A closer look at wealth management business models

Round table participants

Mike Bussey, CEO, Arbuthnot Latham

Humayon Dar, CEO, BMB Islamic

Adrian Gayler, Head of Private Banking, Bank of London and the Middle East

Daniel Gerber, CEO, Julius Baer International, London

Mark McCarron, Chief Investment Officer, SEI Investments

Gavin Rankin, Head of UK Products and services consulting, UBS Wealth Management

Tom Slocock, CEO, Private Wealth Management (UK), Deutsche Bank

Sally Tennant, UK CEO, Lombard Odier

Venky Venkatesh, Director, Private Wealth Management Solutions, Oracle Financial Services

Yuri Bender, Editor in chief, Professional Wealth Management

Portfolio Management

Yuri Bender: Thank you for joining us today. I am looking forward to discussing new business models for wealth management and private banking. Gavin, can I start with you? UBS Wealth Management is the largest global wealth manager, and one that has been in the news of late for many reasons. The investment solutions department of your organisation in Zurich has been busy introducing new types of managed portfolio with a much bigger range of options for investors: home or foreign buyers, core/satellite structures. Do you expect this new thinking in portfolio management to catch on among UK private clients?

Gavin Rankin: The product that you are referring to was released in Switzerland at the beginning of this year, I think in January. It is very similar to a product that we released in the UK back at the beginning of 2007, so it owes a lot of thought to a product that we had already been selling quite successfully here: that is, multi‑asset class UK home buyers, tactical asset allocation, tax efficiency and that sort of thing. We started the business in the UK in 1999, and it took us seven years, really, to get around to having a tax‑efficient onshore discretionary solution for our clients. That is the flagship of what we offer here in the UK, and it has been very successful to date.

One of the important things about the product, looking at trends today versus trends two years ago, is the selection of asset classes used within the product. The product just released in Switzerland is unique on the product shelf there, because it has the flexibility to select solutions without alternative investments. We have been offering that in the UK for two years. While it is being offered similarly in Switzerland, clients have obviously lost a lot of faith in real estate and hedge funds, for example, for various reasons. The product released in Switzerland is an attempt to listen to where trends are evolving and respond to them, and we think that we have been doing that successfully in the UK for the past couple of years. To answer your question, we are slightly ahead of where we are globally.

Sally Tennant: So what is the defining feature of this product: that you can choose not to have alternatives? That you do not have to have them?

Gavin Rankin: For the product that Yuri was referring to, that is not the defining feature, but it is one of the core selling points. The rest of the solutions in Switzerland, as a default, use alternative asset classes. The product released in Switzerland allows you to select three asset class solutions: equities, fixed income and cash. That is one of a whole variety of different features.

Sally Tennant: Back to basics.

Gavin Rankin: Typically, when a client walks through the door, we go through what we call a risk profiling exercise; I am sure most institutions have exactly the same thing. In that risk profiling exercise, we focus on liquidity as well as tolerance for unregulated investments. Through that fact‑finding exercise, we end up at a solution, over which there is also a qualitative overlay in terms of the dialogue with the client. So there is a road map and a route. It tends typically to be driven by the client, but we still suggest that they use alternative asset classes within their portfolio. That is our best thinking. The more asset classes and the more diverse they are, the better the outcome for them, but if the client has strong opinions and is not prepared to tolerate unregulated investments, they end up in a three asset class solution.

Yuri Bender: Will you still have a 20 per cent default allocation to alternatives, or do you feel, with the changes in risk tolerance, that that is moving slightly lower now?

Gavin Rankin: There are two sensible alternatives in the five asset class solution: real estate, which I call alternative, and hedge funds. The UK solution, which I think it is appropriate to focus on, uses a 20 per cent allocation to hedge funds. It is 20 per cent because there is a restriction: if you were to optimise a portfolio using historical and forward‑looking data, your hedge fund allocation would be significantly higher than 20 per cent, so we cap it at 20 per cent. Real estate is another 10 per cent, so we are looking at portfolios – multi‑asset class solutions in the UK – of 30 per cent allocation to alternatives.

The kernel of your question is really whether, given the market environment and what we have learned from some asset classes, we think alternatives still have an important role within client portfolios. I think the thinking is very much that they do. Maybe we will come to hedge funds later, or maybe we can talk about them now. It is very important to look away from the noise about some of the characteristics of why hedge funds are included in portfolios. We include them because they are a great source of diversification and of return, and for capital preservation.

However, what benchmark the client considers for hedge funds is really what determines whether they will be pleased with the result. If clients consider hedge funds versus cash, as many will have done over the past year, they will be disappointed, if hedge funds produce about a 20 per cent decline. But if clients consider hedge funds versus equity indices or other risk assets, they should actually be quite pleased, because we have seen a significant level of capital protection. Global equity markets fell by about 42 per cent, so they outperform equities significantly.

Our thought process is that clearly there is a lot of noise and turbulence in the hedge fund market, although this year has seen a little more stability, but we still believe that they are fundamental building blocks of any asset allocation solution.

Adrian Gayler: With this model, have you still seen a lot of uptake? Are clients investing in alternatives?

Gavin Rankin: No, I would say it has declined this year. The trend has certainly been towards three asset class solutions rather than five. To an unbiased observer, that is understandable and probably quite rational. Hopefully, we are past a lot of the illiquidity in alternative asset classes, but we cannot be sure. If you cannot be sure, and you are a client looking to allocate new money to an asset allocation solution, at this point in time, given how easy it is to change the solution from three to five asset classes, it makes sense to capture the three.

Alternative Allocations

Yuri Bender: Daniel, the noises coming from Julius Baer in Zurich are that allocations to alternatives, to hedge funds in particular, are decreasing. Is that your experience in the UK as well?

Daniel Gerber: Absolutely. Back to basics. Our clients focus on wanting to understand more of what they are invested in. They do not like to be invested in things that they perceive as a black‑box and not to be able to see what is going on inside. What we see at the same time is that new clients are mainly investing in cash at the moment. The ones that are invested in hedge funds and alternatives want to get out as soon as possible and go into the basic building blocks and things they understand.

Yuri Bender: Sally, Paul Marson, whom Lombard Odier recruited recently, is saying, ‘Let us keep steady with the strategic allocation to hedge funds; let us perhaps look at them slightly differently.’ Is that correct?

Sally Tennant: Yes. To pick up on what you were saying, if you consider hedge funds versus cash or global markets, you can either be pleased or disappointed. It prompts the question whether you have a portfolio of hedge funds that is actually trying to hedge, or whether it is geared beta. Some portfolios may have been thought of as hedge funds when they were in fact long‑short funds that had a huge amount of beta. Their role in portfolios has probably changed significantly – people would rather have a cheaper exposure long‑only – but portfolios that are genuinely hedged and market‑neutral and that try to use strategies that are not linked to equities still have an important role to play in a portfolio, in terms of both preservation and diversification.

Yuri Bender: Staying on the theme of beta, Sally, during one of your previous incarnations as Head of Institutional Business at Gartmore, the big five managers controlled the UK pension fund business in the early 1990s. That was followed by a move to the core/satellite model, and there were problems of underperformance by active managers and a host of other factors. Then the likes of Barclays Global Investors and State Street Global Advisors started winning large passive mandates. Do you think that we will finally see a move to a passive core in the wealth management industry?

Sally Tennant: To a certain degree, it has already started. For making tactical moves, having exchange traded funds or passive exposure makes a huge amount of sense, but it depends on people’s investment philosophy and process. If you are very tactical and you believe that it is all asset allocation and that you cannot add value at the stock selection level, then you will probably have more passive exposure. On the other hand, if you have fewer tactical moves and take two, three or four‑year views, then you are more likely to have active managers or spend time finding managers who will add value bottom‑up. In answer, yes, I think it has already started, and I think it makes a lot of sense for tactically positioning portfolios.

Yuri Bender: n Switzerland, Gavin, UBS is talking about having up to 50 per cent of clients’ portfolios in exchange traded funds. Can you see that happening with your clients in the UK?

Gavin Rankin: It is the first that I have heard of it. I would strongly resist putting a large part of a client’s core long‑term asset allocation in exchange traded funds. As a house, we still believe strongly in active management in the core, but active managers per se are not the be‑all and end‑all. You must have a process that consistently identifies active managers. The evidence is that active managers outperform, but that it is very difficult to identify those managers. We would certainly echo Sally’s point about ETFs being used in tactical asset allocation. It makes sense for clients. If you are taking a tactical asset allocation bet, you do not want manager risk as well as country risk. It makes a huge amount of sense, but within the core, we still invest significantly in a strong manager due diligence function, and I imagine that that will continue to be the core of what we do.

