More than just champagne and peacocks

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To many of the small family-owned firms of Switzerland's Lac Léman, private banking is still all about providing a discreet service to those old-money Europeans who still have time to contemplate their investments amid champagne corks and peacocks. But the leisurely approach of these private bankers is under threat from aggressive global institutions who see private banking as nothing less than a personalized form of investment banking. Jules Stewart reports.

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"Many of our clients have Bloomberg screens on their desks and they know what's happening in the market in Hong Kong, Korea or Japan just as quickly as we do." The remark comes not from the head of a bank's foreign-currency trading operation or Eurobond sales team, but from Michael Tomalin, managing director of Barclays Private Banking.

It's a fair reflection on the rapid development of an industry that until recently looked upon providing a walker for a client's poodle as one of its most valued services. With almost $20 trillion in private wealth sloshing around the world, everyone is getting in on the act and established private bankers can no longer afford to rely solely on the Austrian millionaire art collector seeking to set up a discreet trust to shelter his family fortune from the ravages of inflation and currency volatility. He himself might be demanding discretionary advice on a cross-border stock portfolio or multi-currency investment fund.

Also, private bankers are playing for higher stakes than ever before. The SBC-UBS merger, for instance, brings together a private-banking empire with $580 billion in assets under management ­ more than twice the asset pool of its nearest competitor Credit Suisse ­ and a global network of research and sophisticated investment products. Small wonder that the new United Bank of Switzerland has upped the ante for new clients to a minimum of Sfr1 million ($680,000) in assets, whereas in the past as little as Sfr100,000 would give you access to an account executive.

Not long ago private banking was dominated by the Swiss, and the typical client might have been a South American with a Geneva account who was concerned about political stability in his home country. It was a simple business: the banker guaranteed confidentiality, the money would be quietly tucked away in a Swiss bank account and the client would stop in for a glass of sherry with his private banker on his yearly shopping trip to Europe.

Barclays' Tomalin defines private banking as a business of craftsmanship rather than one of industrial processing. "The things we design for our clients are bespoke to particular client needs," he says. "The private client of today is looking much more for investment performance and the relationship is a much more transparent one. It is still delivered clearly with discretion, but the flight-capital-type private client is being replaced by the sophisticated investment type."

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Michael Tomalin,
Barclays Private Banking

Tomalin says he feels at home in the markets after having spent years in merchant banking and investment management around the world, from the Caribbean to Hong Kong, New Zealand and Japan, before coming into private banking in 1992. "I look after a few clients myself but not on a full-time basis," he says. "It's only when you're dealing with clients that you see what they want. I like to work in the markets and understand what's going on, but in every single one of those cases there will be a full-time banker assigned to the client as well. My role is more avuncular, although I would certainly be involved in the big-picture activities."

The type of clients he likes doing business with come to Barclays with about $1 million of assets since, as he explains, looking after a client is an expensive business. "Nobody with less than that amount of assets for us to manage would really be interested in doing business with us," he says. Clients often deal with several banks rather than setting up a single-bank family-type relationship. Tomalin says an international client might have $5 million or $10 million of liquidity of which Barclays might manage $2 million or $3 million initially.

Towering ambition

One of the most aggressive competitors in the new arena of private banking is based not far from Barclays' office in London's exclusive Mayfair district. But Merrill Lynch's operations tower over the discreet Victorian premises of most of the city's private banks in a modern six-storey office block. And most private bankers reluctantly admit that the US bank is providing some of the hottest competition in town.

Michael Giles, chairman of Merrill Lynch's International Banking Group, was recruited primarily to lead a commercial banking effort that would be more oriented towards capital-markets activities. "The more I looked at it the more I kept thinking that it didn't make much sense and we weren't maximizing our historic strength, which is the private-client side," he says. "We weren't linking banking services to the private-client side of the business. Providing credit to corporations and competing with the world's major banks did not look to me like a sustainable competitive position. So we essentially stopped it in the 1980s and reoriented everything towards the private client. One thing led to another and we merged aspects of banking and brokerage. I co-managed the client business before becoming chairman."

Giles, who divides his free time between tennis and collecting Asian art and antiques, has set himself a personal objective to see at least 75 clients and prospective clients a year. "I don't act as a day-to-day account manager, but I certainly act as a senior or back-up manager on a handful of very substantial relationships," he says. "This is a people-oriented business. We've been aggressive in hiring private bankers from other institutions over the last half-a-dozen years." The US bank is targeting multi-market investors in the $500,000 to $5 million range. "This is where a lot of private banks struggle," he says. "Internally they segment at the $3 million to $5 million level and have to put in formulae to consider anything below that." Merrill Lynch doesn't set an official minimum level of investment but nobody with less than $250,000 to construct a portfolio would be encouraged to cross the bank's threshold.

