The death of private banking…
…and how wealth management can have a brighter future.
The old concept of private banking is not fit for the modern age of finance. And if the people who run these institutions don’t change the core premise of what they do, and how they do it, then their clients will effect that change for them. Wealth management is being dragged, sometimes kicking and screaming, into the 21st century. The catalyst for change will be the twin goals of sustainability and impact. At the other end of what will be a long journey could be a better business for everyone.
If you browse Credit Suisse’s corporate website, you may be surprised by what is missing from the Swiss bank’s pages: the term ‘private banking’.
Two years ago, Credit Suisse made the switch, replacing those two words with two others: ‘wealth management’.
Just down from Zurich’s Paradeplatz HQ, at rival UBS, you won’t find the words ‘private’ and ‘bank’ side-by-side either – former chief executive of the business division Jürg Zeltner refused to refer to his business as anything other than ‘wealth management’, say colleagues. It’s the same at Lombard Odier, Pictet, Vontobel and Julius Baer.
That the largest financial institutions in the country, ones that gave birth to the concept of private banking, have distanced themselves from the term may appear to be a subtle shift, but it is symbolic of a much larger one happening across the private banking industry as institutions enter a new era.
It is a concept being embraced by non-Swiss private banks as well, many of which have given up their private banking operations in Switzerland over the last decade, looking to concentrate their efforts for onshore wealthy clients or build assets among the world’s emergent wealthy, especially in Asia.
In 10 years, we may report the CO2 footprint of every client portfolio - Thorben Sander, Nordea
For many in a new generation of wealthy families and individuals, the concept of paying a bank to simply preserve and manage their money (let alone hide it from authorities) is untenable in an era of increasing inequity, government deficits, public spending cuts and growing global environmental concerns. Wealthy clients, conscious of these global challenges, are looking for institutions that can help them marry their financial needs with those of wider society.
This, however, was never the role of the private bank. And it might seem incongruous to call the death of private banking at a time when the financial institutions are keener on it as a business than ever before.
Banks with big wealth management operations generally trade on better multiples than those without them; shareholders like the high margins and lower capital requirements of the business and their potential synergies with other parts of the bank, not just investment banking products but commercial banking, as well.
What shareholders do not like, however, is the reputational risk that comes with the concept of private banking. That distrust comes not only from the billions of dollars of fines that private banks have been forced to pay but also from a dislike of the opacity and even deceit that centuries of so-called ‘private’ banking imply.
Whether they adopt ‘wealth management’ for their brand or another as yet undiscovered term, private bank chief executives have no choice but to reinvent their business as one that is more socially and environmentally attuned to today’s society.
Iqbal Khan, CEO of Credit Suisse International Wealth Management
As the chief executive of Credit Suisse International Wealth Management, Iqbal Khan, explains: “We believe the model of looking at risk and return for clients will evolve materially, as the industry will have moved on to adding the third dimension of impact.”
But those efforts are patchy and the obstacles are numerous.
It will take time for private banking to get to the other side of this change. But the reward could be a better, more sustainable and, indeed, more palatable business. Or, as the chief executive of one top global bank with a substantial wealth management business told Euromoney recently: “This industry is finally looking like it might be fit for the 21st century.”
Private banking emerged in Europe in the 1600s and 1700s as the continent’s nobility needed a safe place to hide their money amid the various revolutions that sought to level the playing field between the wealthy and the poor.
Back then, ‘private’ largely meant ‘secret’; later attempts to redefine it as ‘personal’ have been unconvincing.
Last year’s ‘Paradise Papers’ leak, which itself came on the heels of the ‘Panama Papers’, revealed that private banking still has more in common with its 400-year old roots than the industry would care to acknowledge – chiefly that private banks are advising clients how to avoid paying taxes, even if today they call it ‘tax optimization’.
Between 2009 and 2016, Swiss banks and the Swiss private banking arms of international banks were fined $5.8 billion for tax violations in the US alone, according to data from the Corporate Research Project’s violation tracker. Last year, HSBC’s Swiss private banking arm paid €300 million to settle a tax probe with local French tax authorities.
