Research by Kapila Monet, Elizabeth Mundy and Rebecca Sleath
Full results and methodology
Profiles : UBS Wealth Management , Sarasin, Bordier & Cie, Credit Suisse Private Banking, Coutts, Bank Privat, Degroof, Mandatum, SG Private Banking, Sal Oppenheim, CenE Bankiers, Banif, Cuatrecasas, Carnegie, Citco, Man Group, Noriba, UBS, PwC
THESE ARE WORRYING times for the private banks and other financial firms competing to win and hold the custom of the world's rich. As leading bourses enjoy a sustained rise after a prolonged bear market, wealthy individuals are recovering from the shock of seeing paper fortunes destroyed and are reassessing the performance of their financial providers through the recent wrenching volatility. They are not all happy with what they see.
Frank Canosa, managing director at Julius Baer, says: "When the malaise is general, as it has been, clients stay put. During a downturn, clients generally feel it's not the best time to change horses, as everybody is doing badly. It's now, when markets turn up again, that clients analyze you very directly. It's now that they may leave."
The first signs of the worst being over for high-net-worth individuals were already emerging by this time last year. In their June 2003 World Wealth Report, Merrill Lynch and Cap Gemini Ernst & Young concluded that the wealth of these individuals – defined as people with $1 million and above in financial assets – had grown by 3.6% in 2002 to $27.2 trillion. Europeans – the largest component – enjoyed 4.8% growth and Asia-Pacific high-net-worth individuals 10.7% growth.
Europeans benefited from having more diversified investment portfolios and less exposure to equities than America's wealthy, who lost 2.1% in 2002. Since April last year, a broad stock market recovery has taken hold. The report forecasts that by 2007 the combined wealth of high-net-worth individuals will reach $38 trillion – an average annual growth of 7%.
The prospect of sharing in annual earnings of, say, 100 basis points a year on that huge sum has bankers' mouths watering.
Private wealth management continues to attract all manner of banks, asset managers, brokers and other specialist providers of services from asset allocation to trust and tax advice, philanthropy services, leasing for private jets, custody and specialist investment in everything from art and collectibles to ethical investments.
A key aim of this Euromoney survey of the private wealth management industry is to establish which providers industry participants themselves believe to be the best in each country and region at the financial services wealthy people use. Canosa says: "It's almost as essential to have a database of which other firms do which things best as it is to know what you yourself do best."
|Canosa: "Bankers should|
admit what they're good
at and what they're not and
Part of the allure of private banking for shareholders of financial institutions is that it promises steadier earnings than, say, the more volatile components of investment banking. Yes, private-bank earnings fall in a bear market when wealth is destroyed, but they don't completely dry up, as M&A fees and equity capital markets fees often do.
But this is not an easy business to manage. It is quite unlike retail banking – a numbers-driven business in which products are the key to success along with efficient processing and distribution. Private-banking success, by contrast, often depends on much less tangible aspects of client service. Individuals count. Great private bankers have to be good salesman who can woo clients and also good technicians who can manage their money or provide high-level technical advice on how to do so. The hunters of wealthy clients can't win them over and then palm them off to diligent farmers to manage. Wealthy clients demand attention from the very people who impressed them in the first place. That constrains firms' size and growth potential.
In compiling this survey, Euromoney found that private bankers are working at about 85% capacity in terms of clients they could handle. Some chief executives will privately admit that they are still burdened by the excess capacity they built for the bull markets. Others are already worrying about how to scale up. Robert Taylor, head of private banking at Coutts, says the bank, an early proponent of hedge fund investing, which has saved clients money through the bear market, enjoyed a record year in 2003 in attracting £1.6 billion ($2.7 billion) of assets under management and is adding 3,000 clients a year. He ponders: "Can private banking continue with this model and have the same banker find the client, assess him, bring him in, set up his affairs, review them every year and continue to be this all-singing, all-dancing single point of contact? I'm not sure that it can."
Private bankers will have welcomed signs of stabilization and recovery in the underlying base of wealth on which they earn fees, but they will have been less pleased with another report, from Booz Allen Hamilton and Reuters. Also published last June, this suggested that many European customers are dissatisfied with the performance of private banks at a very basic level. They are angry not so much at poor investment performance as at many banks' failure to profile and understand clients properly in the first place. And they suspect that many private banks are palming them off with inappropriate products rather than tailoring independent and objective advice.