Rocket-science approach

Another major force in the market, the new United Bank of Switzerland, is pinning its hopes on a rocket-science approach to private banking. Italian-born Rodolfo Bogni, chief executive of private banking at SBC, has been named to head the merged Swiss group's private-banking operations, and will bring to the job his skills as a mathematician. When he was approaching 50, Bogni took a 15-month sabbatical to do a mathematics programme at the Centre for Quantitative Finance. For an investment banker with eclectic pursuits ranging from Italian art and opera to scuba diving it was not, perhaps, such a surprising decision.

"I did nine months of raw maths and six months of financial application to options theory," he says. "This is very useful for private banking. The client tends to exercise a high degree of sophistication when his own money is at stake. The bottom line is that today serious private banking is only a personalized brand of investment banking."

Bogni, who came to SBC after working at Chase Manhattan and Midland Bank, says it became evident to him that the derivatives markets were very quickly becoming more important than the cash markets. "Although I developed early on by necessity as a practitioner on the job I didn't feel I had a sufficient mathematical basis to be on absolutely safe ground when talking things through with my younger colleagues."

Bogni believes that an increasing number of new operators are moving into private banking on the false assumption that little capital is required to enter the business. "A modest amount of regulatory capital and equity are required to be active in private banking," he says. "But you cannot disregard the huge element of goodwill that is not recorded in the balance sheet but which has contributed to building up this great private-banking franchise, particularly among the Swiss banks. The risk is that new entrants with a relatively low skill base may give the whole business a bad name. Using them is like buying a Cartier in the streets of Naples. If you choose to do so, good luck to you."

The Swiss private banks grouped around Geneva's Lac Léman resemble a cosy family affair where for centuries high-net-worth individuals have entrusted their wealth to soft-spoken and impeccably pinstriped bankers. Most of these institutions are pygmies in comparison with the "thundering herd" and they acknowledge the threat of competition posed by Merrill Lynch and other big players. But they believe they can compete on their own terms.

"We have Sfr100 billion under management and we are the largest specialized fund-management bank in continental Europe, so size is not a problem for us," says Ivan Pictet, a seventh-generation member of the founder family of the triple-A rated Pictet & Cie. "For instance, Pictet & Cie is not in hedge funds but we have a special department to monitor these fund and if a client wants this as part of his portfolio we can refer him to other managers. This way we can outsource anything from a third to half of a client's portfolio and still retain its key functions."

'We never close'

Pictet, who chairs Geneva's Chamber of Commerce and Industry and has set up a foundation to promote the integration of the city's 40% foreign population, says he wouldn't consider a professional life outside private banking. "This gives you the feeling of being in the centre of the business world, not looking at it in an abstract way," he says. "It's not so much how hard you work, but the fact that you must always be available. There are no opening hours here as the private-banking relationship is always a live one."

Pictet defines the art of private banking as gaining a client's confidence to the point where he can come to accept underperformance when the markets turn down. "Once you've established this relationship you can go through difficult periods with them," he says. Pictet tends to discourage smaller investors and makes a priority of properly allocating the asset managers' time. "It is not fair for big clients to always get more attention," he says. "But discreet customer segmentation is a major challenge."

One of six partners, Pictet says he has a policy of spending at least half his day with clients. "The idea is to be available at all times. That's the art of private banking, as well as stability and continuity. Our yearly staff turnover has averaged 3% for the past 25 years, compared with 15% or 20% for the large Swiss banks. Clients know who they are dealing with on a year-to-year basis. This is the only way to guarantee the confidentiality factor, which cannot be separated from asset management."

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Pictet says that when he joined the bank 25 years ago clients were frightened of inflation and political risk. "We didn't even invest in the UK or France for fear of inflation," he says. "Today we have an investment horizon of 62 countries. It's all quite different, and clients now understand concepts such as benchmarking and relative performance."

Grégoire Bordier, a partner in Bordier & Cie, says a big challenge is to separate clients into the traditional type who is interested primarily in confidentiality and security, and the new entrepreneurial type looking to maximize returns on his capital. "The most difficult ones to deal with are those who switch back and forth." he says. "When you switch your account to a more aggressive mode and things go against you, suddenly you get negative returns and you have difficulty coping with that. We are struggling with these clients. We need to educate them more and that takes an enormous amount of time."

Bordier, who became a collector of opium pipes during his travels in Asia, discounts size as a critical factor in private banking. "We are not the size of certain of our competitors who have very different strategic goals," he says. "They have to compete against the likes of Mercury Asset Management and Gartmore, but we don't. Merrill Lynch and SBC don't represent competition for us, but rather great opportunities in terms of new clients. A client from a big bank will come to us for two reasons: he may be looking for a different kind of service or he may not have received what he expected. The idea is to try to get these clients to diversify their portfolios, let two banks compete and show him what we can provide."

