implement the view – not five different systems," says Hans Ulrich Meister, head of private banking and wealth management at Credit Suisse Private Bank.
It also results in fewer, but more targeted, products. In the past private banks have been guilty of creating products either to please clients or because internal compensation structures have encouraged product ideas – often at a high cost or loss to the bank.
Phil di Iorio, chief executive of JPMorgan Private Bank, says that banks have often just leveraged investment views from asset management or the investment bank instead of having dedicated views for private banking clients. JPMorgan introduced the CIO role in the late 1990s. "We recognized that the days of just leveraging investment management or capital markets research had passed. Individual clients’ needs are quite different from institutional clients’ and they deserve a dedicated CIO who analyses markets with a private client lens," he says.
Mark Mason, chief executive at Citi Private Bank, says having a house view enables the bank to be more focused in its products. "For example, our view was that the European financial sector is still going through a shift and waiting to deleverage, so we created investment opportunities relating to distressed financial institutions," he says.
Mason stresses that it’s not even crucial that clients agree with the house view. "In some ways the house view is the opening dialogue with the client, and even if they don’t agree it is a way to start discussing themes and investments and asset allocation with them that will ultimately enable the adviser to better understand a client’s needs." Bankers say that the house view and simplified line from oversight to implementation mean that the bank can react faster to any macro events globally.
|Hans Ulrich Meister, head of private banking and wealth management at Credit Suisse Private Bank|
It sounds like a bold move by the private banks. Are they resting all their investment decisions on one person? Not at all. In fact they argue it is a better process for managing risk by including many views. Taking UBS as an example, Zeltner explains: "We have an investment committee comprised of experts by asset class and regions, and the smartest guys from all over the group. We also talk to third parties like BlackRock or Pimco to see if our thinking is robust. From there we think about how to position ourselves. And then Alex and his team orchestrate that one view and are accountable to apply it. And overlying that, if they want to move overweight or underweight from the view, that then needs to be approved first. It’s a more standardized way of managing risk."
There is therefore less risk of a call being incorrect, but nonetheless the risk is there. Zeltner says banks can only try to get it right. "Investment management is not a science as we don’t control every lever and markets are heavily reliant on central banks now, and we can’t promise performance, but we are showing clients that we are doing our best, what exactly we are doing and providing them with a reference point."
The former head of a European private bank says wealth managers will never make bold enough calls to alienate clients. "No bank is going to take an extreme view. And let’s be clear – there are only a number of amazing traders in the world who make extreme and correct calls and they are not working for private banks. The private banks aren’t trying to call markets. They are just trying to say: ‘We can help you construct portfolios with balanced views and this is how we put those portfolios together’.
It’s unclear, however, whether the CIO model will be anything of a differentiator, especially if it’s now the model for every global private bank. What private banks seem to do best is to avoid losing money and to offer some investment ideas and review allocations. If you were to compare the returns of the top 35 private banks, they would be fairly similar for comparable risk/return profiles, and with the CIO model that is likely to continue. "There are only so many ways to invest a portfolio. No one is breaking the mould," says one consultant.
And do clients care that deeply about investment performance? Sallie Krawcheck, who used to run Bank of America Merrill Lynch’s wealth advisers and private bankers, says that in all her studies with clients, investment performance ranked low on the list of must-haves. "Barely any clients know what their investment performance is, even those who say they are more investment-oriented. The number-one reason clients leave their bankers is not performance, but rather because their phone calls were not returned quickly enough. That said, a change in strategy can create momentum by motivating employees as well as their clients."
That private banks are trying to come up with measurable means to attract and retain clients can only be helpful, as well as being viewed as an acknowledgment by the banks that it’s time to show what client fees are being spent on.
It is too soon to tell whether or not the shift to the new house view and CIO model will lead to better relationships with clients. The former head of the European private bank says that the banks, rather than mimic each other, need to come up with a unique philosophy. "Do they avidly believe in alternative investments? Is that their hook? Are they known for their research? If all the global players become the same, then how can they turn this shift into a revenue generator?"
It’s back to the long-held debate: do you specialize and therefore take the impact of market cycles? Or is it preferable to be more diversified? UBS has seemingly gone all out for the new paradigm of investment management being essential and the CIO as integral.
Zeltner says that there will be a shake-out in the industry as a result. He says those banks without robust in-house investment management and research will struggle in this new era of the house view. "If you don’t have content or internal expertise, how can you possibly form an investment opinion for your private bank and clients?" he asks.
