Private Banking and Wealth Management Survey 2006: What it takes to keep up with the wealthy

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Private banks are enjoying a period of growth as financial markets improve and global wealth increases. Long-term success will lie in offering a broader range of products linked to investment banking, while ensuring the high levels of service that clients now demand. Euromoney reports on the drivers of success in its annual survey.

View the results


                     
The keys to success
Methodology

Top ten global overall results:
2006  2005
 1 1UBS
 2 2Citigroup Private Bank
 3 4 HSBC Private Bank
 4 3Credit Suisse Private Banking
 5 5JPMorgan Private Bank
 6 9Merrill Lynch
 710ABN Amro Private Banking
 8 7Pictet & Cie
 9 6Goldman Sachs
1011Coutts

THE RESULTS OF Euromoney’s third annual private banking survey show that 2005 was a positive year for private banks in their efforts to attract growing global wealth. Between 2005 and 2009, high net-worth individuals’ wealth is expected to grow annually at a 6.5% compound rate, according to the Capgemini/Merrill Lynch World Wealth Report, and the Euromoney poll indicates that most private banks are successfully tapping into this newly created wealth.

The top 20 global banks all reported increases in asset under management, with UBS Wealth Management, which is once again voted best global private bank by its peers, succeeding in increasing AUM by 19%.

A poll of the heads of business at the top 20 global private banks reveals three key determinants for the increase in AUM: improved portfolio performance, development of onshore business, and use of investment banking ties to attract a larger share of a client’s wallet.

With almost 68% of private banks charging percentage fees based on AUM, increased assets have resulted in improved profitability. Universal banking groups have therefore realized the value that private banking can offer. Clive Bannister, global head of HSBC Private Bank, says: “Having been in the doldrums in 2001 to 2003, private banking is now back and on a rising wave, which means financial institutions are taking an interest in the industry once again.”

Improving financial markets have no doubt eased pressure and enabled private banks to retain clients based on portfolio performance. By mid-December 2005, the S&P 500 was up almost 4% on its level at the beginning of the year. And rising interest rates have been beneficial to those investors holding cash. Hedge funds, which enjoyed inflows from private clients, have also survived mid-year glitches, with most strategies producing positive returns towards the end of 2005. The MSCI hedge fund composite index had returned 4.28% for the year to the end of October 2005.

One effect of positive portfolio performance is that clients have switched their attention to service, with private banks attempting to retain clients by offering service enhancements. “In part the move to open architecture and thereby having access to best-of-breed investment products has taken some pressure off performance issues, and now quality of service is what clients are focusing on,” says Mike Lagopoulos, president and CEO of RBC Global Private Banking. RBC made a strategic decision to ensure its senior relationship managers were spending less time on administrative tasks and more time with clients. “It requires a lot more travel, and time out of the office but it means we understand our clients better.”

The increased focus on service is evidenced by the number of clients per relationship manager reported in this year’s survey compared with that of 2005. The survey shows that there are fewer clients per relationship manager than at the end of 2004 in both the super-affluent and ultra high net-worth sectors. Relationship managers are now working at 69.45% of their capacity compared with 75.2% one year ago. This indicates that private banks are encouraging their bankers to handle fewer clients, offering an improved level of service.

Quality of service

In a 2005 survey of high net-worth investors by IBM Business Consulting Services, 83% of respondents ranked quality of service as the main criteria for selecting a private bank. Only 50% of respondents regarded investment performance as crucial. It’s a throwback to the old days of private banking, says Lagopoulos, when service was supreme. Other heads of private banks agree and, in the bid for improved service, they have been maintaining last year’s trend towards client segmentation. “At the heart of client segmentation is the increasing complexity of the world we operate in. One size does not fit all, and it is important to know which services are appropriate,” says UBS wealth management and business banking CEO Marcel Rohner.

In particular, entrepreneurs are a segment that private banks have identified as growing. Of the respondents to Euromoney’s poll, 88.5% of private banks said they were focusing on entrepreneurs. Rob ten Heggeler is the global CEO of Fortis MeesPierson and says that his firm has been developing products and services for that client sector. “We’ve been recently looking at corporate banking and private banking together to service enterprises and entrepreneurs. Most private banks would agree that this makes sense, but not as many as you would think are actually tailoring products for entrepreneurs.”

Coutts, which is known for its segmented approach, has posted growth in its entrepreneur-focused business and has been developing a broader range of services in that area. “Many entrepreneurs are frantically busy running their own businesses and realize that their banking network hasn’t moved with them,” says Sarah Deaves, chief executive of Coutts UK. “We offer traditional banking and credit cards right through to investments, estate planning and capital markets products.” Coutts also offers networking evenings around the world. “It’s designed to be helpful to clients. They can meet people with similar backgrounds and experiences, and talk about financial issues, or make contacts on a business level.”

Using investment banks

These entrepreneurs tend to be financially savvy and so expect sophisticated products. Furthermore, they require sound advice for corporate activities such as finance raising or M&A.

Such demands have boosted business for those private banks that have ties to investment banks. Being able to offer clients a broader range of solutions ultimately results in a higher share of the client’s wallet and so an increase in AUM.

In 2005 in particular, this relationship between investment banks and private banks blossomed, and for many of the top 20 global private banks it is regarded as the year’s most important trend.

The key driver of the closer relationship between the investment bank and the private bank has been a revival of the M&A market, say survey respondents. “Higher M&A activity among mid-market family-owned businesses creates wealth and, therefore, improves inflows of business to the private bank. Our links with the investment bank have benefited us,” says Mike Bussey, chief executive of Rothschild Private Banking & Trust, which has a strong M&A investment banking arm.