Mark McCarron: On the idea of core/satellite and putting more money into core, it seems cheaper to do that, but it also depends on what the satellite is. Ultimately – it might be a reaction to today’s markets – that might mean giving up on some active management and paying a little less money, but unfortunately, the risk associated with that satellite will still drive your relative return against that core. It might not solve the client’s problem of wanting more consistency in the return. In our view, there is a flaw in core/satellite. All you are doing at the core is damping down some of the active risk, but you are still taking it to some degree. Depending on what that active risk is – whether it is a hedge fund, a commodities allocation or something very satellite – it will ultimately be the pure driver of your risk, and you cannot offset that just by having a passive core. There may be a better idea involving using a core strategy but trying to balance satellites almost to bring a core at the portfolio or strategy level. Using core/satellite, it is difficult, in our view, to capture the end result for the client.

Tom Slocock: It is often more challenging if you have core assets combined with lots of different satellite approaches. It is sometimes more difficult to hedge your satellite risk effectively, but at least you are identifying more closely what risks you are taking and limiting those specific risks. One of the attractions of core/satellite is that you can effectively use beta in your core and put more of your resources to work selecting managers and products that give you real alpha in the satellites. You will know what that core of 50, 60 or 70 per cent of your portfolio is going to do allowing you to target opportunities for alpha where you think it is most likely to be available in the satellite investments.

Gavin Rankin: Maybe you are looking through the wrong lens. Maybe logic is not the right lens through which to look at a lot of the responses from clients and the marketplace at this point in time. Given the volatility, there is a huge amount of fear about where the next disaster sits in terms of clients’ portfolios. A lot of the responses are not necessarily rational at this point. They are quite responsive.

Tom Slocock: There is clearly a lot of emotion, and there is a lot more emotion in our part of the financial services industry than in others, because we deal with individuals. We are all individuals sitting around this table; we do not always act rationally. However, I would argue that part of our role is to at least present rational arguments – not necessarily to beat clients into submission with the power or otherwise of our logic, but at least to point out to them where they are making rational decisions and where they are making emotional ones. It is perfectly acceptable for them to be making decisions on an emotional basis – ultimately, people want to sleep at night and feel comfortable, and it is their money and they can do what they want with it – but it is important that we as investment and financial professionals at least have a core and solid understanding of what we think an investment process should look like.

Yuri Bender: Are you promoting the notion of a passive core at Deutsche Bank, Tom?

Tom Slocock: No. I was not pushing a particular view; I was just picking up on what I perceive to be a reason for taking that approach. It is not a question of trying to hedge one risk versus another. If you end up hedging all of your risk, you know what you end up with – at the moment, not very much – but it is a question of identifying the risk. Looking at the present environment and what went wrong, is there anything specifically wrong with the concept of hedge funds? No. Did we understand all the risks? Probably not. Did clients invested in them understand all the risks, including liquidity, gates, correlations and all the rest of it? Did we understand it? No. If we can drill into the risks that we are taking and be comfortable that we understand them, that is part of our role.

Adrian Gayler: As BLME is a Sharia’a based bank, I cannot include hedge funds from the alternative world, so the dialogue I am having with clients about the more illiquid components of their assets has narrowed, but that does not mean they have changed their expectations of returns, so there are some additional challenges. Interestingly enough, a lot of the dialogue on alternatives is starting to focus on private equity, specifically since we find that some clients feel that the more they know about a company and the more influence they can have, the happier they may be about the risks they are taking. It may sound a bit counterintuitive considering some of the dialogue we are having, but although they may be slightly illiquid and very long‑term, clients seem to find a level of comfort in this which appeals to them. It is quite interesting, although not from a fund perspective per se – that would be a challenge for us, as it is early in the cycle of Islamic finance – but on a club basis, say, where you can get together 20 significant clients at a certain investment level: let us say $5m. When they get together, it is almost like building a business model and a solution from that client set. They say, ‘That ticks one box in my total allocations.’ Although I don’t like to say ‘back to basics’, t it is that sort of approach: saying, ‘Well, this is not so much product‑driven as solution‑driven’. We must go right back and say, ‘What is it these clients are asking of us, and how do we come up with a solution when a number of things available to conventional institutions are off‑limits?’

Yuri Bender: Would you use Sharia compliant ETFs in those solutions? BNP Paribas launched the first one – I think the Islamic Market Titans at 100 – in 2007. Do you expect those to take off among your clientele?

Adrian Gayler: It is a dialogue that is taking place. One of the reasons is cost. For the comparative risk and perceived potential rewards, where can we reduce the cost of engaging and acquiring assets? They are considering the whole balance. Looking forward to 2009, 2010 and beyond and seeing that overall returns on a mixed and balanced portfolio might be a little lower, of course they are targeting where costs could be reduced. I cannot specifically say that we are considering them, but a number of clients are asking, ‘Is the ETF world a solution for us?’ We are saying, ‘Yes, but we need to look into it and ensure that we understand it and that it is truly compliant.’

Yuri Bender: What is your experience on this issue, Dr Dar?

Humayon Dar: We have been considering hedge funds, private equity funds, real estate transactions and, of course, ETFs as well. In the last 18 months to two years, Sharia compliant investors’ expectations have changed completely. We have been working on a product called the SHARE platform: Sharia alternative return evolution. Initially, we wanted about 40 per cent of the assets on the platform to be hedge funds, about 20 per cent to 30 per cent private equity and the remaining amount in other asset classes, including commodities. Now, after going back to the market, we have realised that there is a complete shift away from hedge funds. Sharia compliant investors would not like to expose themselves to hedge funds, primarily because of hedge funds’ negative publicity, and there are of course some Sharia concerns about hedge funds as well.

We have observed lately in Sharia markets a preference for commodity futures managed programmes. Basically, one fundamental preference remains in Islamic markets: high return. Some managed futures programmes have generated huge returns of 20 per cent to 35 per cent. These are the kinds of return Islamic investors are looking for. Hence, in our SHARE platform, we have decided to increase the percentage of commodity futures managed programmes. ETFs are a new area, and a few products are already on the market. I believe that this is something that Islamic investors would consider if ETF programmes came up with some kind of capital preservation as well. One area that has developed very rapidly in the last two to three years is structured products; probably we will discuss them. Many structured products offer capital preservation. That is something that a very distinct segment of the Islamic market is looking for: capital preservation plus decent return. I think the future expansion of Islamic markets will be in structured products. In the beginning, when Deutsche Bank started an Islamic structured programme, there was some criticism from a Sharia viewpoint, but now almost all investment banks into Islamic banking and finance have their own Islamic structured programmes, and Sharia problems concerning them have gone away.

Mike Bussey: What we are hearing from clients is scepticism about active management and product driven sales. There is more worry about the cost, and therefore value for money and about anything not transparent in structure, whether it is structured products, funds or hedge funds. What we hear about hedge funds depends on how they have been ‘sold’ and what their role is in the structure of the portfolio. Many investors will have bought hedge funds in the expectation of absolute return, capital protection and lack of correlation, not that they would specifically outperform equities. Therefore, we are seeing that hedge funds absolutely have a role. Direct access to good managers is important, but there is less appetite for funds of hedge funds, given cost and transparency issues.

Clients are receptive to the core/satellite argument, not just on the obvious basis of cost, which keeps coming up, but also because it is more transparent. The fact you can see exactly what sits within an ETF, unlike other, closed funds, is important, as is increasing breadth across asset classes. The fact that they can be traded intra‑day also plays well and they can increasingly play a part within the active allocation. We must be conscious of what has happened to clients over the last 12 months. The norms of our world have been challenged and found wanting. Listening to clients and the emotion coming out is important, and we must respond to that. There is a danger that we as an industry can pontificate a little too much to clients about what is good for them. We have to do a lot more listening and react to it.

Yuri Bender: Looking into the satellite parts of portfolios and the more actively managed elements, Sally, Lombard Odier, like many Swiss banks, seems to be big in the thematic area of socially responsible investment, as with its partnership with Generation Investment Management, sustainable investing and agriculture. Is that the main reason why people now come to Swiss banks: for the thematic element? Patrick Odier said to me a couple of weeks ago that entrepreneurs in particular are interested in the shape of the world and how things are changing – not just in their own money but in the factors that shape the global economy.

Sally Tennant: A big question. I would not like to answer for the whole of Swiss private banking as to why people come to Swiss banks, because there are a number of reasons. One is that the industry has been proven over decades and hundreds of years to be part of the Swiss DNA. That is a major reason why people come to Swiss private banks, as well as for reasons of discretion and for very high‑quality service. When it comes to investments, there is a trend among entrepreneurs and people who have made money in the past decade to want that money to make a difference. Therefore, there is a much greater interest than before in the philanthropic side of things and in ensuring that the money that they are putting to work, which they have earned from their own businesses, will also do good. That is why there is huge interest in the sustainable side.

As you said, there is a big trend among entrepreneurs towards socially responsible investments. I do not think that that is particularly Swiss; it is happening around the globe. We have seen it from Bill Gates downwards. There is much greater awareness of our planet and what the issues are, and people want to ensure they are generally more responsible. Swiss private banks seem to have picked up on that quite early and have a number of thematic funds across the banks. Again, it is about listening to clients – Swiss banks are particularly good at doing that – and then building products and solutions around that. It is interesting that a private bank should be able to provide bespoke services tailored for a client’s particular needs as well as broader products accessible to other people. The Swiss have been quite good at doing that.