Wealthy clients might be grumbling about such failures, but will they do anything about it? In the past, they have been remarkably loyal to their financial providers. Mark Powell chairman of Rathbones, a traditional UK discretionary fund manager, says: "We tend to lose about 3% a year, mainly due to clients dying. I can only put that down to an indefinable feel-good factor."
In the past, clients have been slow to punish underperformers and reluctant to move accounts. And they have paid healthy margins for private-bank brands despite often mediocre service and poor products. Now all that may be changing.
Exit pursued by a bear
"There is more client movement now: the bear market has been a catalyst for that," says Liz Cacciottolo, managing director at UBS Wealth Management and head of its UK operations. "It used to be that more of a focus was placed on new wealth creation rather than seeking clients with entrenched relationships." Cacciottolo has led a hiring spree at UBS in the UK that the bank is repeating around Europe as it grows its onshore private-banking businesses in the UK, Italy, Germany, France and Spain. The bank has concluded that the growth in a business once dominated by assets managed offshore, primarily in Switzerland, will increasingly come in onshore markets. The Swiss banks that remain global leaders in private banking are expanding and acquiring businesses that serve wealthy people in their own home countries.
Cacciottolo notes intriguing developments in the way clients spread business. "A lot of clients have several banks. It may be that if I hire a top adviser from another leading firm then that adviser's clients may at first shift over assets perhaps from a third bank – one of the weaker performers among their banks."
Good private bankers who change firm will rarely bring most of their former clients' assets with them, but they may bring a proportion over time – some senior bankers say up to 30%, some even suggest as high as 50%. And in the battle for talent, plenty of private bankers are moving around.
In the late 1990s, banks went on great hiring sprees as soaring markets made more people wealthy almost overnight and the private wealth management business looked ever more attractive. In the bear market that began in 2000, some private banks had to cut costs and some good bankers lost faith in their own organizations and looked for more committed ones with more convincing strategies. Wealthy clients' loyalty is split: they adhere to their bank but also to their personal banker.
"Clients are much more discerning now," says Heinrich Adami, managing director at Pictet in London from where he looks after the bank's UK and German efforts. "If what are perceived to be big names in private banking are not cutting edge, technically, today then within three or four years they will be second tier and then they can forget about keeping big, important clients. The market will be ruthless in determining this."
Debra Treyz, managing director at JPMorgan and head of its private-banking operations in Europe, the Middle East and Africa, suggests: "We're in a new phase of private banking. Buying behaviour is changing." JPMorgan concentrates on a particular group of the richest customers, ultra-high-net-worth individuals that Treyz defines as "those whose wealth is going to outlive them". They are almost like institutional investors in character. She sees their demands changing. Partly this reflects the renewed emphasis on wealth preservation and risk management, rather than the investment performance that was the brief obsession of the bull market.
Wealthy people don't want to go back to handing over their money to private banks and simply letting them manage it on a discretionary basis, as they did so passively up until the 1990s. Nor, though, do they want to manage the money themselves and relegate private bankers to glorified stockbrokers who execute client orders.
For a while in the boom market, many wealthy people became day traders – they bought stocks and watched them go up and convinced themselves that increasing their wealth was a simple business. They must bear some responsibility for the losses that followed. Traditional private bankers complain that by the end of the 1990s, clients were pressing them to place more and more of their assets in technology stocks and calling them fuddy-duddies if they cautioned against this.
Product wary, keen on advice
Wealthy people no longer think the investment game is easy. Treyz says: "After the roller-coaster ride of the 1990s, a time in which many banks and clients misunderstood their true objectives, risk tolerances and time horizons, customers are looking for advice and objectivity. Customers are suspicious of financial providers whose business models are based around the distribution of products."
Warming to the theme, Treyz declares: "We come at this with a mindset of fiduciary responsibility born out of being a trust bank and an asset manager. That's no small thing. I don't have a portfolio that I must sell, a loan book to increase or an IPO to distribute. We sit on the same side of the table as the client and sometimes that means advising actions that are contrary to the interests of the bank, such as that clients should deleverage or shift out of equities into cash or bonds."
