Global Private Banking Awards 2016 - Analysis: Wealth managers search for winning formula

Private banks have, for many years, talked about moving to an investment-led model, away from tax breaks, secrecy and ‘walking the dog’ concierge culture. But a detailed study of 120 entries for the 2016 Global Private Banking Awards, shows reality is very different.

Investment skills and returns no longer appear to be key differentiators among leading private banks. Most now market themselves in terms of global reach, technical knowhow and digital prowess, and of course softer skills such as service and empathy with clients. The key question today is whether clients now look to private banks to manage portfolios to the best possible efficiency, or whether they have other needs in their relationship, more important than the lure of profits.

Only a handful of banks, mainly in the US, presented any evidence of expertise in up-to-the minute institutional style investment strategies, incorporating latest thinking on factor investing and asset allocation, despite the fact that all private wealth managers claim to be investment experts.

There have been many recent asset management innovations. Yet it seems private banks are either falling behind other institutions in the way they are overseeing assets of the world’s wealthiest families, or they have other priorities in mind. Our panel of 15 judges was divided about the very question whether private banks should be investment leaders.

“Few wealth managers appear to revisit their investment approaches in this era where politics more than economics drive the returns,” comments Amin Rajan, founder of the Create consultancy, a key supporter of building innovative solutions to asset management problems. 

Current distortions in asset values require “new lenses” going well beyond old assumptions of “modern” portfolio theory, to which private banks are still clinging, despite much of it being discredited since the 2008 crisis, argues Mr Rajan. “I was looking for some fresh thinking, which was not much on display,” he says.

Those banks which do care about investments, particularly introducing new thinking in alternatives in a time of near-zero interest rates, such as Banque Syz and LGT, are picking up more recognition for their efforts. But rather than creating alpha, the majority of submissions focused on non-investment issues, like client service and technology. This is a positive development, believes Sebastian Dovey, co-founder of the Scorpio wealth think-tank, which conducts a wide range of insight programmes for wealth managers, researching the views of private clients about what they are seeking – and obtaining – from their wealth providers.

“Firms are beginning to recognise that major drivers of future growth in terms of net new assets are not centred on promoting investment strategies and performance,” he says. “The biggest contributors to growth – based on client feedback collated – are service factors, such as access to the wider range of client service team specialists, while technology also provides the opportunity for greater efficiencies which is also an expected standard.”

Substantial investors in digitisation – the likes of UBS, Citi and Northern Trust – remain among our major award winners, but the club is not as exclusive as it once was. Singapore’s DBS has gained a firm toe-hold in the innovation and technology league tables. Both CaixaBank and BBVA have shown how Spanish private banks have digitised faster and deeper than in countries which appeared to have an advantage before the race began. Fast consolidation on the previously crisis-ravaged Iberian peninsular means only those which have acted quickly have been able to move into the new, more optimistic era.

It is not the case that the other banks are not spending money, far from it. The financial services industry is after all, among the top three investors in technology worldwide, according to Scorpio. But many banks are investing the bulk of their vast technology budgets in platforms and operational processes, not in digital communication with clients, which is what our award winners are concentrating on.

There is no doubt technology has taken centre stage in the business model and client relationship channels of private banks. There is a bifurcation taking place, with a handful of innovators pulling away from the pack, which struggles to develop a vision, argues the Aite Group’s Alois Pirker. He warns those higher up the food chain they will have a tougher job than high net worth or mass affluent advisers in mixing digital progress in with the human touch. 

“Solutions will have to be tightly integrated with adviser-led services,” he says, making implementation a complex undertaking. “It is hard to leverage pre-fabricated digital platforms and a custom approach is required for firms that want to differentiate from competitors.”

Swiss banks in particular dominated PWM’s awards in the early days, as their thinking in private banking seemed more advanced. UBS, for one, remains an industry leader, “almost unplayable” for competitors in some segments and areas of expertise where it moves. Pictet is still a formidable force in Switzerland and Europe. But other powers are starting to falter.

A new cohort of banks is emerging against this backdrop of a fading if still vibrant empire. They care less about the Swiss way of doing things and are self-confident in their own, home-grown approach to private banking. France’s BNP Paribas, the Netherlands’ ABN Amro and the UK’s Coutts fall into this category. 

“Switzerland as a financial centre does not have a monopoly on the way the global wealth industry conducts itself,” comments Mr Dovey. “Global private clients are not magnetically attracted to Swiss booking centres any more,” in the way they were just a handful of years ago.

A parallel move towards onshore private banking is in full flow. UBS was ridiculed 15 years ago, recalls Mr Dovey, when it publically declared its global, 10-year onshore strategy, prioritising a handful of European domestic markets. Now it is extending this thinking to Asia. But both local and international operators are catching up in the Far East, where UBS once appeared to hold an unassailable lead. 

Latin America, on the other hand, remains unconquered territory for many global private banks. Of the Latin players, only Itaú and BTG Pactual show any cross-border, regional ambitions, says family office adviser Gerard Aquilina, former leader of several global private banks. Local Latin markets still have much room for growth, with the “behemoths” of Brazil and Mexico offering much to those brave enough to invest.

It is clear from the vast majority of submissions that, although clients and regulators are dictating major changes, with banks beginning to address huge cost bases, the much predicted overhaul of the private banking business model is still to come. However, it is getting closer and the shapes on the horizon are becoming clearer.