If private banks once viewed tax avoidance fines as merely a cost of doing business, they now have an entirely different problem – their clients do not want that business.
Josef Stadler, UBS’s head of global ultra-high net-worth, has said publicly his billionaire clients, for example, are concerned that growing inequality between rich and poor could lead to a “strike back”.
Those fears reverberate across the wealth spectrum.
Morris Pearl, a former managing director at BlackRock, is a founding member and chair of the group Patriotic Millionaires. Its members are wealthy individuals lobbying for higher taxes for their income bracket in the US.
“People understand that the growing gap between rich and poor is causing social unrest, and it does not work. We don’t want a world of armed guards – no one does,” says Pearl.
What many of the wealthy want today has little to do with tax optimization, private jets and concierge services.
“Clients care less about red carpet treatment and more about whether they are getting a holistic, modern service, and to know the impact of how their money is spent and invested,” says Santander Private Banking chief executive Victor Matarranz.
Falko Paetzold at the Centre for Sustainable Finance and Private Wealth at the University of Zurich says that some German and US wealthy individuals are asking their family offices to be less aggressive when it comes to taxes.
“Only the most progressive of asset owners are starting to talk about the tension between investing responsibly or running a foundation and being tax aggressive,” says Paetzold. “Nonetheless these conversations are beginning. It’s a view into the trajectory that wealth management will take over the longer term.”
Shift in mindset
How fast can the private banking industry shed its reputation of aiding and abetting disequilibrium? Comments like those made at a conference in January by Yves Mirabaud, president of the Geneva Financial Centre and senior managing partner of Mirabaud Group, show it may take some time. Expanding on remarks about the Panama Papers, Mirabaud said: “It is not the task of banks to treat everything as illegal that society regards as immoral.”
That is the epitome of ‘private banking’ thinking and the exact opposite to what a growing number clients want, namely moral and purposeful wealth management.
The shift in mindset among clients (if not all private bankers) has been fast.
Sofia Merlo, co-chief executive of BNP Paribas Wealth Management, which has more than €10 billion invested in responsible investments, points to her firm’s research on business owners: “Two years ago, 10% considered mission to be important, now that’s almost 40%.”
And Mark Haefele, global chief investment officer at UBS Wealth Management, says 40% of family offices are already expected to align their portfolios more closely with social and environmental values.
Several factors are at play beyond clients becoming more conscious about the impact of their wealth.
“In the last two years, we’ve also finally seen the data to show that investments with a positive impact do not have lower returns per se and, indeed, they often enjoy stronger performance,” says Maximilian Martin, global head of philanthropy at Lombard Odier.
According to UBS’s latest ‘House view’, roughly 90% of the 2,200 peer-reviewed academic studies on the relationship between sustainability and financial performance found either a positive or neutral correlation.
ESG about taking a client’s entire portfolio and looking at the impact it has and whether that aligns with the client’s values. It’s not about putting 5% of your money into a strategy - Erika Karp, Cornerstone Capital Group
This outcome backs up research by Harvard Business School showing that companies that focus on sustainability as well as growth benefit from less waste, more diverse workforces and greater employee satisfaction, retention and productivity, all of which translates into better performance.
Younger generations are driving the rapid increase in demand for products and services that allow their wealth to be put to work responsibly.
A study of entrepreneurs by HSBC Private Banking showed a noticeable difference in priorities and goals between clients in their 20s and 50s. Some 24% of 20-somethings cited “having positive effect in the community” as their priority, versus just 13% of their 50-something peers.
And while 45% of the 50s group listed “increasing personal wealth” as their goal, that was just 38% among those in their 20s.
Private banks have had millennials in their sights for a while, well aware that, according to data from the Shullman Research Centre, 23% of the world’s millionaires are millennials. This age group of 20- to 37-year-olds is also going to be on the receiving end of the $30 trillion transfer of wealth from the baby-boomers.