The client's side of the table is going to become increasingly crowded. Every banker, broker, asset manager and specialist adviser that Euromoney spoke to for this article claims a seat there. Who can possibly be left sitting on the other side?
The difficulty for potential customers is distinguishing between the banks that genuinely live by the principle of putting client's interests above the bank's own and those that merely pay lip service to it.
All private bankers will declare, with hand on heart, that they give good objective advice to clients on how to invest. But there are plenty of refugees from the large private banks now setting up smaller, advisory firms – such as multi-family offices aiming to coordinate purchasing of financial services for very wealthy families – touting their own independence and casting grave doubt on this claim.
At many banks, these refugees say, the opposite is the case. The priority is to invest client assets wherever earnings for the bank itself are highest. That could mean in-house discretionary managed accounts, or the banks' own pooled vehicles, irrespective of their performance. If the money is put into investments managed outside the bank, it would at least be put into those that pay the bank the highest kick-backs for directing wealthy investors into them.
One veteran now at a small, independent fund manager says: "At the big banks you have certain products that you are encouraged – in a variety of ways – to sell. And once you get a new client's portfolio invested, you are on to the next client and the next product. A lot of advice is designed to produce the initial recommendation that clients should go into the product that earns most for the bank – often equity – and then periodically to recommend changes in allocation that generate further earnings."
It's the worry of being taken for a mug, as much as actual losses, that haunts the wealthy. Banks know they must loudly avow that they do not push duff products on customers. "Clients will forgive bad judgement, they will forgive mistakes and honestly recommended investments that lose out", suggests Marcus Gregson, chief executive of HSBC Private Bank (UK) Ltd, "but they will never forgive bad faith."
Open architecture has become the great buzz phrase in private wealth management. Firms with open architecture will offer third-party investment products to clients rather than attempt to cling to the whole pot themselves. Banks may advise that some proportion of client assets still go to their own managers, where these can plausibly claim to be among the best in a particular asset class, while the bank will also advise on placing the rest with best-of-breed (another favourite catchphrase) external managers in asset classes where it has less in-house expertise, such as hedge funds and other alternative investments.
"Any house today that doesn't embrace open architecture is sounding its own death knell," says Canosa at Julius Baer. "Last week I had a client who wanted to do a real-estate transaction. I told him that we don't do that but gave him names of a couple of good people to talk to. We are not a universal bank and have no desire to be. And it's very comforting that you don't have to pretend to be an expert in something you're not."
Many banks now make similar claims. Jeremy Marshall, is head of private banking and private-client services in London for Credit Suisse. He manages an onshore and offshore business focusing on clients with £5 million or more of investable assets, including entrepreneurs, family offices and what he calls London-affinity clients – wealthy people from around the world who simply like to manage their financial affairs out of London.
"We are proponents of genuine open architecture," says Marshall. "We're good at providing overall advice. I encourage clients to think very seriously about alternative investments of many kinds, which may include property and commodities as well as private equity and hedge funds. When you cover family offices you really have to show the best of all products. We recommend investment products from some of CS's competitors, like GAM/UBS and Vontobel if we think they are genuinely the best in a particular asset class. Some of our biggest clients have no Credit Suisse manufactured products at all."
It has become impossible for so many private banks all to maintain the pretence that their in-house fund managers are the best in the business. Financial services providers to the wealthy are changing as a result. Since his arrival from HSBC Asset Management, Andrew Ross, chief executive at Cazenove Fund management, has overseen a transformation in the private-client business from being a collection of stock-pickers to a provider of all round investment advice. This often starts with tax advice which can suggest the use of pooled investments. He says: "Of the £3 billion we have under management for private clients, just under £1 billion is in pooled vehicles. An advantage of pooled funds is that clients can gain direct access to the most talented investors. In our core areas of pan European equities and bonds we have that talent at Cazenove. However, no one house is good at everything, which is why we have £500 million in multi-manager funds – that is outside managers. We have a team of six people who just monitor these managers."
