Top dogs take fresh approach to investment and technology

As private banks approach two years of negotiating an unprecedented global public health crisis, accompanied by prolonged economic uncertainty, it is time to assess what they have learned from the Covid-19 pandemic.

Recent coverage has centred on digitalisation. Yet the judges of PWM’s Global Private Banking Awards, now in its 13th year, are united about the key differentiating factor, which they see as the quality of investment advice.

Unfortunately, the general standard of portfolio management has remained poor. “But those firms built around a strong chief investment officer (CIO) now really have a case to sell and are starting to get material traction,” says Christian Edelmann, managing partner and co-head of Europe at consultancy Oliver Wyman.

Private banks with fixed, conservative dispositions, have been left behind, as the traditional 60:40 equity-bond allocations prove anachronistic and associated buy-and-hold strategies fail to deliver. 

“As a result, only a handful of private banks, with visionary CIOs and serious research expertise are able to successfully weather this storm,” says training consultant and veteran banker Kim Cornwall.

This select few, including UBS, Citi, Pictet and Lombard Odier, were able to highlight their investment prowess during Covid.

Many clients, however, have suffered significant losses in the pandemic’s early days, triggering a flight to quality portfolio managers. This led banks to re-address risk controls, particularly around sophisticated structured products and derivatives, the subject of controversies during previous crises.

In these uncertain times, more banks have been focusing on core markets, rather than experimenting with peripheral territories, and for good reason. Most large firms derive 90 per cent of their income from 10 per cent of clients, with a handful of regional markets delivering the biggest gains in managed assets and revenues.

This is particularly true for Asia-Pacific, where the likes of UBS and HSBC garner the lion’s share of their revenues and the US, where giants like JP Morgan, Northern Trust and Bank of America reign supreme, despite their global pretences.

Quick on their feet

Private banks must however remain nimble in each regional market, with expected rotation, in Asia-Pacific for instance. UBS often wins the prize here, though previous winner DBS typically run them close. Our commentators also expect boutiques to enjoy a stronger presence in their regions of origin.

The tendency of existing, large private banks to be ruled by their compliance departments will lead to the development of more client-friendly boutiques. While the traditional banks may envy the fintechs, in particular, they cannot replicate them, says Ray Soudah, founder of Zurich consultancy MilleniumAssociates.

Brain drain

There is looming danger that these technology-led players, while not replacing the banks, will sweep up talented youngsters previously destined for the banking sector, believes independent wealth management consultant Seb Dovey. Being on the losing side of this war for talent could have “major longer-term consequences for these businesses”.

Despite the claims of most private banks that they have achieved some kind of technological nirvana state, following root-and-branch digital transformations, the view from our judges is that this narrative is overcooked, with most firms still using old approaches to solving problems. Those such as Citi, which has won our innovation award, are in the minority. Most banks have yet to embrace the need for fresh thinking associated with the digitalisation trend.

Despite the ‘D-word’ topping the agenda for management boards, progress is coming at a “glacial pace,” hampered by twin barriers of legacy systems and legacy thinking, says Amin Rajan, founder of the Create-Research consultancy. “Standalone systems dominate at a time when digitalisation demands integration,” he says.

Same as ever

The one thing which has not changed is the merry-go-round of regular scandals and controversies, which have traditionally plagued the private banking sector. 

Such events tend to have an inevitable afterlife that can extend for years, rather than months. Credit Suisse, for instance, faces a “perfect storm” with “dire consequences” for both clients and shareholders, believes Shelby du Pasquier, head of the banking and finance group at Geneva lawyers Lenz & Staehelin, although he expects the problems to be mitigated by the bank’s recent management reshuffle, likely to lead to an overhaul in risk and compliance culture. 

Clients and the market are able to forgive and move on, after a period of time, but regulators and shareholders in particular, tend to have a much longer attention span.

There also appears to be a certain inevitability to regulatory transgressions, typically occurring in cyclical patterns. As private banks are dependent on volume growth, new product launches or aggressive pricing are likely to trigger compliance issues, which lead to languishing share prices. 

Indeed, when it comes to private banking trends, the more things change, the more they remain the same.