‘Gatsby’ era draws to a close for private banks

Wealth managers are busy adapting to a highly regulated onshore business model in which kick-backs are a thing of the past. Although this is partly due to the UK’s recent Retail Distribution Review (RDR), a broader re-alignment could have repercussions across Europe.

Previously, mass affluent customers had no way of figuring out how much they were being charged for a bank’s services. Banks were able to take a cut from both the client and the fund manager they were introducing them to. But this is no longer allowed.

From the beginning of 2013, banks in the UK in particular started to respond to the new economic and regulatory reality. Now they must enter a period of re-industrialisation to both satisfy clients and maintain profitability, believes Seb Dovey, founder of the Scorpio Partnership think-tank.

“This is not just about painting the office or putting a new brand name on the front of the building, but systematic, re-adjustment of the business model, the products, distribution and how they expect to be regulated,” he says.

With new foreign players such as Julius Baer, Handelsbanken and KBL taking significant strides into the UK, smaller wealth managers and high-end independent financial advisers (IFAs) which service high net worth individuals are increasingly up for sale.

These boutique groups have been preparing for RDR for many years and their new models are compliant with regulations. But building and maintaining new infrastructure, compliance machinery and keeping up with increasing business costs means those with older staff in particular are wondering whether it might be time to hang up their boots and sell business books on to hungry newcomers.

Mr Dovey says: “These people are not in trouble and nor are they bad businesses, but is their approach to securing income the only way to do it?” This mood of soul searching could eventually move up the scale to larger private banks and seep across European borders to Asia.

Mounting regulatory costs and burdens are not the sole issue of banks’ concern, while they may weigh more heavily on IFA firms. The bigger a bank gets and the more relationship managers it employs, the greater the challenge of balancing costs against incomes.

Even recently increased regulatory-related expenses account for just 10 per cent of private banking costs, estimate consultants, with fast-inflating salaries of private bankers making a far greater dent.

“This the ‘Gatsby’ era of private bankers, paid very well for delivering a complex service,” claims Mr Dovey. “But does the return on their cost justify their incomes? The answer is probably not.”

Cost-income ratios have recently become an obsession with private banking bosses, though poring over internal productivity measures of relationship managers can prove “a bit of grind” admits Luigi Pigorini, CEO of Citi Private Bank in the Emea region. “The fun part is being with clients. The tedious part is to look at all the metrics for a client adviser.”

Feedback from Citi’s pioneering Voice of the Client survey shows clients place far more value on advice they are given than products they are sold.

This could provide one answer to problems affecting the business model, believes Mr Dovey. A premium cost could be attached to the intellectual skills of strategic planning and advice requiring human interaction.

Other services, such as cash management and standardised portfolio solutions, would then be sold more cheaply as a commodity and through digital channels. Customers would be happy with such a compromise, believes Mr Dovey. Whatever the result, it is time for these issues to be seriously discussed before the industry sees more client dissatisfaction and defections.