Clients should pay close attention to the distribution of fees between their so-called trusted advisers and the manufacturers of the so-called best-of-breed investments these advisers recommend. Many asset managers will offer kick-backs, or rebates, to third parties – financial advisers, private banks, family offices – that promote their products to wealthy investors. It's a practice that undercuts the whole notion of genuinely independent advice.
One industry veteran says: "You get third-party fund manager A with a good track record, consistent performance, low volatility but that pays a rebate of only 20bp. Then you get fund manager B in the same strategy and style offering mediocre returns and high volatility but paying a 40bp rebate to the private-client adviser. And guess what? Somehow or other the client ends up with fund manager B."
There are now, at least, plenty of firms building a systematic business out of this multi-manager approach, marketing themselves not as managers of clients' money but as managers of managers. Marc Giebels van Bekestein, a former private banker at Goldman Sachs, is managing director at Marcuard Family Office, an independent organization with offices in Zurich, London and Bermuda that offers wealth management services to, at present, some 30 families with substantial assets.
Van Bekestein says: "First, we sort through extensive data on thousands of funds and manager series, and group them based on the investment objectives and styles. We then apply multiple filters and the top 10% of funds in each category are further analyzed in detail. Next, we apply statistical measures and screen these funds in an in-depth and objective manner. This process allows us to quantitatively examine performance, risks, investment styles and manager skills. We then try to understand these performance characteristics from a qualitative perspective. Visiting and interviewing the investment managers, and understanding their investment philosophy, process, discipline and risk control serves to confirm our statistical findings. We often visit companies together with fund managers in this due diligence process to gain a first-hand view of their decision-making process. Only when we are convinced from both the quantitative and the qualitative aspects would we invest in a fund or with a manager."
The firm will construct portfolios of managers for clients, monitor them and consolidate daily reports from them. Although it tends to recommend a static asset allocation between cash, bonds, equity, hedge funds and other classes, it is more active in recommending changes to managers within those asset classes. This would happen if managers ceased to perform, drifted from their style or had their style rendered redundant by changing market conditions. Marcuard recommends absolute-return funds but only those that are transparent and make it possible to track changes in allocations, so enabling analysis of alphas, betas and Sharpe ratios. The process is designed to expose clients to a portfolio of managers that produce higher returns for lower risk.
Marcuard displays all fees to customers. So if a fund manager charges a 150bp fee but offers a 40bp rebate to Marcuard, the client is charged only 110bp.
Knowing the customer But selecting and monitoring investment managers is the second stage in the process. Far more important is understanding the client's overall financial position, assessing risk tolerance, expectation of return, time horizons and liquidity and income requirement. This drives asset allocation, which is the first thing to get right and is, all too often, something financial services providers to the wealthy skate over.
For many years, private banking was a corner of financial services that prided itself on lack of transparency and where investment performance was not an overriding priority of many customers. Poor advice often came at the starting point of asset allocation, which accounts for more than 90% of the variation in investment returns and is far more important than individual manager selection.
The head of one private bank recalls his first experience of the business after transferring from investment banking. "We had a client who was an entrepreneur with 90% of his wealth effectively tied up in the single stock of the company he had founded. He had just taken out $10 million through a placement and our advice was that he invest a large chunk of it in equities. We should have told him to put it in bonds, or even cash but we weren't looking at the totality of his assets, exposures and liabilities." It was wholly inappropriate advice and it wasn't an isolated example.
The little matter of tax
Even before asset allocation there are other key decisions for wealthy people and their advisers to make. They must decide what is the best vehicle through which to own and control assets and how best to construct these and subsequent investments with a view to minimizing the biggest negative return of all, outstripping fees and investment losses: tax.
Good private banks should start from this point and many claim to. But for those who want advice separate from suppliers of financial services and investments, more and more sources are appearing.
Adam Wethered is a partner at Lord North Street, which describes itself as a private investment office. The firm has worked with billionaire families in the UK and Switzerland, and now represents six families and provides independent advice on asset allocation which it then implements. It offers manager selection, bespoke reporting and arranges custody, generally with Northern Trust. It charges a transparent fee based on assets and, unusually for the industry, has no bias towards higher-risk asset classes. Wethered was previously co-head with Walter Gubert of JPMorgan's investment banking operations in Europe and subsequently ran its private banking and institutional client business there.
