Clients demand central place in new era of wealth management

Strategists at the top of wealth management groups have long recognised the industry is entering a transformational stage and that business models must be redrawn, in recognition of changing economics, encroaching regulation and the advent of a technological revolution.

So far, much of the talk has been confined to conferences and forums, where CEOs pontificate about the industry’s future. But what we are beginning to see in mid-2014 is a strong reaction from private clients. Wealthy families are becoming increasingly assertive about what they want from their bankers and what type of institution they need to serve them.

Consequently, relationship managers, just finding their feet after the post-2008 crisis, are finally starting to realise that if they do not service clients in a way beneficial to the customers rather than the bank, the punters will vote with their feet.

Clients are becoming increasingly savvy, says Jon Needham, global head of fiduciary services at Société Générale Private Banking Hambros, with a spate of newly formed single and multi-family offices now prowling the ultra high net (UHNW) worth space, ready to eat the private bankers’ hard-earned lunch.

In many cases, he believes, smaller organisations – the likes of Germany’s Berenberg – will be better placed to service clients than some of the major private banking machines which have prospered in the past.

While vastly increased compliance costs will lead to massive economic pressures, the rebuilding story is far from a structural change caused purely by ramped-up regulation, unwieldy economics and necessity to mechanise, he acknowledges.

“Many UHNW families, post-2008, realised the story they had been sold and fed by a number of private banks was not the case in reality,” says Mr Needham. “As a result, banks have suffered from a tarnished reputation since that time.”

Institutions, he says, must be more selective and exit markets in an acknowledgement they can no longer be all things to all people.

“Banks are refocusing on core activities in markets where they have critical mass,” he adds. For Société Générale, this has meant pulling back from the South East Asian markets, on which they had once based ambitious expansion plans, and increasing presence in French home territories, neighbouring Benelux countries, the UK and Middle East.

In these markets and the UK in particular, Mr Needham feels a “lack of baggage” will spur his effort to get back to basics. “We must refocus on the critical things our clients expect. This means thinking about them, rather than us.”

Crucial to this re-evaluation is identifying exactly who the clients are, what their priorities are likely to be and how they differ from those holding “old money” which once kept the banks afloat.

SocGen has been working closely with Forbes to identify Wealth Trends information. Joint research from the two groups shows Europe growing at a rate close to Asia, with Eastern economies such as Russia, the Czech Republic, Poland and Ukraine important in new wealth creation. Customers from all of these markets are particularly keen to diversify into UK commercial property.

The approach to clients in Europe must now be a family-led one, believes Mr Needham, with 50 per cent of European businesses in the hands of controlling families, including the likes of BMW and L’Oreal.

“A lot of things went wrong with our industry because we made it too complicated,” argues Mr Needham. “We need to go back to the principle that we are a service industry, there to meet the needs of our clients. It’s actually not that difficult, provided you focus on family first.”

Client expectations have shifted dramatically since the crisis, agrees Heinrich Adami, group managing director at Pictet & Cie, charged with doubling assets currently managed by the Swiss bank’s London office.

“Nobody wants to be sold to these days,” he says, even if he there was a time when sellers were once respected.

“There used to be a strange phenomenon in private banking,” says Mr Adami. “Bankers were selling and a certain group of clients actually liked that, because they respected people who were full of ideas. Sellers were quite successful for a long time.”

But the mood among clients has since changed, with unauthentic “trading” bankers quickly smoked out. “The bigger, more informed clients can recognise a product push in the first 10 seconds,” ventures Mr Adami.

Cynical banks might be tempted to use new technology to disguise the fact they are selling products and to improve the efficiency of the sales process. But this is the wrong way to approach technological innovation, says Aite Group’s head of wealth management research Alois Pirker, based in Boston, US.

Instead, new technology should be used to smooth the shift from product-centric to client-centric business models, even if the brand new systems are attached to fee-based transaction platforms. “This will generate more competition among portfolio managers as they will no longer be able to get away with high fees and low performance,” suggests Mr Pirker.

Banks including Singapore’s DBS, Korea’s Hana Bank, Spain’s BBVA, the UK’s Coutts and Switzerland’s Credit Suisse are all in the vanguard of these innovations, which involve linking an “investment chassis” to trust and brokerage capabilities.