Yuri Bender: Daniel, you have some good experience of that. Julius Baer launched an agriculture fund recently. Is that the kind of thematic investment that the private client is demanding from you at the moment?

Daniel Gerber: We have seen demand for thematic investments for some years already. We have quite a long history in our own products of thematics. We have a physical gold fund, and we have considered other ideas in the past and are considering agriculture now. There is certainly a demand for these products, but there was a demand – perhaps it is decreasing now – to make a difference in the product offering and to make different products or commodities. If they are successful, they will be copied quickly. With thematic thinking, we were ahead of the curve, and we see more people entering that. To add to Sally’s comments about Swiss banks and what is attractive about them to clients, I fully agree. It is not only products that we offer; as you said, it is other values and themes that attract global clients to Swiss banks.

Yuri Bender: But this is the danger. Tom, I know your CIO, Klaus Martini, has been a fan of thematic investing for many years, but is it just something used to start a dialogue with clients to make it easy to propose products to them? Does it really have a place in portfolio management?

Tom Slocock: I do not think you can link a themed approach with a particular product suite. The product is simply how you execute that particular theme. If you want to invest in agriculture, whether through an ETF, a structured product or a hedge fund or by flying out to Ukraine and buying a few million acres of farmland, there are different ways of doing it. It is much more about engaging with the client and coming up with an investment story, which is hopefully much more than just that that is what the client wants to hear. It should be based on sound economic fundamentals of what is going on in the world. That is much more likely to start a dialogue with the client. How you end up investing to take benefit from that view, assuming it is correct, is ultimately neither here nor there.

Sally Tennant: It is very important, actually. Ultimately, it is a question of price. If that theme is already reflected in the price, as we saw in commodities last year, you have to be very careful about how you position portfolios. Ultimately, it is a function of ensuring that you preserve or enhance your clients’ portfolios. The theme may be a great theme, but it is already priced, so you cannot build the whole portfolio around it.

Tom Slocock: Absolutely, and some themes will be more readily accessible than others. It depends how complex a structure or product needs to be, but as has been said, with the growth of ETFs, structured products at the other end of the spectrum and everything in between, you can do a pretty good job of identifying the theme and the risks that you want to play and executing that through whatever products you want. You can invest in a hedge fund index or an ETF. That happens to be a Deutsche Bank product, so I will put my hand up, but it trades on Zetra and you can trade it intra‑day.

Humayon Dar: Risk return is very important – it is fundamental to selling a product. On the Sharia market, while we were engaged recently in an exercise with one of our clients, we came up with the idea of combining SRI screens with Sharia screens. We went out in the market, and compared to our expectation, the response was huge. When you go out on the market with a quality product that has the added feature of socially responsible investing, the response is huge from Sharia investors, be they private individuals or banks and other institutions. For the last 15 years at least, there has been an increasing emphasis on that in the Islamic market. Okay, profits are good and investing in compliance with Sharia is required, but investing should be socially responsible as well.

Adrian Gayler: The interesting thing is that one theme for the last couple of years has been green‑oriented, and therefore agriculture and many other ideas have come up. However, within the Islamic world, that ethical framework, which involves ideas and thoughts that must be embedded, effectively, in how we operate and think, is already there. They are precursors to us, actually, in coming up with a solution. To pick up on the idea of philanthropy for entrepreneurs, religion apart, I want to think about the framework, because it is equally applicable to any client, Muslim or non‑Muslim. That broadens the opportunity for us.

It is very interesting that people are now saying, ‘What’s our social responsibility?’ and considering sustainability. We have been through a cycle of quasi‑boom and bust, and it has been a little painful to look back, particularly at 2008, so when people look forward and start engaging, they are thinking, ‘What about sustainability? Maybe I’m not looking for the overall highest return, but can I repeat that return over three to five years?’ That seems to be a theme that I am hearing, based, for us, on the ethical framework of picking specific themes. I think it will become interesting. I believe that it is industry‑wide, because we are talking about the same people as a client base. That global client base is potentially very transient, and their wealth is transient.

The Multi-Manager Concept

Yuri Bender: Can we look at what works and what does not with private clients, in terms of internal and external solutions? Sally, when you were at Schroders previously, I remember you brought in a multi‑management portfolio in partnership with Russell Investments. That was later followed by the Schroders plus philosophy where high net worth individuals were keen to put their money with Schroders itself. Do you feel it is vital, as a private bank, to have a really strong asset management facility in‑house to attract external clients to the bank in the first place?

Sally Tennant: It is very important for a private bank wealth manager to have a strong investment DNA and to really understand portfolio construction – the drivers, the movers – in order to provide returns. It is pretty hard to do that if you have no capability in‑house and you just buy in and assemble for other people. It is incredibly important that trust is built with clients and that they do not just have in‑house product. You must genuinely look for product that would stand its ground even if you were at a different private bank. The product used must be one that other people would buy themselves. But unless you have investment professionals and investment DNA, it is a hell of a lot harder to make asset allocation calls, construct thematics and so on without that capability.

Yuri Bender: Mike, everywhere you have been – HSBC, Rothschild, Schroders – you have introduced a multi‑management capability. Is that because you think it is the best solution for private clients?

Mike Bussey: It is a solution for private clients, but I do not think that it is the only solution. To pick up on what Sally said, the DNA is important. Being able to really understand the client – going through the whole risk/reward exercise and understanding what makes them tick – and delivering a solution that meets the needs of that specific client are important. There is a whole array of tools that you can use. One of them might be multi‑manager, absolutely, but again, a lot of private clients would certainly say that the ability to get to the top managers across a range of asset classes, geographies, etc., is a powerful tool. It is one tool of many, but it is an important one.

Yuri Bender: Mark, you are obviously big promoters of the multi‑manager concept at SEI. Is that because you are strong believers in open architecture, or do you just think it is a good business model that you can easily insert into smaller private banks that do not necessarily have a huge asset management capacity?

Mark McCarron: It is a business model and approach that is quite attractive to smaller and less developed private banks that want to provide that capability but might not have the resources internally to do so. However, it is critical that those who decide to offer this to their clients understand that they are giving ownership of a lot of those decisions to someone else outside the bank. Asset allocation strategy, product or manager selection, accountability and due diligence are outsourced to some degree. We found that a critical aspect last year, obviously: who is doing your due diligence, and are they doing it right? In many ways, although you might have capability internally at the bank, a specialist organisation such as ours has found at least some buy‑in and connection with others that want to offer best of breed if they can but do not have the capability, do not feel able to take on the risk and ultimately leave it to someone else. That said, we try to work closely with our clients to ensure that they understand the nature of what we are investing in and the strategies that we have built so that they feel that it is their product and not someone else’s. If that breaks down, then we are just a provider of product, not a solutions provider, which is what we aim to be.

Yuri Bender: Venky, you can monitor all the trends in private banks, with a global remit and a client base here in the UK. We have talked about a large number of products and solutions: multi‑manager, off‑the‑shelf funds, structured products, hedge funds and ETFs. How easy is it for one technology provider to control all that and for the platform to be accessible to one provider? Is it necessary for a variety of partners to look after the technological outsourcing needs of an institution such as a private bank?

Venky Venkatesh: I have been listening to the conversation. As you said, I have met customers in various countries, including India, China and a lot of Asia Pacific countries, but it all goes back to the basics. Although customers are looking at a product that can provide them with multi‑asset capability and maybe with front‑office, middle office and back‑office capability, we see that most of the usage and demand involves quickly getting a front‑office solution. Primarily, that is because, if we look at the market trend today, customers are demanding transparency. Number one, I want to see that I am getting the return that you promised me. Number two, customers think that they are more intelligent than they were, so they think that they can look at their investments and at the risk profile of their investments and at least make some judgment about them.

Primarily, what we see is demand for products that would, ideally, cover front office, middle office and back office. When I say front office, I mean client‑facing – client relationship management ability. When I say middle office, I am talking about locating products, looking at their performance, trading and that kind of thing. At the moment, what we see banks investing in through our different offices is primarily client‑facing products allowing them to talk to the client and make them feel that their requirements are understood and the product is being tailor‑made for their risk profile, investment horizon, etc. So the client feels comfortable and thinks, ‘Okay, here is the bank. Here are the tools. They have a risk profile questionnaire that they will put across to me, and based on what the bank has heard from me, they will come up with a product that fits my requirements.’ That, typically, is a combination like the ones we have discussed: equity, fixed income and cash. That is the primary part of the portfolio.