Most of the Lord North Street's work is done before selecting asset managers even becomes a consideration. Working with the client's lawyers and accountants, LNS advises the clients on how to get the big decisions right, those relating to the control, benefit and governance structure, minimizing tax and defining the investment strategy and specific mandates. After this, LNS takes monitoring and risk-return reporting to a new level, selecting, monitoring and changing long-only managers. For alternative asset classes, such as hedge funds and private equity, the firm chooses specialist managers' funds of funds, checking on their manager selection processes and performance in different market conditions.
It's one of the growing breed of independent firms that make a virtue of providing unbiased advice and of receiving no incentive to push any product or service. Wethered says: "This is a service for people with very significant wealth. And for them, we are changing the terms of trade. This is already happening at the top of the market first and will increasingly be demanded lower down the market too."
The relationships between independent firms like Lord North Street, Marcuard and mainstream private banks are unclear. The banks say they enjoy working with sophisticated buyers at family offices and cover them as a discrete customer base. But at some levels they are in competition. Multi-family offices might be described as mini-private banks in the making. And they seek to drive down costs for their clients and margins for banks by bulk purchasing financial services.
Responding to the niche houses In response, many private banks now also offer family office divisions of their own or dedicate teams of lawyers, tax advisers and investment advisers to wealthy families which, the banks say, mimic family offices. And the traditional private banks point out that such boutiques are expensive, probably unsuitable for any but the very wealthiest of families with assets running to hundreds of millions of dollars.
The growth of family offices in Europe – they are long established in the US – and the appearance of other independent boutiques, suggests a greater fragmentation of the private wealth management industry. The new boutiques themselves are typically staffed by former private bankers. If they lead wealthy clients to unbundle their business and parcel it out to the best custodians, lenders, asset managers, estate planners and tax advisers in different countries, they will make survival much harder for the traditional private bank providing a hodge-podge of these services varying in quality from the good to the ordinary.
Few even of the industry giants would still lay claim to being all things to all men. All are struggling to differentiate their strengths. Adami at Pictet mentions the bank's prowess in global custody. This improves its reporting and manager monitoring capabilities but requires customers to have £50 million or more with the bank.
With $260 billion of assets under management and 5,000 staff in 50 locations, HSBC Private Bank is as far away from the specialist, boutique end of the market as is possible. Its chief executive, Clive Bannister, describes it as a bank geared to provide high-end trust, asset management, banking and broking services to international clients with complex affairs. Bannister says: "There are clear benefits to scale in this business which is one in which costs – not least regulatory costs but also staff training costs – are rising all the time." The bank has just acquired a world-class trust capability with the purchase of Bank of Bermuda. It has built a tax advisory capability with 230 hires, many from Andersen. It has a joint venture with SEI to provide its wealthy clients with a manager of managers account. It provides four Swiss registered funds of hedge funds of its own and has hedge fund research teams monitoring over 1,000 managers. Still, Bannister insists: "This is not a business where you are selling products. You are advising."
HSBC is also prepared to do something many rivals shrink away from: lend money.
Like many of the private bankers in senior positions that Euromoney interviewed, Bannister is a former investment banker. It seems that few people set out to be private bankers. Some start as investment bankers or fund managers. And many of them say private banking today is reminiscent of investment banking 10 or more years ago, a fragmented industry, not blessed with abundant management talent, in which participants are still struggling to devise and execute the right strategies.
|Palmer: "This is a business|
that has all the syndromes
and debates of investment
banking in the 1980s"
Some of this is fiendishly complicated, some incredibly simple. "There's been a lot of resistance among private bankers to being told how to do their jobs, which is natural," says Palmer. "If you're told 'you've got to listen to your clients', that's so basic it's almost insulting. But it really is important. Traditionally, people in this business have always given investment advice, but usually in just one asset class and without taking into account a client's overall situation. The combination of open architecture and the context of overall financial planning, starting with legal framework and only finally moving to the investment piece, makes it possible to do what makes sense for the client in ways which are not possible if the dialogue is just based on stock-picking or market -timing.
"This long-term approach, taking into account all the client's needs and goals, is the key to the future."
It's a business that Euromoney intends to follow closely.