Everest and other high-level work

Benedict Hentsch, managing partner of Darier, Hentsch & Cie, agrees that the goal is not to become a huge bank. "That would wipe out our specialist character," he says. "We emphasize personal contact at the very highest level possible." When not climbing on Everest, Hentsch says he spends 80% of his time developing personal contacts with clients. "That is where size comes into the picture," he says. "You cannot have 500 lunches a day with clients. We have Sfr30 billion under management, which is small compared with the estimated Sfr3 trillion managed by Swiss banks. But this affords us an opportunity to grow market share without having to develop a business in Thailand, for instance, as part of some global market plan."

Hentsch says new competition has a relatively positive effect on business. "The more people entering the market, the more publicity for those near the top of the pyramid," he says. "We stick to what we've been doing for the past 200 years. You can say that quickly but it represents an enormous amount of culture that cannot be created by decree from head office in New York."

Hentsch says the key is to match the bank's structure to its assets under management. "The danger is to hire hundreds of research analysts and managers who needlessly cost you a fortune. We are a small but lean firm with 450 people worldwide."

Focus is the keyword of Geneva's smallest private bank, MM Mirabaud & Cie, whose partner, Pierre Mirabaud, stresses the importance of distinguishing between private banking for individuals and for institutions. "We do not do any institutional money management," he says. Mirabaud is one of Geneva's most tradition-bound private banks and its clientele may come closest to the popular image of "old money" ­ individuals contemplating a private art collection in an environment of peacocks and champagne corks.

"Our clients are in touch with the bank's top management, not with account executives," says Mirabaud. "Merrill Lynch, for example, is a good bank but you do not know who is making the decisions. Being too big makes it harder to service clients and therefore it is not always an advantage. Our clients look for long-term views and long-term relationships for continuity in their contact with the bank. We always give them a clear idea of what we are doing."

Mirabaud recognizes increased competition as one of the main trends in private banking, but he says this can be turned to his bank's advantage. "This can be seen as an opportunity for boutique-type banks that look after their clients and it has been very positive for us," he says. "The competition is coming from Swiss banks and from large international banking groups such as Merrill Lynch or Lloyds. Our competitive edge is the performance we achieve. We believe asset allocation is one of our strong points. We are aware of our limits and we will tell a client if he is looking for a particular service that is not one of our specializations. We'll allocate assets outside our team of managers if required. This way you do not lose the client."

In theory Mirabaud sets no minimum threshold for clients. "But of course, we cannot manage a $100,000 portfolio in the same way as $1 million," he says.

Switzerland is not the only home of traditional private banks. It would be hard to find a more stick-to-the-knitting type of private bank than C Hoare & Co, Britain's last family-owned bank. Tucked away discreetly in Fleet Street, the bank has been managing the money of wealthy individuals for more than 300 years. Several families, like the Calvets whose portrait hangs in the banking hall, have been clients since the founder-family days.

Butterflies as well as banking

"We are a retail bank, not an asset-management bank," says the bank's managing partner Anthony Hoare, who confesses to a passion for butterflies as well as banking. "This sets us slightly apart from the ordinary run-of-the-mill private bank. From our perspective I think people are looking for two things. One is an integrated financial service. A one-stop shop is a terribly dangerous thing, because you can't really be an expert in all those fields. What you can do is be an integrator and pull together the services that are needed. Then you have to add your own particular expertise in the area where you have it."

Hoare says clients are becoming a little more sophisticated in the services they require, but basically come to him to get the kind of retail banking they cannot get elsewhere. "They want to have a friendly voice at the other end of the phone, somebody who is intelligent who hopefully doesn't change from one year to the next," he says. "People still come here largely for those traditional values. They are tending to ask us more about fixed-term lending, derivatives, and so on. There are some services we don't provide. We've certainly set our face against derivatives trading. We don't understand the mathematics involved and we don't have sufficient depth to be able to spread the risks. It's a very big cake, and we have to look to safety rather than to sophistication."

Hoare says there is a lot of "new money" among the bank's customer base, but the background to the bank is old-established money. "We compete on service level, quite simply," he says. "You can define it in so many ways. We recently gave a presentation to a firm of solicitors, some of whose partners bank with us, and one of them was thankful to us for a very small and apparently very silly thing. She had written to ask us to start a new standing order because she was employing a new nanny. We reminded her that she still had a standing order for the old one, a fact she had completely forgotten. She was blissful, for otherwise it could have taken her up to a month to pick up on the fact that she had made four weekly payments to someone who was no longer working for her."

Hoare private banking depends on personalized service. "By and large people want to be able to relax and enjoy their wealth, secure in what's being done with it," he says.