Could private bankers become the new ‘Masters of the Universe’?
Investment bankers used to call the shots, with private banking and asset management seen as little more than diversifiers. But times have changed, and as banks redraw business models, wealth management divisions are being placed front and centre
Two important anniversaries are fast approaching. The autumn of 1987 witnessed the infamous Black Monday stockmarket crash, which first hit Hong Kong before decimating the markets of Europe and the US.
It also saw a related event, the publication of the quintessential 1980s novel, Tom Wolfe’s Bonfire of the Vanities. The author spent time on New York’s trading floors to write his vivid tale of high finance, racism and city politics, describing “Masters of the Universe” such as bond trader Sherman McCoy, who prospered during the decade of greed and decadence.
Further reading
Even 10 years later, investment banks still dominated the financial landscape, with private banking and asset management seen as ‘diversifiers’ to keep the nest feathered when the traders hit poor market conditions. Until recently, many universal bank chiefs described private banking merely as a distribution channel, to sell their structured products and corporate banking services.
At the turn of the millennium, this was the perceived wisdom not just at the Wall Street bulge bracket players such as JP Morgan, but among the sophisticated French financiers sipping coffee in the Opéra district of Paris and the more sedate Swiss players in Zurich’s Paradeplatz. These giants employed ‘enforcers’, setting targets for volumes of structured products, internally manufactured at the investment bank, to be sold to private clients. After the financial crisis, UBS even apologised for running its business in this manner.
All change
By 2010, things had changed drastically. Goldman Sachs had moved its Manchester-born chief economist Jim O’Neill, inventor of the Brics acronym which has defined emerging markets in the modern era, from the helm of the investment bank to head up the $800bn asset management division.
This was in response to regulatory changes which redefined both investment banking and asset management, but was also recognition that after a series of crashes and scandals, investment banking was no longer held in such high regard by the institutions themselves.
Up until the eve of the global financial crisis of 2007-2008, the ‘one bank’ structure still dominated the world’s financial centres. Investment banking controlled the satellite units which orbited it, supported it, sold its products and took its cast-off, burned-out employees. But by the time Citigroup’s chief executive Chuck Prince announced his bank was “still dancing”, even as subprime losses were beginning to bite, strategists in New York, Zurich and London were already beginning to redraw their business blueprints.
Credit Suisse and UBS kept the ‘one bank’ mantra, but they stealthily switched the cards round, installing the wealth management business as the new core, with investment bankers now supporting the private client managers.
At Société Générale, investment bankers were sent in to inject some of their capital markets trading sparkle into what was seen as a sleepy backwater, where a previous boss smoked a pipe during meetings.
Targets for numbers of clients and products to be offloaded on private investors were drawn up in early breakfast strategy meetings, held in shirt-sleeves. Those targets have since been ditched and strategies modified, as the investment turned private bankers have got into the slower, yet pulsating rhythm of the private client world.
New clientele
There is a recognition today that private clients have changed. The younger generation of entrepreneurs are sick of being force-fed capital markets products or being ‘advised’ to enter an IPO by sharp-suited charlatans for hefty fees. They are more interested in philanthropy, impact investing and educating the next generation of business leaders. Private banks must cater to this new mindset.
Zurich’s leading players are still clinging to the notion that investment banking is central to the private banking algorithm for success. But more sceptical voices are questioning this wisdom.
Does it really make sense to maintain departments of highly paid M&A teams, merely to advise private clients who may or may not be selling their businesses? Most ultra high net worth individuals, what UBS calls the “Big Money”, will use expensive investment banking facilities at some stage during their business cycle, believe the bankers. But is there any evidence that they will always want to use the services provided by their own bank?
Opening up
If these major institutions have long prided themselves about an ‘open architecture’, where they sell asset management products from the whole market, or more likely from a limited circle of ‘preferred providers’ with the capacity to swallow up big chunks of business, surely this philosophy can be applied to investment banking too?
If so, we have to start asking ourselves which major institutions will still be left in their current form during the next couple of years, with regulations, financial technology and customer demands fast reshaping business models.
Private banks are currently in the right place to take advantage of the zeitgeist, focusing on links between entrepreneurship, wealth, philanthropy and socially beneficial investments. Their branding is tuning into this public mood, as they distance themselves from the product-pushing machines they once were.
Most are improving their asset management skills and promoting the fashionable investment discipline of private equity, leaving black box methodology on the back burner.
Thirty years after the Bonfire of the Vanities, the universe is ready to anoint some new masters