One key thing that we are seeing is that banks are starting to use financial planning to give the client comfort: ‘We are working with you to create this product.’ The second trend is that many banks want to offer client access or a client portal where they can see their performance remotely without having to come to the bank and ask. They like to have confidence that the bank is providing the return promised, and they like to be on top of things. They like to see it from wherever they are, by logging in or communicating with the relationship manager through various channels. It could be via the platform itself, by PDF or by SMS, where they get automatic alerts from the system saying, ‘You have put in some conditions in your investments, and this is what has happened to them.’ They like to receive alerts. Clients like to be on top of what is happening and what the bank is doing with their investments. Are the returns happening? They have been promised returns. That is one key thing that we are seeing. Banks’ clients are demanding access to their portfolios to view their performance, and they want easy communication with their relationship manager, whether they are in the country or outside it. That is the kind of provision that people are looking for in a technology platform. We see that as a key trend.

We were talking about distribution of portfolio management, mandates, etc., but quite a few banks offer self‑managed portfolios. They tend primarily to attract retail customers and retain them. They offer ways for people to invest their own money using the bank’s system, brokerage and products, but alone people self‑manage via a portal. We see that as an increasing trend in retail. For example, Deutsche Bank is a client of ours in India. They use our platform. The trend in India is typically to invest in assets that give definable or guaranteed returns. Typically, Deutsche Bank sells a lot of mutual funds. They have their own mutual fund products and unique trust products in India, not so much equity products. We have another client there; BLME uses our applications, coincidentally; you might like to know that that is happening here.

Another trend – I am using the word ‘Sharia’ loosely – is that customers are looking to invest in assets backed by real asset investments. That is a term that I see in the non‑conventional market as well. The client would like to see their performance and what is behind it – the assets underlying a mutual fund. They want to break it down into the underlying assets and see how they are performing, and to do industry analyses and sectorial analyses and see whether they and the bank are in sync with what they think is the right investment. Are they in sync with what the bank is doing with their money? Basically, to answer your question, we see a lot of investments being made in the front office, initially at least. They want an easy way of integrating back‑office systems and [legacy?] applications, providing a good, jazzy front end for the client, making the client feel that the bank understands their need for investment and giving the client a facility to look at their performance and understand how their portfolio is performing. They want a way to communicate with their relationship manager to say, ‘Hey, are you doing this for me? What is happening?’ Alerts are becoming very important. They like to be on top of investments and receive alerts wherever they are about what is happening to their investments.

Yuri Bender: After Venky’s summary of trends today, I know that Adrian is keen to come in with his perspective.

Adrian Gayler: We have been talking a lot about products. I have been asked about the future of the industry and where I saw changes and opportunities. Directionally, I see a move away from being product‑oriented and sales‑oriented, although we all have to meet our shareholders’ expectations and generate revenue, towards a smaller entity: taking a consultative approach with our clients and delivering tailored and bespoke solutions. What does that mean from a technology perspective, and what might we have to do?

I am not saying that all clients are ultra‑high net worth or sit in the private or family office scale, but clients’ requirement is to be able, through their technology, to see consolidated pictures and views of their financial assets. Whether they sit with UBS or with you, Tom, or with me, and whether they are an individual or perhaps at a family or private office level, they often have independent advisers who help them consolidate these pictures and views: ‘Where is my cash now? Where will future income come from?’ and so forth. But for some high net worth clients, no one is really doing that. Perhaps technology can provide a window into the soul of their financial health. I am not saying that it is the only solution, because then the client must be helped and educated to use the technology for their benefit, but that is one area.

Technology

Yuri Bender: We have had several unfortunate and apparently fraudulent issues affecting the industry. The Madoff and Stanford cases have affected not just one or two banks but the whole wealth management industry. How can technology help improve communications across big banking groups? There have been cases – maybe the banks represented by several individuals here have been involved – where a central department in the bank that does due diligence on funds and their managers has said, ‘We shouldn’t actively use any of these managers in our portfolios.’ But some client advisers or other departments working with family offices will set up a fund or other product type using people who are not on an approved list. Could there be a list that everyone could easily check? Surely the technology exists for a client adviser to check quickly whether certain funds are on the list. Do you see private banks trying to improve those lines of communication by using technological solutions?

Venky Venkatesh: Of late, yes. Does a system exist? No. Every bank has its own way of looking at products and systems, primarily because of the competition. They do not want to share data and make available to other banks the details of what products they have and what they do. However, of late, there have been requests, at least from certain segments of the bank, asking if it is possible. Typically, if you look at the secure IC products anyway, to qualify the customer. ‘Here is the customer. What is his background? What are his deposit trends or money transfer trends?’ We require it on top of the KYC area. We can use similar technologies to capture data on a product’s background, the company that offers it or the people behind it, or to track their history and make it available to banks.

Requests have been coming in, but are standard solutions available from the market at the moment? I do not think that I see anything standard, but public domain information is available. People can log in and find out about background, but we are working towards making that available to investors and banks in a more structured manner. Having said that, I think [AML, KYC, OFAC?] and the entire regulatory stream is becoming very stringent. We are working with several banks – large tier 1s and the tier 2 and 3 banks – to implement a stringent regime within their organisations in terms of what products they can trade, to what extent they should share information with clients and how transparent they should be with investors. We are already putting in platforms to make such data available to investors, because people are demanding them: ‘Okay, I would like to see the underlying assets and the company behind this mutual fund or ETF.’ aSo that is already in place, but in terms of having a central repository, we are working towards it. We also need support from the banks to get it up and running, but there have been requests, especially from some of the large banks with which we have been working, for Oracle to take some initiative in that area.

Yuri Bender: Would any of the representatives of the Swiss private banks like to comment on how lines of communication are being improved to address such issues?

Daniel Gerber: It all comes down to the systems you already have in place and how you do your work. If you use external products and have an open architecture offering, you certainly need information in place to decide whether a product is appropriate. You also need somebody to do due diligence regularly, bringing up red flags if necessary, and to exchange products if you see that they do not fit, but I think that that is in place pretty much everywhere. The most recent issues with Madoff and Stanford probably have not, or not yet, had any impact on communication within banks, because that was already in place. As for communication between banks about red flags and products that might be poisonous or toxic, as you said, for competitive reasons, that is not wanted so much. You probably have to look at your competitors’ offerings and ask yourself, ‘Why are they offering this?’ or ‘Why are they not offering this?’ but communication exchange between banks is probably not going to be top of the list.

Tom Slocock: For that sort of issue, you need an information clearing house, and the regulator is the obvious one. Apart from anything else, you have an obligation in certain jurisdictions to point things out to the regulator if you have serious concerns.

Yuri Bender: I am more worried about communication within banks themselves. Mike, you are Head of Private Banking at Arbuthnot Latham and have been at several institutions in the past. In terms of the technical platform that you would have supervised, for instance at Schroders, did you hive that off to the back‑room boffins, or do you see it as a key part of your business model and something you have to be on top of?

Mike Bussey: I think technology is a hugely important to successful client delivery. As you rightly said, the ability for clients to access information in a timely way, accurately and with an umbrella view is important. It is also a bit of a holy grail. I am not sure anybody has actually cracked it yet. At the ultimate umbrella level, you are still looking at cementing together a whole pile of information from different sources. I do not think that there is a seamless answer out there at the moment. We have mentioned Madoff, etc. Again, I am a bit old‑fashioned about technology. I think it is only as good as what you put in and how you interpret what you take out. I know for a fact, having read the firsthand experience of a distributor for one of the people involved, that the warning flags are thrown out. You have to be in a position where you can be assertive enough with the client to communicate that to them. A couple of these situations were particularly difficult because the managers themselves were positioned in such a way that it became almost a status thing to access them and have money with them. In the past, certain institutions have marketed themselves on the basis that they had access to a specific hedge fund manager: ‘This is normally closed, but we have an allocation and we can get you in there.’ In that way, technology is absolutely important, but it is only part of the solution. Ultimately, you have to be able to communicate effectively enough with your client to convey the message about the risks involved, but it is hard when you come to the soft area where a client really wants to be in, whatever the technology and the data show.

Yuri Bender: Lombard Odier has a simple chip card that clients can use to gain immediate access to their portfolio. Sally, you were saying that people want access, but they do not actually use it.

Sally Tennant: They do not use it that much. They have access to all our research on all the funds and our investment views, but it is very interesting. They think they want to, but ultimately, a lot of them are time‑poor, which is one reason why they are hiring you. Although the large family offices will often use our consolidated reporting platform very actively, it is their administrators who are looking across a number of portfolios into consolidating.

Daniel Gerber: One point is that they are time‑poor, but another involves the human interaction. Banking is a people relations business. It is more convenient, and probably also more pleasurable, to give your relationship manager a call and ask him a question than to go through the whole log‑on process, with all its security gates, and to ask the machine.

Sally Tennant: Often, what happens is that you are talking about it over the telephone, and both of you are looking at the same information.

Mike Bussey: We have also found that overall, if clients have two or three different providers or are using two or three different parts of your business, they would rather have really good, in‑depth analysis and reporting from two or three different places than compromise that in order to have a single consolidated view that may be of lesser quality the higher up the ladder it goes.

