BBVA keen to provide a more open experience

The increased loss of confidence and trust of investors in private banks, which have seen their reputation shaken by investment scandals and profits fall, due to decline in wealth and increased allocation to lower margin asset classes, can be turned into opportunity if the firm has a good business model and has emerged from the crisis with its brand intact, believes Alfonso Gómez Garcimartín, head of BBVA private banking in Spain.

Banca Personal and BBVA Patrimonios, which were recently integrated under the same brand, BBVA Banca Privada, cater respectively to affluent investors with at least E300,000 in assets and ultra high net worth individuals, defined as those having more than E2m. In the ultra high net worth wealth management unit, BBVA Patrimonios, which accounts for E10bn assets of the total E40bn managed by the bank, the 80 private bankers can deal with a maximum of 30 family groups. “Our model is quite unique in the Spanish private banking industry. Understanding investors’ needs is the name of the game and our closeness to clients is a very important competitive advantage for us,” says Mr Gómez, who has been driving the Spanish bank since he left the direction of the bank in the UK in July 2008.

“Communication and client handholding are absolutely critical. Our bankers have significantly increased their contact with their clients in order to keep them up to date and explain how we are managing the situation. Our philosophy is to be clear and transparent at all times,” he says.

Increased headcount

The bank’s assets have remained flat over the past two years, against an average decrease of 16 per cent in the private baking sector. While some other domestic competitors have cut their costs and reduced staff, in the past 18 months the second largest private bank in the country has considerably increased the number of its advisers, who shot from 180 to 300. “We are strengthening our advisory force because we believe that the lack of confidence in investors gives us a great opportunity to propose BBVA’s model, which is solid and has produced very good results” he says.

The primary source of new advisers is the BBVA group itself, explains Mr Gómez. “We plan the personal career of our bankers, we train them to make sure that they have good knowledge and can add value. Technical skills are important but so are commercial skills, and we are trying to combine both,” he says, conceding that some new advisers are also poached by competitors.

This hiring spree is aimed to make the most of the potential growth in the domestic private banking arena. BBVA private banking, which has around 9,000 clients, of whom more than 5,000 are in the ultra high net worth space, is looking to increase the number of its affluent/wealthy clients by 15,000 by the end of 2012, explains Mr Gómez.

According to a study from consulting firm Accenture, up to 65 per cent of wealthy Spanish families do not use the services offered by specialised wealth management firms in Spain. “The most sophisticated families in this country deal with us but in Spain most of the wealthy individuals do not use private banking specialists to manage their wealth and take care of their needs,” he says.

“The market potential for private banking in Spain is huge. BBVA has a very solid position and a great reputation and we should be able to take advantage of this,” says Mr Gómez, pointing out that migrating clients from competitors is the main way to increase the bank’s client base.

Long-term relationships

Client loyalty is crucial to ensure the success of the strategy. If the latest world wealth report by Merrill Lynch and Capgemini found that around 25 per cent of high net worth investors withdrew assets or left their wealth management firms altogether in 2008, the annual results of the Spanish bank’s client research survey reported increased levels of client satisfaction year on year, with over two thirds stating they would recommend the bank to families and friends.

“On average, our clients have been with us for 12 years and our annual client turnover is only 1 per cent,” claims Mr Gómez. The reason why many customers have lost confidence in private banks is because product push has been the philosophy underlying many banks’ hunger for profits. “What is most crucial that private banks realise is that we should not sell products but advice,” he believes.

The way advisers are remunerated has a huge impact on the business model of a private bank. Like in the rest of industry, private bankers at BBVA have a basic salary and a bonus but their performance is based on many aspects, such as the number of new clients they get for the bank, levels of client satisfaction as well as business performance, including profits and assets under management.

“Of course profits are part of it as we have to make money, but what is important is that we are not looking to make profits only in the short-term, but also in the medium and long-term. We want to build long-term relationships with our clients and their families,” he says.

A strong advisory process led by a holistic approach to clients is coupled with a rigorous portfolio management based on open architecture, says Mr Gómez. “Products are commodities. All the banks have the same products, what is key is the service,” he says.

BBVA model portfolios are provided by BBVA asset management and research. The selection of third-party funds, as well as the creation of funds of funds portfolios that include both in-house funds and third-party products, is carried out by Quality Funds, the multi-manager platform of BBVA Group. “A clear indication that our due diligence on products is working very well is that our clients’ portfolios had no exposure at all to Madoff’s funds and the percentage of products that were impacted by Lehman’s collapse was very low,” states Mr Gómez.

In fact, BBVA bank as a group was exposed to the fraud as it created products linked to third-party funds invested in Madoff Investment Securities on behalf of financial institutions and institutional investors, and reportedly had E300m of losses related to it. The bank stated that none of its retail or private banking clients were sold products managed by Madoff Investment Securities.

Earlier last year, as a result of tough market conditions and issues in the hedge fund industry BBVA, which was the hedge fund pioneer in Spain announced the shut down of all its alternative management operations, embarking on a process of withdrawal and redemption of assets of the funds run by its hedge fund subsidiaries Próxima Alpha, Altitude and BBVA Partners. Most of the clients affected by the closure of the funds were institutional investors.

Nevertheless, alternative instruments still have a relevant role in private investors’ asset allocation. “We do use hedge funds in clients’ portfolios, depending on their risk profile; I think they are a smart way to take advantage of market conditions. And similarly structured products, which tend to be demonised a lot lately, are very useful instruments if employed correctly and tailored to meet clients’ needs,” says Mr Gómez.

In Spain, the financial crisis has exponentially amplified the traditional risk aversion of private investor attitude, perhaps more than in any other European country.

“We have been extremely prudent in recommending equities,” he says, acknowledging that margins are indeed necessarily lower now for the bank. “But we work with our special business area, planificación patrimonial y multifamily office to identify investment solutions that have low correlation with the financial markets, in order to manage clients’ portfolios’ growth.”

The trend is for Spanish private banks to gradually move clients’ portfolios towards an equal split of assets managed in-house and by third-party product providers, according to Mr Gómez, although he declines to confirm what proportion of assets third-parties manage in BBVA’s private client portfolios. “We have a very strong relationship with our in-house asset manager, but at the same time we use many different foreign firms. Open architecture is a real fact in Switzerland, the UK or France but in Spain we still have to work extremely hard on it,” he concedes.