JPMorgan Private Bank has also taken advantage of its relationship with the investment bank in advising the proliferation of families selling or acquiring their businesses. In Europe, in particular, this sector of the M&A market has been booming. Debra Treyz, head of EMEA for the firm, says: “According to our research, more than three-quarters of businesses in Europe are owned by families, and there are more than 10,000 family-owned companies in the UK, Germany, France, Spain and Italy with annual turnover greater than $50 million. Of those, one-fifth of them will be experiencing transition events – usually a sale, equity offering, or transfer to the next generation – over the next several years.” Treyz says that the demand for investment banking products as a result of M&A activity is one of the best opportunities for the private bank to gain new assets in Europe. Indeed, JPMorgan ranks second globally and in western Europe for corporate advisory services to private clients.

Family business

“Until their businesses are sold, the vast majority of the wealth many families have is tied up in their business,” says Treyz. “For them, traditional private banking services tinker around the edges, whereas investment banking services can get to the heart of the issues. Their business might need to be grown or sold, for example, or they maybe need to diversify to preserve the wealth they’ve created in that business. They have family governance issues and often a concentrated position that results from the sale of a business to a public company in exchange for stock. Their needs are usually institutional in nature and in size. For the most part, because of the institutional size and scope of their needs, private clients come to JPMorgan precisely because of the access the bank provides to global investment banking opportunities, and they ask for it. Referrals between the two businesses are at all-time high levels.”

Citigroup Private Bank enjoys a similar advantage in having its strong investment banking sister business. CEO Damian Kozlowski believes that the two sectors of the business will become more integrated. “There’s been a noticeable convergence in advice,” he says. “Originally financial services have been rather segmented to clients but it’s clear that entrepreneurs are not making that separation. You have to be more knowledgeable about industry issues – how wealth is created. You cannot just look at personal wealth any more. The industry is moving towards a more group-based approach to wealth.”

On the other side of the coin, links to investment banks can provide interesting investment solutions in the shape of structured products. In the search for yield, demand for structured products from high net-worth clients has increased, and private banks consider them to be among the top-five services offered with cash/deposits, loans, fixed income products and foreign exchange capabilities. SG Private Banking, for example, has been highly successful in partnering its investment bank and creating tailor-made structured products. It increased its AUM by more than 15% during 2005.

Onshore vs offshore

In Europe, private banks have continued to develop their onshore businesses in response to the European savings directive – a move that has enabled them to capture growing assets in those markets. “The directive has prolonged the effect of last year’s Belgian fiscal amnesty and that of the earlier Italian amnesty encouraging a repatriation of funds to Europe from offshore centres,” says Philippe Damas, CEO of ING Private Bank. It’s an opportunity for private banks that can offer tax-effective repatriation strategies and structures he adds.

The move to onshore investment has been much quicker than people expected, says Citigroup’s Kozlowski. His firm, which two years ago seemed to be retrenching from onshore Europe, has been building up in local markets. Similarly, BNP Paribas helped fill the gaps in its onshore European platform with last year’s acquisition of Dutch private bank Nachenius, Tjeenk & Co.

HSBC’s Bannister says: “Offshore jurisdictions are having to work harder to justify their existence. Clients want to use their funds in the countries in which they operate.” The effect of the savings directive and fund repatriation efforts was expected to hit Switzerland hard, but Ivan Pictet, partner at Swiss private bank Pictet & Cie, says that although consolidation among private banks in Switzerland continues, inflows of money have not slowed noticeably.

“We have been developing our onshore presence but Switzerland is still attracting money,” says Pictet. “Rather than being considered an offshore centre, I believe Switzerland is more of an international centre like the UK and the US. And studies show that international centres have been enjoying a revival as high net-worth clients take a more global approach.”

Outside Europe, Asia continues to be an attractive region for private banks. Many, though, are realizing that it takes significant investment to create a strong proposition. ABN Amro Private Bank added 75 new staff in Asia last year, taking its employee count to 300. “Most private banks are investing heavily in Asia, and attracting staff is an issue,” says Jos ter Avest, global head of ABN Amro Private Bank. “Some private banks are setting up programmes to train up private bankers. We are grooming people in our preferred banking business in Asia for roles in the private bank. We also have a commercial banking business in Asia that we could look to for staff.”

Given the immaturity of the private banking market in Asia, some firms are still struggling to work out a profitable strategy. Says RBC’s Lagopoulos: “We’ve seen the high cost of doing business in Asian markets. Some private banks have been upping their minimum wealth thresholds, which can make staff nervous. Some private bankers are uncomfortable with having to alter their client base to fit in with business alterations and are voting with their feet.”

Given the growth in the private banking industry, finding suitable staff is a problem that goes beyond the Asian market, and its solution will be crucial to ensuring the higher level of service now required by high net-worth individuals. “Having the best people is essential in private banking, but prices are going up quite steeply as there aren’t enough good bankers to match the demand,” says Jeremy Marshall, head of Credit Suisse Private Bank in the UK. “The industry has been quite bad at training good staff and it now realizes that it needs to develop good people in their early 30s. This will be key to ensuring long-term success in private banking.” 


Banks or clients wanting to view more detailed results and analysis can do so by contacting Mark Lilley, head of data publishing, Euromoney: Tel: +34 915946046; email: mark.lilley@euromoneyplc.com