Venky Venkatesh: If you look at the retail banks that are getting into private banking, or rather for mass affluent or slightly high net worth individuals, most of their clients are internet‑savvy anyway. They look at their account balances very regularly. I have seen people logging on to see whether there is still money in their account. These banks cater to people who, because they are not in the high investment segment, invest in pretty regular kinds of product, and they can easily see how those products are performing. Some of them do not want their relationship manager to talk to them because they think that they have better knowledge than their relationship manager.

I am talking about the professional segment. If someone calls me from Lloyds Bank on a regular basis, I will say, ‘I know what I am doing,’ because I have seen it on the internet anyway. If I get a call saying, ‘Your pay has just come in, Mr Venkatesh. Do you want me to transfer that to your other account?’, I will say, ‘I do it on a regular basis on the internet.’ I do not want to be called and asked, ‘Should I do it for you?’, at least in the professional segment. There, we think that technology as an enabler really helps, primarily because a relationship manager will typically manage some 200 or 300 clients. For him to be in physical contact with 300 clients on a monthly basis and communicate effectively will be very difficult, where as in Lombard Odier or [APICTA?], it might be one to 10, 15 or 20 clients, depending on the profile, so the relationship manager has sufficient time to spend physical time with the client, understand their requirements and make them comfortable. It is a skill, primarily. If you are managing 250 people, it is physically impossible to really communicate with everyone.

Typically, such banks do not have tailored products, unlike banks such as yours, which may tailor‑make a product to suit an individual. They offer standard products depending on the investment profile or the appetite of the individual. You might have 10 products to cater to a conservative investor and five products to cater to an aggressive investor, so typically you sell that and manage the portfolio. The relationship manager would have sufficient knowledge only to communicate data such as those, not the kind that Sally was talking about involving in‑depth knowledge or investment DNA. A retail bank will have just sufficient knowledge to communicate about that kind of thing: ‘Okay, Mr Customer, you want returns of so much.’ There, I think, technology really enables a retail bank to quickly get into such areas.

The other thing is the cross‑sell or upsell for a relationship manager. A private investor with a retail bank will also be a current account holder or mortgage holder, so developing technology gives them a 360‑degree view of the client that allows them to see their data: how their credit card bill is doing, how their mortgage is doing and whether the customer is keeping pace with their payments. There is always a facility for the relationship manager to upsell or cross‑sell other products: a loan product, maybe, or a new mortgage. What these banks are looking at is a single view of the customer – along with their portfolio performance, their insurance, mortgages and credit card borrowing on a single screen – so that they can cross‑sell or upsell and communicate with the client as well.

I totally agree. The segments here are totally different. If you look at a retail bank – mass affluent, high net worth – technology really enables. That is the only way that they can communicate with the client, unlike with ultra‑high net worth clients, where physical communication is very important.

Adrian Gayler: Technology presents us with a challenge as an industry, because it is a holy grail that all solutions and assets could be documented. But in our broader remit with the regulators to provide best advice, we must also think about what is going on with the client in their corporate world. It really depends whether it is inherited wealth, or whether they are generating their wealth from their corporations and other activities. We must ensure that we are directing clients and thinking about their assets and where they are going – I am going to use a terrible word – holistically. We will also have to start thinking about the risk profiling, around the world, that is generating the wealth that is then feeding into the investments.

This is a world with illiquidity that could get us into trouble. We are guiding or advising on, say, illiquid asset classes, and a client might not understand fully whether those businesses can continue to throw off that sort of cash to pump into private equity, real estate or other future commitments. Although relationship managers have in‑depth knowledge, the gathering of those data into systems is a big challenge, from my experience in different conventional and now Islamic institutions. A lot of that – again, this is only my personal experience – is that it is in the relationship manager’s head. If we are to look at that and say best advice, we will have to broaden our view. Whether we are dealing with those assets and providing corporate financial advice to corporate entities, say, or to their business world, that is a different subject altogether, but we must understand where we are going to be able to guide clients. That is quite a big challenge. It is not just about hanging it out there; it is not something that will be fixed easily just by technology. It may also have implications for how many clients we can service because of how much time we need to spend with them to really understand their position.

Yuri Bender: Staying on the theme of developing business models, Mark, SEI has always been quite innovative in building new platforms for wealth managers so that, for instance, they can execute mass trades across the client base to increase efficiency and cut costs. Do you believe ideas of that kind are being considered seriously by the private banking industry?

Mark McCarron: We hope so; I believe so. This is linked to your first question about communication and consistency. Again, our experience with our clients is that at a global bank, in one area there might be a relationship manager making recommendations on a portfolio and buying into a fund, strategy, manager or product, while somewhere else they are doing something entirely different. The clients with whom we are working today find comfort in the fact that they can take more control, gain a better understanding of risk and be more consistent in their advice to the end client using technology. The standard models that they offer might be set on a platform. You assign clients to those particular allocations, and then, in one central location, you make changes to those models as appropriate to meet the client’s objective.

At the same time, technology is not the only way to be fully risk‑controlled. You also have to ensure that the products and services used within those models are overseen, that due diligence and assessments are being done and that there is accountability on them. Traditionally, SEI brings to their client base that technology solution, which is to provide clients with the capability to rebalance regularly back to target or objective at the same time. It is more efficient, but it is also more controlled and consistent. It treats customers fairly, in many ways. From my perspective, at least, there is more comfort within the bank that at least a core strategy is being controlled like that. On the investment side, accountability for what is inside and a due diligence responsibility also comes with that. So it is linked together.

Yuri Bender: Of the factors that measure success in wealth management institutions, including performance for clients, client retention and value to shareholders or partners of the institution, what do you feel will be the differentiating factors between institutions, bearing in mind that you spend so much time on technological solutions? Will the front office or the back office – the so‑called flight to advice or the flight to operational efficiency – differentiate the success of wealth managers in future?

Mark McCarron: Advice is ultimately what will differentiate one provider from the next. Technology and back‑office solutions might help deliver that advice, but without that quality up front, you will not be able to keep clients on track with their objectives. Whether their objective is to beat the benchmark, beat the peer group or beat cash, it should hopefully be defined ultimately in terms of the advice goal, which is to preserve capital. Are you doing that? Can you report along those lines? You are getting back to that, in a sense, if your objective for the client is to provide advice and certain advice can be measured and reported on in the same framework; sometimes there is a disconnect.

So you might have, ‘Here is a preservation strategy, this is the intention, this is what you said you wanted to do, and by the way, here is its performance against equities.’ Then you enter into a discussion of, ‘Well, why am I in that now?’ and that reporting is not consistent with the ultimate objective. So, linking that together, it maybe brings both of your questions back. There is the front‑office advice and the linking to the back office, and that consistency. Ultimately, with poor advice or implementation at the front office, you will not be successful, so you need to get that right.

Yuri Bender: Why is the UK such an important private banking market, Mike, in terms of potential for profitability? You have worked in international institutions, and now you are concentrating purely on the UK, which is a very crowded market, what with everybody around this table being involved.

Mike Bussey: We are clearly a small bank. We are growing quite nicely, but we are a small bank, so we do not really play the market share game. We have a defined target client, and we go after a fairly small niche market, so we do not need a lot of new clients to make a fairly large difference to our business, as long as they are of the right profile. The classic differentiator is theoretical, I suppose – the amount or degree of the UK market available – in that a large chunk of it is self‑directed or in the hands of IFAs versus a more rounded private bank. That still leaves an awful lot to play for.

It comes down to the quality of the advice that the client is receiving from whatever provider they are using. You have to be very clear about how you position yourself in the market. To pick up on the previous point, I do not think that there is a problem if you want to differentiate yourself and compete based on product, price or performance, but if you choose one of those things, you had better deliver it. If you are going to be a product provider, your product had better be up to it. It is the same with performance. You need to pour investment into those areas. For us as a small bank, it is absolutely about service and relationship.

Independence is important – true independence – in terms of the advice that you give and the ownership of the organisation. A lot of that, in the eyes of the client, is about perception. Again, a lot of people talk about independence, but you have to look at the client and how they perceive you. Are you perceived to be independent, and what does that really mean? From our point of view, we are not sitting there as one of the big five clearers or a huge insurer saying, ‘We need X per cent of the market to make this work.’ We need a fairly small number of clients. We are capturing clients of the quality that we want at the moment to help us grow our business.

Yuri Bender: Gavin, you have been involved in a fairly aggressive scrap for new business in the UK, having bought some IFA firms recently. People who have worked for UBS have then been split off with their own operations. How do you keep them and the clients loyal to you? What kind of remuneration do you employ, and what business model are you hoping to develop in that area?

Gavin Rankin: It has been nearly four years since our last purchase, which brought great strength to the organisation in terms of client relationships and talent. One thing that we have not necessarily touched on is the breadth of talent in wealth management versus other financial industries. UBS’s goal with the UK is to develop what we call home nation status, which is – although you can argue about it – let us say 10 per cent of the market in which we wish to compete. Currently, we are pretty far from that level; 10 per cent is a level that no wealth manager has achieved in the UK or come close to achieving at this point, given the fragmentation that exists.