Up to now, resources have been focused on attracting and retaining millennial clients through offering soft services, such as networking events, and providing them with the digital experience they want. Indeed for the last three years, wealth managers have talked of nothing but their efforts to boost clients’ digital experiences. But when it comes to talking through life goals and investing, banks have struggled to capture this more mission-driven approach that is held by many younger clients.
Paolo Fresia is a case in point. As a 29-year-old male, research by the Wisdom Council shows him to be in the most aggressive demographic when it comes to desiring a sustainable portfolio. Since graduating, Fresia has been a bond trader with Goldman Sachs, a CFO for Doctors Without Borders in Haiti and more recently has consulted for Fortune 500 companies on sustainability.
He now runs his family’s wealth. Keen to run that wealth in alignment with his family’s values of only investing in projects or companies that have a positive social and environmental impact, Fresia put out a request for proposal (RFP) to the leading European private banks in sustainable investing to run a $10 million portion of the overall portfolio in a sustainable fashion. He describes the experience as “depressing”.
“Other than a couple of banks, the model portfolios suggested were haphazardly put together and contained green-washed products,” says Fresia. “Some banks said they couldn’t do it at all.”
He scored the banks responses out of 5 and says the overall average was 2.5.
He adds: “The bank I went with scored only 3.6. Every bank is talking about their commitment to sustainable investing, but my experience was that none are dazzling clients with their offerings in this field yet.”
The industry may have exchanged its oak-panelled board rooms and fountain pens for white boards and glass, but its products and services have not had the same upgrade. One private bank chief says his business is often seen as being “a concierge service” rather than something more substantial.
“That model is not sufficient,” he adds.
The challenge for private banks to do more than simply say they are committed to impact is multi-layered.
According to some consultants and researchers, the vision held by senior management is not being translated by client advisers, who are uncomfortable with the topic of sustainability because they do not understand it or do not feel their banks can provide solutions.
Not wanting to look stupid in front of their clients, they either don’t bring it up or they dismiss it.
Indeed, Paetzold and impact investment consultant and author, Julia Balandina Jaquier, say millennial clients complain that not only do their advisers not speak to them about environmental, social and governance (ESG) screening, socially responsible investment (SRI) and impact investing but they often actively dissuade them from including these investments in their portfolios.
Obviously there is a hole that needs plugging, especially given that sustainable investing has now been shown to improve returns.
Private banks therefore need to address their talent and processes if they want to be taken seriously in sustainability, says Balandina Jaquier.
“Resistance from relationship managers is a pain point for private banks,” she says. “It needs to be tackled through training and alignment of incentives structures. It also helps to tweak the client on-boarding process to include not only questions of return expectations and tolerance for risk but also client values and how they should be reflected in their investment and philanthropic portfolios.”
We are trying to help advisers to bring in sustainability to every conversation - Damian Payiatakis, Barclays
Advisers are also said to be apprehensive about delving into more sensitive topics with their clients. ‘What are your views about the state of the world and what is your role in it?’ are more challenging questions, than ‘When do you want to retire?’
Patrick Odier, senior managing partner at Lombard Odier, says that such conversations are much richer and more rewarding to clients.
“Advisers don’t have to come up with the solution to all the world’s challenges,” he says. “There is no one way to clean the plastic out of the oceans, for example. And everyone has a different perception of the world and different sensitivity. The adviser’s role is to open up that discussion and find out what direction the client wants to move in. It’s not about having to educate clients but about empowering them to make the decisions about things that matter to them.”
As Fresia points out, one member of his family had been a committed philanthropist in the field of lung cancer research, only to discover she had had large amounts of money invested in tobacco stocks.
“This is something an adviser should have flagged up,” he says.
Senior managers of private banks will not freely admit that their advisers are in need of training, although off the record they are quick to do so. Almost 40% of respondents to Euromoney’s survey of global private bankers say their bank is increasing training for advisers over 2018.
And several wealth managers that took part in the Centre for Sustainable Finance and Private Wealth’s recent study on sustainable finance say they are having to tell younger clients they are not yet ready to serve them but are investing in training to do so, says Paetzold.