Ariel Salama, partner at NuVerse Advisors, says the more private banks can standardize their investment-performance tracking so that they can be compared with their peers, the better. "In that way, banks can explain to clients that it is more relevant to be benchmarked against balanced portfolios rather than single-asset-class returns." Salama developed an industry benchmarking index (the FTSE Private Banking Index) that ran for several years pre-crisis and that compared private bank portfolio returns, but financing was sorely affected in the Lehman Brothers default in 2008 and the index had to cease operations.
Salama adds that CIOs are under a lot of pressure because of the uptick in markets. "Clients are disappointed because they are comparing their portfolios against the 32% returns of the stock markets last year – but of course no private bank would have their client invested wholly in equities. It puts CIOs on the defensive. For this year they have their work cut out because clients want to be in equities, but this might not be the year to get swept up in equity markets."
So how can private banking CIOs cement their positions as key drivers of the wealth management business? And to what extent are they able to differentiate their strategies to clients?
Euromoney attempted to shine some light on these challenges by asking the chief investment officers of five of the world’s biggest wealth managers for their views on how to beat the market in 2014 and beyond. Their responses suggest that differentiation will come at the margins, at best.
Take the big question that all clients are asking: where will growth and portfolio performance come from in 2014? Strobaek at Credit Suisse says: "We don’t expect to see such high equity returns as in 2013. The recovery has been discounted in, and it’s more realistic to expect 6% to 10%. We don’t believe the cyclical bull market in equities is over, but we will see more volatility and market swings than in 2013."
|Richard Madigan, CIO, JPMorgan Private Bank|
Steven Wieting is global chief investment strategist at Citi Private Bank. He took on the role in May 2013, having previously been a director and US economist in Citi Research. He agrees that while emerging markets will maintain the fastest global growth rates, those rates are decelerating. He adds: "The US and the UK should easily be the fastest-growing large developed economies. The 1.3 percentage point acceleration in the eurozone’s growth rate we expect in 2014 could still be a very meaningful positive surprise to investors."
All five CIOs that Euromoney surveyed are underweight fixed income. Thomas Moore is chief market strategist for HSBC Private Bank. He joined HSBC from JPMorgan, where he was CIO in the bank’s personal asset management group. Moore says: "We are advising an underweight position in fixed income, or short duration to a client’s benchmark. We prefer credit to sovereign debt still. For the first half of the year we are also constructive on high yield. Over the medium to long term we expect yields to lift higher as the global economy continues to improve."
Alex Friedman at UBS also likes high yield, but Madigan says that while he continues to own extended credit, including high-yield bonds and loans, the amount is far less than JPMorgan has had in previous years.
Most of the CIOs believe that absolute-return investments will have a place in client portfolios this year. Strobaek at Credit Suisse says: "Absolute-return products are becoming more palatable now that it’s clear that other investments that were deemed safe are no longer so and returns cannot be expected from such places as government bonds. We would look for sufficiently transparent and diversified multi-asset portfolios and hedge funds."
Friedman at UBS says that hedge funds have performed poorly over the past five years as markets have been politically driven. He says: "Long/short and event-driven strategies fare better but we’re not expecting blow-out returns. In any long-term portfolio we encourage a 12% to 15% allocation to hedge funds because it makes sense to allocate to uncorrelated assets in a low-return environment."
Most of the chief investment officers believe the window of opportunity to generate returns remains open. Moore at HSBC says: "So long as inflation remains subdued and earnings growth momentum continues, then equities should maintain a relatively positive footing."
|Michael Strobaek, global chief investment officer, Credit Suisse|
Madigan at JPMorgan says: "We told clients at the start of last year that 2013 was a year of rational exuberance and not to be out of markets. We feel the same about investing in markets this year. But we are keeping a close eye on valuations as, unlike last year, there is nothing obviously cheap across markets."
Wieting at Citi thinks that US unemployment will fall below the present 7%, assisting above-trend growth for the next two to four years. He says: "If the economic recovery incentivizes a rebound in the labour force, the US and global recovery could be an unusually long one. But we can’t just assume it. Such notions require continuous monitoring."
Taking a view, promoting it, and constantly reviewing that it is the correct one: such is the role of the new private banking chief investment officer. But the people that will be monitoring their calls, and their impact, will be the chief executives of the world’s leading private banks: the future of their business may depend on it.