In terms of how we seek to reach that level, the lesson that we have learned is that organic growth must be the principal driver, and that must be built on attracting the best people, delivering the best advice and maintaining client relationships: all the standard things that make a company successful. One thing that clients focus on – we have spoken a lot about the hard issues, but the soft issues are very important to wealth management clients. Quality of advice is clear, but the relationship that they develop with their client adviser is key as well. One thing that we have seen generally in the wealth management industry over the past few years is too much turnover in relationship managers. Relationship managers moving to another institution do not typically take their clients, but it is very disruptive to a client relationship, and it affects the client’s happiness and loyalty to the institution.

From a wealth manager’s perspective, the things we have discussed – the quality of advice, the delivery of evaluations, the quality of those evaluations and the quality of the people within the institution – are key differentiators in how we expect to be successful.

Yuri Bender: Sally, what are your ambitions in the UK, and how do you intend to achieve them?

Sally Tennant: Our focus in the UK is pretty much on the international community: UK‑res non‑doms, the very vibrant international community who could be non‑doms, non‑res but who come through London, UK entrepreneurs and families. We are a family business – a seventh‑generation family business – so there is a big affinity with family businesses and families wanting advice. Our competitive edge and the way that we are gaining share is partly due to our independence. We have no investment bank and no toxic exposures, so right now in the marketplace, people feel very comfortable and confident with us. We can also create bespoke solutions for our clients. We are absolutely at the top end. There is no sense that you are just a number with us. Every portfolio is bespoke, and we are incredibly flexible about having advisory clients as well as discretionary clients.

The big trend that we have seen, which has been exacerbated by the events of the last 12 months, is that people want control. They do not want to give it to somebody else. We can work around that, and that is how we are gaining market share.

Yuri Bender: Tom, Deutsche Bank bought Tilney and SocGen bought ABN AMRO’s banking business not too long ago. Do you expect more smaller‑scale wealth managers to be bought up by larger groups such as yours?

Tom Slocock: I am not sure that I would classify Tilney as particularly small‑scale, given the fragmentation of the market.

Yuri Bender: How big was it in terms of assets under management?

Tom Slocock: Total assets when it was bought were around £7 billion to £8 billion. Do I think that there will be more acquisitions? Possibly. Looking back, the transactions that have happened have not necessarily worked out particularly well. One reason why I believe Deutsche Bank’s acquisition of Tilney has worked so far is that there was no sizeable existing business. It was the foundation for what has now been renamed and is becoming Deutsche Bank Private Wealth Management in the UK. Looking back not just a few years but beyond that, acquisitions that have been merged into existing wealth management platforms have not necessarily been particularly successful. The alternative is to leave the acquisition outside, almost like an investment, therefore failing to achieve the synergies. People will always perceive this as an attractive business to be in, but buyer beware.

Islamic Finance

Yuri Bender: Daniel, I am keen to hear your take on this. Swiss banks in particular have come under attack by the G20, the OECD, Barack Obama and various other powers that be. Your management in Switzerland often talk about the old Julius Baer and the new Julius Baer, with the new Julius Baer looking to diversify globally with onshore operations in a number of countries. Bearing in mind that the balance of world wealth has swung to more emerging economies, how important is the UK business within that model?

Daniel Gerber: We are a niche player, and that is what we want to be here in the UK as well. We have other growth areas, notably the Middle East and Asia, where the footprint is very different, especially in Singapore, where we have a fully fledged bank that has grown strongly. But of course we do not want to give up on traditional and strategic places such as London, where we have been present for such a long time. To expand on the onshore or location part of your question, the Julius Baer Group’s business model remains offshore banking. Where we have onshore locations, it is because the market is interesting and big enough for us to have a slice and make an onshore representation profitable, as in Germany.

Whereas in the UK, for example, we do not book our assets here, so in a way, we still use the offshore model. All our assets out of London are actually booked in Guernsey, Switzerland or Singapore, so it is still the offshore model, but with local representation. At the same time we are onshore in other markets, like Germany and Italy. Which model will dominate, that being said in regard to the most recent increase in pressure from the European Community and the G20, remains to be seen. It is a very dynamic environment at the moment, and the challenge will be to adapt to those. Developments. Personally, I think Swiss banking confidentiality not dead and will never be. The protection of legitimate privacy is one of the core values of the Swiss banking system. There will be ways to fulfil the requests of the G20 and countries that want more information about clients without actually having to give up client confidentiality: For example, European savings tax could be expanded as a model. That is probably the way forward.

Yuri Bender: Dr Dar, do you believe that the UK has a strong role? You have achieved your successes in Malaysia, the Middle East and those geographical areas to which financial power has moved over the last 10 years or so. Where does the UK fit into that spectrum?

Humayon Dar: A lot of development has occurred in the UK with respect to Islamic banking and finance. We now have five Islamic banks: one retail and four investment banks, primarily in London, although the retail bank’s headquarters are in Birmingham. However, purely from a market viewpoint, I do not think that the UK is a major centre of excellence for Islamic banking and finance on the retail or corporate level or, of course, from a private banking viewpoint. However, there are some strategic reasons to be present in London. One is that it gives a lot of credibility and authenticity to Islamic banking. A lot of initiatives that have occurred here in the UK or other western countries in Islamic banking and finance have contributed to the development of the industry. From this viewpoint, the UK will remain a very important destination and centre for Islamic banking and finance.

With respect to private banking, deployment of resources is important for banks that would like to have a presence over here. When it comes to raising capital, the important markets are the ones where Islamic banking and finance are significant on a retail level. I am referring to the GCC countries, Malaysia, Indonesia and other countries such as Singapore. I do not think that Islamic banks and their private banking arms would make a lot of profit by focusing just on the UK market. Of course, it helps them to be present over here, but their real markets are where Islamic banking and finance are significant.

Yuri Bender: What do you think about the role of the Swiss banks in Islamic finance? There has been some demand from Islamic investors for banks in Zurich and Geneva to develop excellence in these areas. Have they missed a trick, do you think?

Humayon Dar: Actually, Swiss banks have been involved in Islamic banking for a long time. Dresdner Kleinwort was the first one to entertain Islamic clientele from the Middle East, and UBS has been involved. UBS was probably the first European bank to set up an Islamic private banking arm, in the name of Noriba, in Bahrain. That was wound up to bring the Islamic operations to the Dubai International Financial Centre a couple of years back. Historically, Swiss banks have been involved in offering Islamic private banking services to their clients in the Middle East and elsewhere.

Another trend is emerging: Islamic banks are setting up their private banking shops in Switzerland. Faisal Private Bank is one obvious example, but I know some other Islamic banks are either looking into setting up shop in Geneva or coming up with joint ventures involving existing Swiss banks. Given the authenticity and history of Swiss banking, I would say that a marriage between Islamic institutions and conventional private banks will be helpful for the Islamic finance industry.

HSBC, a UK bank with a private bank in Switzerland, has been offering Islamic services to a number of its clients. Deutsche Bank, historically, has not been a very active player in Islamic markets, although its clients include a number of very important royal and ruling families from Muslim countries, but even Deutsche Bank and Deutsche Private Wealth Management are looking to tap into that market. The associations and linkages that are occurring – Deutsche Bank and other banks are going to Riyadh, and vice versa – will play an important role in the development of Islamic private banking.

I must say that Islamic private banking is a new phenomenon. When it started in 1975, it was purely a retail banking phenomenon, and that remained the case until the 1990s. In the 1990s, Islamic investment banking emerged, and since the start of this century, Islamic private banking has become important. A number of Islamic banks are evolving towards the private banking model: first retail banking, then themed banking for the mass affluent class. Now the next step is to come up with fully fledged Islamic private banks.

Yuri Bender: Within the developing model of Islamic private banking, do you expect structured products to have an important place in portfolios, as opposed to UCITS 3‑style funds and private placements?

Humayon Dar: I believe that with the expansion of private banking services, structured products will definitely play an important role in Islamic wealth management. Why? Although there is a large influx of Islamic money into the Islamic financial services industry, we find that there are not very many Sharia compliant assets. Hence, in the medium run, it is necessary to come up with what I call a Sharia conversion technology, which should sit between Islamic investors and conventional banks and allow Islamic investors exposure to quality non‑Sharia compliant assets in a Sharia compliant way. A number of investment banks have taken that approach, and it is very much liked by the industry. As I said, it will be a medium‑term policy.

Once a sufficient number of compliant assets exist in the market, I would say there will be a gradual shift away from that kind of structured products. Structured products will remain, but the nature of Sharia compliant structured products will be very different. In that case, it will be purely financial structured products. The objective will not be to have exposure to non‑Sharia assets; rather, it will be, ‘These are the assets. Do you want to have certain features on this portfolio? Do you want capital protection?’ or coming up with different risk/return profiles for products. That will be the long‑run objective of Islamic structured products, but they will remain important in Islamic private banking.