Damian Payiatakis, head of impact investing at Barclays, is one of the rare bankers that publicly acknowledges the challenges.
“We know not every adviser is having the deep conversations with clients about social and environmental impact of portfolios,” he says, “so we have in place specific training, an online knowledge platform for basics around ESG and impact, and are trying to help advisers to bring in sustainability to every conversation.”
At Morgan Stanley, technology is seen as critical in helping advisers get comfortable with sustainability. “We see these conversations being driven by desktop tools and are looking at using artificial intelligence to provide advisers with exactly what they need to know,” says Lisa Shalett, head of the bank’s wealth management investment resources and investment and portfolio strategy.
The biggest advocates of sustainability among advisers are naturally those that resonate with the ethos behind it – across all age groups. For some advisers, it is clearly an exciting prospect.
As one private banking head points out: “People want more from their careers than to help the rich get richer.”
Better communication between senior management and advisers around sustainability is important to prevent advisers keen to make an impact from leaving to join specialist sustainability-focused wealth managers, or even set up their own.
Erika Karp, Cornerstone Capital Group
Erika Karp, for example, was managing director and head of global sector research at UBS Investment Bank and headed up sustainability research. In 2013, she left UBS and founded Cornerstone Capital Group in New York, an investment advisory firm and wealth manager that integrates sustainability and impact into all investment decisions.
In January, Cornerstone announced its assets under management had reached almost $1 billion. Karp says there was and still is a gap for firms like hers that are wholly committed to sustainability.
“Clients aren’t just ‘dipping a toe in’ but want their portfolios to entirely reflect their values,” she says. “[They] feel frustrated with larger firms, and so too do some relationship managers. Large firms are just moving too slowly.”
Competition in the specialist sector is growing. Reto Ringger is the founder and chief executive of Globalance Bank, which has not shied away from the term ‘Swiss private bank’ and points out on its website that it is one “without legacy problems”.
Ringger was the founder of Sustainable Asset Management – an institutional asset manager for sustainable investments that was later bought by Robeco – running it through the mid 1990s and 2000s.
Seeing a gap in the market for individual investors, foundations and family offices, Ringger then set up Globalance, with a mission to advise clients on how to invest in assets with positive economic, social and environmental impacts, and to manage those portfolios. It now has SFr700 million ($750 million) in assets under management.
While relationship managers at larger firms may be confused about what SRI and ESG are, by contrast at Globalance, advisers are sitting down with clients to discuss the extent to which gold is considered a harmful investment because of the labour practices in the industry and the environmental damage of extraction. They are discussing whether US treasuries are part of the solution, or part of the problem, and how challenging it may be to diversify away from treasuries.
Ringger guesses that already 20% to 30% of all high net-worth individuals do have an interest in this kind of conversation and portfolio construction – he is just not sure how the larger wealth management industry is going to get there.
“It’s not just about offering some sustainable investment strategies or funds,” he says. “Clients who want this approach are buying a philosophy, and that means the entire culture and incentive systems of a firm have to be aligned with sustainability.
“That’s easy for me to say as I’ve been engaged in sustainable investing for over 20 years, and Globalance’s mission is very clear. As such, we only attract employees who are aligned with our mission and who are naturally driven to give the best advice around.
“For a company with 150,000 employees and a legacy of not thinking about sustainability, this shift is going to take some time. Some private banks are trying, but many just seem to be mired in confusion right now – which is better at least than those that are still in denial that the world of wealth has moved on from tax avoidance.”
This point Ringger makes about “not just offering some funds” is the second part of the challenge for private banks. Unclear on how to approach sustainability, many have relied on what is tried and true, namely creating SRI funds or ESG-screens.
“They’re treating ESG like an asset class, and it’s just not,” says Karp. “It’s about taking a client’s entire portfolio and looking at the impact it has and whether that aligns with the client’s values. It’s not about putting 5% of your money into a strategy.”
Barclays’ Payiatakis says there is an evolution happening that starts with funds but ultimately ends up in cross-asset allocation, with a responsibility or sustainability overlay.