Unlike previous technological advances, these will directly affect the client’s interaction with private bankers. “Today’s innovation happens in the front office, not at the back,” explains Mr Pirker. “It’s all about changing the experience, finding a different way to engage with the client to complement their behaviour.”

These tools can be used in particular to aid asset allocation and to stress-test portfolios, he says. In fact the asset allocation discussion is quickly rising up the client’s agenda, while talk about products takes a back seat, relates Pictet’s Mr Adami.

“What one sees after the crisis is that the whole allocation question gets far more attention, particularly from bigger families. Before the crisis, fortunes were managed in a not too professional fashion, with a traditional 60/40 [bonds to equities] approach, which has been seen as acceptable for the last 30 years.”

The old school approach consisted of outsourcing portfolios to three or four managers with identical mandates, despite paying for a considerable opportunity cost due to lack of diversification.

The new thinking attaches much greater importance to portfolio construction, says Mr Adami. “Family offices believe in vast diversification, many using 15 managers for a portfolio of a few hundred million, while others might use three or four. It is wrong to say A or B is right…but in general, for a portfolio which is globally diversified, we have fewer managers than we saw 10 years ago.”

Technological advancement means clients are also able to see consolidated reporting of their portfolios, he says, allowing clients to be issued with a single report containing details of all positions, weighting and manager exposures. Without this, “it is very difficult, almost impossible, to re-allocate a portfolio.”

Multi-family offices and boutiques could struggle to meet such needs, claims Mr Adami, who believes first tier US investment banks and big Swiss players will continue to dominate the running. “There are a few good successful multi-family offices and it is very easy to appeal to clients as an MFO, because you are sitting on the side of the client to do an allocation, make a selection and build a portfolio.

“But if markets are not good, clients will quickly realise they are getting the same as they got before from a big bank,” he says.

“Then  they start asking how many people are working in manager selection and the first doubts begin to creep in. How can they have 10-20 people doing everything when we have 80 people? Is this really a scientific process or are they taking shortcuts? The answer is clear.”

Of course the story coming from the multi-family offices, which are having a big influence in changing working practices, is a slightly different one. “Some clients prefer a private bank type model as it feels easy to access, you have a friendly relationship and you never have to write a cheque,” ventures Charlotte Thorne, a founding partner of Capital Generation Partners.

“We are not destroying this existing model, but we offer transparency of fees and incentives. Often people don’t want to be sold to, they want a different relationship and a different set of things delivered to them.”

Typically, clients at an MFO might want some more distance from their money, rather than allowing their fortunes to define them, says Ms Thorne. “We look at their assets as a pool of capital that needs a solution, with somebody working hard on this, rather than as a vehicle for self-expression.”

While there has clearly been an exodus of refugees to boutiques from the stop-starting, uncertain models operated by both Swiss and global banks, all relationship managers will now be offered a clearer future, believes Pictet’s Mr Adami, particularly where remuneration is concerned.

“We will no longer see the bonuses of the past,” he suggests, with a rationalisation of banks, affected by poor performance, driving down salaries.

“We look at the problems of the Swiss with the US and understand that the industry will continue to rationalise,” says SocGen’s Mr Needham.

Moreover, London will be an entry-point for players moving into the UHNW space for the foreseeable future, targeting international families as well as domestic private clients.

This view is backed by surveys from property consultancies Knight Frank and Savills, forecasting the UK capital to be one of the key destinations for UHNW families until 2022.

“A lot of that interest is because Switzerland has become much more difficult to operate in,” says Mr Needham. “The Swiss are having to radically change their business model,” with banks also struggling for margins in Asia, despite high growth.

While agreeing about the ascendance of London as the world’s portfolio management capital, senior management at Pictet refuse to acknowledge that the Swiss wealth management sector has been weakened.

During the 1980s, private clients were likely to spread their holdings across a home country bank, a Swiss bank and bank in New York. “This has changed dramatically,” says Mr Adami. “A client can now go to London and get all the international diversification they need. There is no longer a need to go to New York.”

But Switzerland still has high quality portfolio managers, he believes and despite a re-evaluation by clients of the banks
they use and business models these institutions deploy, the Swiss offer remains a
persuasive one.

“I don’t think there is any problem with the Swiss image,” he says. “If you had a business model with tax reasons to hide money, then that is dead. But if you have a model of being a good asset manager to deliver performance, with good service, that is very much alive.”