Daniel Gerber: With this emergence of an Islamic private banking offering, especially in the Middle East, do you think it will be a prerequisite in future for western banks active in the area to develop a Sharia compliant offering in order to have a future there, or will there always be a space for both offerings?

Humayon Dar: In the short run, the coexistence of the two is essential. In the medium run, it is important for Islamic private banks to have close links with conventional private banks in order to have access to superior financial technology. In the very long run, I would say that this association will remain but the nature will change, in the sense that most private banks, in 15 to 20 years, will not be able to sell in the region without a credible link with a local institution. The way that Islamic banking in general has developed in the region is that Islamic banks such as Dubai Islamic Bank, Kuwait Finance House, Al Rajhi Bank, the National Commercial Bank and others have emerged as distribution houses, and all the major western banks have attempted to access Islamic money through those institutions. All the structured products manufactured by western banks are being sold by these banks. I think that that trend will continue even in private banking.

A prerequisite for those western banks that want direct access to Islamic investors will be local shops over there. The historical model of having all resources in this part of the world and going over there to collect money has already stopped working in many ways. In future, I think it will be an even bigger requirement to have a local presence. Institutions such as the DFIC, the Qatar Financial Centre and, in future, King Abdullah Economic City are being developed to lure western institutions into the region. If you do not go there and show your commitment to the region, it will be very difficult to get business from the local Islamic community.

Yuri Bender: Venky, are there any particular qualities and attributes that a technology or other back‑office provider needs to display in order to specialise in areas such as Islamic private banking?

Venky Venkatesh: There are quite a few features. For example, Islamic banking businesses do not talk about interest or investment in certain kinds of assets on the market, so when we report those numbers, we have to name them differently in the system. The basic principles are similar to those of conventional banking, but how it is reported and how the gains or rather haram, products are brought in, is the nature of the change that we need to be looking at in technology.

BLME is one example. That was the first Islamic private banking site for us. We worked with the bank to understand what the requirement was and what kinds of product the system needed to handle. For example, it is very easy to link to the FTSE or Nasdaq, put those products into the system and display portfolios, etc., but we have to link to the FTSE Islamic index, the Dow Islamic index or the sukuks in various countries, so we needed to tweak the system to get those things into them. The basic principles are the same, but we needed to make changes to the screens, the kinds of report generated by the system and the kinds of product that could be handled, which are unique to Sharia compliant banking. Those were some of the key changes. The good thing was that there was already an Islamic core banking platform where we had made all those changes. For example, the Dubai Islamic Bank runs on our Islamic core banking platform. So we had some knowledge there. BLME, Dubai Islamic and a couple of banks in Malaysia helped us modify the private banking platform to comply with Sharia.

Having said that – you can correct me if I am wrong – every your bank has its own Sharia board, so if I am compliant with BLME, I cannot say that I will be compliant with Dr Dar’s bank. We have to work closely with the bank to see what its Sharia processes are and whether we are compliant.

Humayon Dar: In general, I would say that Sharia boards do not go into the technical details of the system.

Venky Venkatesh: It is the underlying product.

Humayon Dar: Right. Primarily, that is because Sharia scholars do not have IT‑related expertise, so they do not like to come up with an opinion. As you said, the IT platform for a conventional bank can be used for an Islamic bank. The major difference is in details. For example, in a conventional bank, the requirement might be to report interest receivables. In Islamic banking, it is not just one figure; it depends what contract you have used. It can be Murabaha receivables, Salam receivables or Istismar receivables. From a conventional viewpoint, there is just one interest receivable. So the emphasis is on more detail and more transparency in the reporting of the underlying products. If one module already exists in the IT system, you just have to add…

Venky Venkatesh: A couple more fields.

Humayon Dar: Right. That is how all the IT system providers have come up with Islamic solutions.

Yuri Bender: Gavin, Dr Dar talked about the extensive use of structured products in portfolios. On private banking more broadly – not just Islamic private banking – I spoke recently with Jürg Zeltner, the boss of wealth management in Zurich. He said that portfolios were too full of structured products, that structured products were sold to line the pockets of the banks and incorrectly sold and hedged and that the industry in general needs to move away from them to a new type of portfolio. Will that advice be heeded in the UK private banking industry?

Gavin Rankin: Is that the time?

Yuri Bender: Will this mean changes in profitability models? For instance, a large amount of private banks’ profit has traditionally come from selling structured products?

Gavin Rankin: Taking everything that you have said, I will answer a different question. Firstly, I would challenge whether a lot of the profits have come from structured products. A lot of the profits in our business in the UK come from annuity revenue. Structured products tend to be much more transactional in terms of how they compensate. To take a slightly contrary position to that of general perceived wisdom, although I am not going against Jürg Zeltner, I would say that structured products are a hugely complex and broad range of different solution for clients. In many ways, they provide the only way to access certain asset classes; commodities are a very good example. In that regard, they still play a very important role.

To focus first on the performance of vanilla structured products, have principal protected notes, for instance, disappointed clients? If clients go into the profile of their return, they should be very pleased with the performance of a lot of structured products. If you are in a capital protected product on the FTSE 100 issued by a very high‑quality issuer such as BNP Paribas, you are probably trading very close to your protection level at this point, even though your underlying exposure to the FTSE may well be 30 per cent or 40 per cent away from where you are. From clients’ perspective, the products have delivered what they are looking for.

The challenges going forward are the same sort as those we have discussed. Transparency: ensuring that clients understand properly what they are invested in. Positioning: when the client enters into a structured product, do they really know why? Are they looking for convexity in terms of equity exposure? Are they looking to access a certain asset class? Dialogue with the client at the outset and how the product is positioned within the portfolio are absolutely fundamental. If products have been positioned in the past purely for the purposes of beta or leveraged exposure to a particular market, and that leverage has been enhanced by using a lower‑quality issuer, such as one of those that have passed by, then clients will inevitably be disappointed, but clients who have focused on high‑quality issuers in terms of appropriate positioning and a certain exposure profile within their portfolio should be quite pleased, and I would hope that they would continue to access this market going forward.

Yuri Bender: But what about the cost associated with the products? Is it not the case that often, the marginal return on a structured product may not be much more than what it could have been on deposit, even though the headline returns look quite impressive?

Gavin Rankin: Again, structured products are a complex and huge range of solutions. With a structured product – certainly with the structured products that we typically sell to clients – the issuer’s compensation comes up front. If you were to compare the up‑front on a five‑year structured product linked to some equity product to fees on an ETF, you would probably find that you were better off, in terms of fee load, with the structured product than with the ETF. We heard earlier today that clients are focusing on ETFs because of cost.

You cannot really simplify this. It is important that you are very transparent about how you are compensated as an issuer and what the client should be looking for within a structure in terms of the return profile. The issue is similar to what we are discussing with regard to hedge funds. You should be very clear about how these products are positioned within a portfolio. If you position one particular structured product as a client’s equity profile, clearly that is not a solution that will fly going forward, for all the reasons that we have learned about structured products, such as issuer risk. That dialogue with clients, how these things are positioned and the transparency around them are fundamental.

Yuri Bender: Tom, what is the experience at Deutsche Bank and with your previous positions? Where you have a choice between a structured product and a fund, which would you normally choose for a private client?

Tom Slocock: Product selection should ultimately come down to what the client is looking for. I hate to agree too vigorously with UBS, but a lot of what Gavin said makes sense. There are certain things that structured products allow you to do and investments and bets that are very difficult to make through another vehicle. It is about knowing the risks that you are taking to execute our particular view. I do not want to repeat what has just been said, but that covers anything from 10‑year capital guarantees to a warrant. They are pretty different. Do we call an option a structured product? How far down the line do you want to go? They allow you to select the investment risk and return profile and match those to your view, and something such as a fund does not. An ETF might, but if you want leverage or you have a view that the market will move in a certain direction over a certain period and you want to maximise that view, with or without capital protection, you will not be able to do so without some sort of structuring, whether it is structuring within one product or within a portfolio, in terms of buying various different options. It does not make a great deal of difference, but it is about having an open dialogue with the client and ensuring that they understand – the first step to that is ensuring that the person explaining it to them understands – exactly what the pros and cons are. I do not want to sound like the National Rifle Association, but structured products don’t kill people; people kill people.

Yuri Bender: I remember that about five years ago, Deutsche Bank signed agreements with eight strategic partners to whom the bank would direct client assets: typically fund managers, including Schroders, Merrill Lynch and Invesco. There was some shock within the asset management group of Deutsche Bank and DWS Investments that they were letting the enemies into their bedroom, so to speak. Have things settled down now? Would you be using Deutsche Bank internal funds as much as the selection of eight partners, or is the palette much broader than that in terms of the open dialogue that you referred to and which funds clients can select?

Tom Slocock: Having been in the position for six weeks, I cannot really comment on what happened five years ago.

Yuri Bender: But what is happening now?