“We don’t see impact as an asset class, but we did start off looking at the products we could offer,” he says. “We decided to create a specific product to be able to offer clients an opportunity to have a holistic portfolio for both financial returns and impact. And this year we’re reviewing the whole platform of investments to see if and how they are considering the impact they are generating.”
Under this approach, there is room for products within the context of an entirely responsibly managed portfolio. But can large wealth managers truly claim to have the expertise required do both?
UBS’s Haefele says they can and it is not a question of whether the model supports it but rather one of leadership, and ultimately one of partnerships. He says UBS’s scale has meant it is able to partner with the best funds or managers in the sector – in addition to partnering with other institutions such as development banks.
In January, for example, UBS announced that it had teamed up with the World Bank on a debt allocation in line with UN Sustainable Development Goals and released a white paper calling for more partnerships to take place. Those partnerships also lead to products.
Indeed, in this new era of measuring an entire portfolio for its environmental and social impact, theme-driven products focusing on low carbon footprint, healthcare and education for example will become more prevalent.
Curated impact investment funds such as UBS’s oncology fund, based on a concept devised by Haefele, or instruments such as Credit Suisse’s conservation notes, will also afford clients the opportunity to focus on the causes they care most deeply about.
Lombard Odier, for example, announced a partnership in January with the Global Fund seeking to come up with ideas on how to develop investments that can help the Fund’s aims to end HIV, tuberculosis and malaria.
UBS’s Haefele says the shift to responsible capital calls for a more nuanced way of serving clients. He foresees portfolios within portfolios.
“Clients will have to discern the things they are most passionate about,” he says. “For example, if a firm has low carbon emissions but is less diverse, how will you choose to invest? Maybe if you care more deeply about gender equality, then that will call for a portfolio focused on diversity within a larger portfolio of social and environmentally responsible investments.”
Again, however, are advisers up to this nuanced way of interacting?
What would support advisers would be the ability to measure and report on impact – particularly if they are to become more reliant on external funds as a source of product.
Globalance, for example, provides its clients with a service called Globalance Footprint that shows clients the impact of their portfolio on the economy, environment and society on a scale of positive to negative. It is basic, but Fresia, who is familiar with Globalance, says it is what clients like himself are looking for across all of their holdings.
All the private banking heads Euromoney spoke to for this article agree this is the next step – as does Ringger if he can scale up his business.
Thorben Sander, head of private banking, Nordea
Nordea’s head of private banking, Thorben Sander, says his firm is exploring how to include performance indicators into portfolio impacts – Nordea Asset Management applies ESG screening to all of its investments.
“But who knows?” he asks. “This may very well become a mandatory regulatory requirement in five to 10 years. So in 10 years, we may report the CO2 footprint of every client portfolio.”
Credit Suisse’s Khan agrees: “It’s not relevant for everyone now, but you need only speak with younger clients to appreciate we are moving towards a reporting model where portfolios have scores for impact.”
At UBS, Haefele says he expects to be able to measure companies not just on whether they are positive for the environment or not but also on a relative scale. Indeed, ranking may be easier than making outright judgments.
“If we can rank companies within industries and sectors, then clients can clearly see what their choices are in terms of creating an impactful portfolio,” he says.
It is measuring impact that is providing the biggest hurdle for wealth managers as they seek to evolve. Indeed, private banks could even maintain their tax advisory services with a clearer conscience if they can point to the impact those taxes had (or would have had). Services like private jet finance could even find a home in a modern wealth management model if one can point to the impact on the environment of running a private jet versus money spent elsewhere.
But it seems a long way off. Stuart Parkinson, chief investment officer at HSBC Private Banking, says: “At the moment we’re not even sure we’re all talking the same language when it comes to the word ‘responsible’ or ‘sustainability’. There are so many terms, and that leads to concerns about products and solutions being misleading. For us to be able to say this holding is rated a six out of 10 on a responsibility scale – and for that to be understood – would be unlikely at the moment.”
HSBC is part of scores of forums and think tanks on sustainability in order to stay ahead of the evolving thinking.