Indeed Pictet, like its fellow traveller and Geneva neighbour Lombard Odier, has been building on this portfolio management expertise to expand its funds franchise, in recognition that traditional secrecy and tax-led assets have been fast migrating.

Smaller banks, including Geneva’s Mirabaud, have also reacted to this trend, having set up an asset management business during the late 1990s. “We asked ourselves then, ‘what if Swiss secrecy disappears in the coming years?’ We sensed a need to diversify from pure wealth management,” says Lionel Aeschlimann, a director of Bank Mirabaud & Cie, responsible for the investment businesss.

“Asset management was a natural move. We already managed money for wealthy clients, so institutions were the next step, but in reality the two disciplines are very different, not just between clients.”

The change is part of the ongoing “identity crisis” taking place in Swiss banking, believes Mr Aeschlimann, with private client work still seen as more important than third party asset management. But the two can learn from each other within a new, improved and collaborative model.

“Asset management is more sophisticated. Portfolio management within a private bank is like a general hospital, which can deal with any disease. Asset management is where we employ the real specialists in terms of depth of knowledge, focus and reporting tools. Every single basis point of performance is analysed.”

Private bankers are finally beginning to understand that the teams of analysts and fund managers working within their institutions may eventually save the Swiss model. “Private bankers now realise that asset management may provide huge leverage for them,” he says.

Analytical reports from the intricate study of central banks’ policies, sectors, politics, sociology, psychology and behavioural science are finally being made available to private bankers and their clients.

“This means they can now provide intelligence and solutions which private banks could not afford to source on their own.”  

The rise of technology

One of the key trends to transform the customer experience in private banking will be migration to digital platforms.

If not leading to the death of the traditional private banking service model, it will surely make delivery almost unrecognisable.

“The high touch model of the past will be replaced by a more relevant relationship model based on a combination of online and offline servicing and relevant alerts and interventions,” suggests David Ferguson, CEO of the Nucleus wealth management platform.

Europe could benefit from the wholesale regulatory-led re-engineering of the UK market, with a platform-led culture ready to be exported across the continent.

While he expects regular contact to continue between relationship managers and their clients, the frequency of meetings and calls is likely to decrease, he believes, with a much greater percentage of contact to be online. “In the new climate, no-one is going to want to hear about heir money over lunch or a day out at the cricket. Those days are behind us.”

Citi has been busy transforming its client experience to take on board these needs. “You can no longer work out of an oak-panelled room if you want to provide the digital experience which clients expect,” confirms Dena Brumpton, chief operating officer at Citi Private Bank, responsible for the transformation project.

This is a change expected not just by younger clients, but by what she calls the fast-growing “silver surfers” segment, embracing social networking tools Facebook and LinkedIn.

While the physical experience still comes first, it is now closely followed by digital engagement, she told the recent Private Banker International conference in London. The majority of Citi clients questioned in an internal survey wanted to see digital channels supplement the advisory experience rather than replace it.

A key part of her brave transformation will be to establish a peer-group communication network, a “Trip Advisor-style” notice-board, allowing Citi clients to share their private banking experiences. However, crucially, she sees a fully digital e-trading operation as a “step too far for private banking clients”.

The wealth management industry is reaching an “inflexion point”, confirmed Ian Woodhouse, director of Private Banking and Wealth Management at PWC, speaking at the same event. Culture, technology systems and responses to regulation will all need to change drastically, he concludes: “We are moving fast to a transformational stage, but few private banks have yet to be transformed.”

Bonfire of the vanities

Jon Needham, global head of fiduciary services at SG Hambros Private Banking, uses a comparison with Tom Wolfe’s quintessential 1980s Wall Street novel to describe his own experiences in private banking 25 years ago.

“It wasn’t quite ‘The Bonfire of the Vanities,’ but many of us thought it was,” he reflects.

In those days and throughout the 1990s, private banks were clearly a distribution chute for products dreamt up on investment banking trading floors, with this system carrying on unabated until the global financial crisis. “They were more concerned about themselves than the clients,” he says about the self-proclaimed ‘Masters of the Universe’, “even though they were telling everybody they were client-focused.”

But this particular chicken eventually came home to roost and in devastating fashion. “The huge catalyst for change arrived in 2008,” says Mr Needham, with deep and long-running consequences.

“We are in that critical post-regulatory phase now,” he says, referring to the UK’s Retail Distribution Review (RDR), which has transformed the wealth management landscape.