Tom Slocock: What is happening now is that internal products – obviously, within an organisation the size of Deutsche Bank, that covers a huge range of potential investment vehicles – must fight it out for space with externals. Certainly in the UK, we do not have a specific group of managers with whom we will only work; rather, we go through the marketplace considering how we think it best to execute on certain investment views. We talked about hedge funds earlier. Many large institutions will have hedge fund expertise in‑house from direct specific funds as well as through various fund of fund‑type structures. I am very comfortable saying that they have to compete on an equal playing field with external managers within Deutsche Bank. As you are probably implying, that can lead to some intense discussions, but that is as it should be. We are all professionals with a job to do, and we have clients to look after.

Looking to the future

Yuri Bender: To conclude, how does everybody see wealth management business models changing in the next few years? Is there anything you want to add?

Tom Slocock: A number of things we talked about, as well as the current financial pressure on the industry, will make a lot of players rethink their business model and level of commitment. If it really is a requirement to have a credible presence local to your client, whether in the Middle East or within the regions of the UK, that will require significant investment and a rethink for many players. We may well see a divergence in terms of the market players, but at the moment, some people are re‑examining how they do business.The focus at the moment is probably more internal than external. Rather than a focus on how things will look in five years’ time, there is a certain amount of focus on how they will look like by the end of this year.

Yuri Bender: Is that the case at Julius Baer as well, or is the perspective longer‑term?

Daniel Gerber: It is both. For sure, there is a short‑term perspective on getting it right and getting through the crisis as undamaged as we have been so far. That is the major concern. Then, of course, there is the question of what comes afterward. How will the world look when we come out of this storm? That is hard to predict, because we have seen such huge changes over the past two years. Simple human extrapolation of what we are all experts in is probably not the right way to predict what will happen, but the underlying business values will be the same: credibility, trust, putting clients first and personal relationships with the client. That is what counts, and that is what will be key for the future.

Yuri Bender: Mike, you have been in the business for 30 years, with a variety of providers. Is there anything that you have seen happen that could prepare us to act now?

Mike Bussey: I am not sure that there is anything in the past. I do think that we are at something of a watershed, and that the themes have come out clearly. Clients are clearly bruised and battered by what has gone on. Wherever you have been in the financial world geographically and in whatever asset class, you are bruised and battered. I therefore think that the next five or 10 years will be about professionalism, trust, confidence, transparency, suitability of solutions and products to clients, very grown‑up conversations about risk with clients, a deeper understanding of risk and rebuilding confidence. As a boutique bank, we have a much more level playing field, and we are seeing that in other parts of the world as well. Small banks will be able to build business very credibly. We are seeing that now: a shift away from the very large providers, which perhaps focus more on product and price, towards advice, confidence, trust, quality of relationship and an adviser who deals with the client. It will be a slow process. I do not think that we will bounce back in a hurry.

Yuri Bender: It must be a particularly interesting time to be a technology provider, with all these issues to discuss with your clients and potential clients.

Venky Venkatesh: We are surprisingly busy. We are pleased to be having discussions with various banks at various levels. For example, we are having different kinds of discussions with private banks from those we are having with retail banks. Looking at the market, retail banks do not make any money on savings and current accounts. Nor do the customers, because with interest at something like 0.17 per cent.

On high‑interest‑yielding savings accounts, there is always a fear that the large retail banks will lose their clients to direct banks such as ING Direct or other banks with an internet‑only presence. A lot of the large banks are under pressure to enter premier banking quickly in order to offer different products to retain clients as well as attract them from the competition. We are in conversation with various banks that are looking to deploy quickly the kind of front‑office solution that we discussed and to reuse legacy applications at the back end to provide various products to the client while integrating them so that the relationship manager can move on quickly to sell new products to the client. They want to provide clients with channels to see their investments, growth etc., so that they feel their bank is doing something to retain them and provide them with products yielding better returns. We see a lot of activity in segments such as that in the effort to get people online or provide premier services to various banks. There is a lot of activity happening on that level as well.

As with the large private banks, they are looking to build firm relationships with their clients. They are looking at CRM systems and how they can share data and information with a certain segment of their clients in order to keep them. We see a lot of activity in that area, especially given the recession. Banks are under pressure to maintain margins, make margins and retain clients.

Yuri Bender: Is it a good time, Adrian, to be a new entrant into the market?

Adrian Gayler: I have to say yes, do I not? Yes, in the context that because we are new – 18 months old – we do not have a legacy or any toxic assets. Will it be a challenge? That might be more appropriate to think about. I think that it will be challenging for all institutions. Generally speaking, we have all agreed to a watershed in the industry. Clients will be looking at us and at things such as the Madoff and Stanford situations, and so on and so forth, and unfortunately, everyone in the industry is tarred a little bit by those issues. Even though we are new and specifically an Islamic bank, clients are wary, but there is opportunity, and the opportunity is that Islamic finance represents, debatably, some $800 billion to $1 trillion of assets under management at the moment. That is so small in comparison with total assets managed by all the big players represented here today. Our opportunity is enormous, and the challenge will be to bring the right products and services to the table at the right time and to achieve something between the alignment of shareholder requirements and demands and focusing on being client‑driven. To return to my point, let us listen, be consultative and provide the right products and services. That probably stretches to working, as an industry, with some of these guys around the table to see whether mutually, we can service an existing global client set together.

Yuri Bender: Mark, are the needs of private banks changing hugely when they look for an outsourcing solution?

Mark McCarron: There is pressure on private banks, which are our clients, their intermediaries or even independent wealth advisers to grow their business while cutting their costs. We see our role as an enabler, to some degree. We can provide some of the outsourcing of asset management processing or asset management implementation for the investment side of things. That is not necessarily a new story. There are a lot of questions: ‘What is my value proposition? Am I good at this? Am I good at that?’ However, as Mike said, the focus is on advice, growing your business and creating better relationships with clients. Can you do that and process, manager selection, fund selection and accounts? In today’s financial situation, all those things are creating pressure. There is the potential to say, ‘I think we are good at that, but perhaps not as good at that, and let us find someone to help us.’ It is not a new story, but it is being exacerbated by today’s environment.

Yuri Bender: Humayon, is the opportunity for your institution purely for Islamic‑oriented clients, or is it much broader than that?

Humayon Dar: As I said, if Islamic banking, especially Islamic private banking, takes the route of socially responsible investing, the market will widen. It will not only be Islamic; it will be everyone. But even if you focus just on the Islamic market, so far Islamic banks have tried to target only 25 per cent of Muslims. The total wealth held by ultra‑high net worth individuals and families in the Middle East and north Africa region is about $4 trillion. Only one‑fourth has been targeted. The remaining $3 trillion could be targeted if Islamic wealth managers came up with more socially responsible products. The question to ask is why 75 per cent of Muslims are not interested in Sharia compliant products. One answer is that they are not sufficiently convinced that Islamic banking is truly socially responsible. Once that dimension is brought into Islamic banking, asset management and private banking, I think that the future of Islamic wealth management will be very bright.

Yuri Bender: Gavin, Mike mentioned that a large part of the private banking industry is feeling bruised and battered. Is that how you are feeling?

Gavin Rankin: I feel great. One of the things about wealth management – we have certainly heard it in various strains today – is that it is a hugely complex business. That is not properly appreciated by a lot of people outside the sector. It is very attractive for new entrants; we will continue to see new entrants, such as those around the table, because of all the natural dynamics within the space, from the secular growth of a potential client base to the stable annuity earnings. However, it is a very complex business, and that complexity will probably increase, not just because of product – the products in client portfolios today were not typically in client portfolios 10 years ago, and that trend will continue – but also because of the regulatory burden, about which we have not really spoken a lot today. I expect that to increase generally across finance, as well as the pressures when we deal with private individuals.

All those challenges to lead to two potential roads. We could see a strengthening of the majors, which can invest in platforms, provide due diligence, attract the best talent and provide the best product. We could also see the opportunity for outsourcing, as Mark said. There will always be a desire within wealth management for boutiques and all the things typically associated with them, but to be a boutique and succeed in a very complex space, you will need to outsource and to focus on what you deliver best. So you have two potential roads. I belong to a major; we bring particular strengths in the former.

Yuri Bender: Sally, would you say that wealth preservation is your main goal for your clients, or are your goals slightly broader?

Sally Tennant: They are broader. Wealth preservation is important for a huge segment of clients, but less important for younger entrepreneurs who want to continue to make money. Looking back at what has happened in the past 18 months there are three key things which are driving thinking at the moment. They have all been mentioned, but for me, one of them is transparency. From G20 to the regulators down to clients wanting to understand their fees, transparency is really big, and we will have to work harder on it.

Risk is the other one. Most people were let down by portfolio construction last year, except those who were in cash and bonds. How portfolios are constructed and how you look at risk and return needs revisiting. Ensuring that we provide value for money is the third issue that we, as CEOs, should all be concerned about.

Yuri Bender: Thank you very much, everybody, for taking part in such a wide‑ranging and fascinating discussion. I hope that you have all enjoyed it as much as I have.

Sally Tennant

Tom Slocock

Venky Venkatesh