“Regulators, investors, corporations, the financial industry – we need to work together at better defining what we mean if we hope to gain momentum in this area,” Parkinson adds.
This confusion, for example, led Dutch pension fund PGGM to work with the Impact Management Project, which is facilitated by Bridges Impact+, to try to uncover the impact of its own portfolio and see if it was in line with what its stakeholders imagined.
What emerged, says Piet Klop, who helped design the €20 billion impact portfolio at PGGM, was that stakeholders had an inflated view of the fund’s investments in companies with a positive impact on the world.
“In reality,” says Klop, “we saw that responsible investing in our portfolio looked more like not investing in companies that have a negative impact.”
Olivia Prentice, a manager on the Bridges Impact+ team at Bridges Fund Management says wealth managers “first need to help clients translate their impact preferences into goals that can help them construct a portfolio. If we want to be able to know our portfolio’s impact as investors, then we need greater transparency of information and more sharing of information across the five dimensions of impact.”
This is where the crux of wealth management’s bid to become a mission-driven partner to its clients lies.
If investors are asking companies for greater disclosure of information, then wealth managers and the larger financial groups to which they belong must also be subject to the same scrutiny.
As Ringger points out: “It’s impossible not to go all in once you claim to have the expertise to advise on what makes a sustainable business.”
Can you honestly talk about gender equality when your firm does not reveal its pay inequity? Are the loans you are making with a client’s deposits helping low-income communities?
“How convincing is your proposition of providing solutions if your firm is part of the problem because it is financing deforestation projects or fossil fuel companies?” asks Ringger.
In the new era of wealth management, private banks are under more pressure than ever to make sure they are practicing what they preach.
That means greater corporate social responsibility efforts.
Sander points out that Nordea is carbon neutral in terms of direct emissions, as a result of offsetting investments made in developing countries. Its new Copenhagen office uses rain water for sanitation and electricity is derived from solar panels on the roof. Haefele says UBS is aiming to be carbon neutral by 2020 and is also addressing its below-average diversity stats.
While five years ago helping clients avoid taxes may have just led the public to lament: “What do you expect from a private bank?”, the response today might not be so lenient. If a client is prepared to divest millions of dollars of stock in a firm whose environmental practices they disagree with, then they will also be prepared to move their hundreds of millions of dollars to a bank that doesn’t exacerbate social division.
That puts private banks in a precarious position. The term ‘fiduciary duty’ has become more nuanced.
Is it your fiduciary duty to make sure your client is not invested in tobacco while giving to lung cancer research? Or is your fiduciary duty to increase the overall wealth of the portfolio by investing in high-performing stocks, or to lower risk by investing in companies with a sustainable future? In the new era of wealth management, the answer is “All of the above”.
Barclays’ Payiatakis, however, says these challenges should not be deterrents.
“In any large company, there is always the risk that something in the business will not align, but that’s not a reason not to do it,” he says. “When you have a belief that you want to be part of the solution to the challenges facing the world – be that as employees, colleagues and people – then you have to be there shaping the field in spite of the challenges and risks and in order to help the field move through them.”
In the case of BNP Paribas Wealth Management, it is even being so bold as to advise its own clients how to ensure their own businesses are sustainable – a training programme it launches in March with the University of Cambridge.
HSBC’s Parkinson agrees wealth managers have to be part of the solution, even if they have not got all the answers themselves.
“This shift goes beyond the usual questions about competitive advantage,” he says. “Banks have an important role to play in distributing capital to where it can best be utilized for society’s good. For us, that includes promoting the longevity of the planet. If you’re committed to that, you have to move forward regardless of the fact that it will be complicated.”
That calls for a level of transparency beyond just fees and a kind of public interaction from banks in a way that is entirely new. Clients do not expect their wealth managers to be perfect, but they want to know that their bankers and advisers understand and respect their desire to align their wealth with their values.
That might not be easy to craft into a two-word phrase such as ‘private banking’ or ‘wealth management’, but it is a positive vision for the future of the industry.