Evaluating partnerships between independent wealth managers and private banks

Private banks are stepping up their efforts to service independent wealth managers, hoping to capitalise on the growth of private investment boutiques and multi-family businesses in the aftermath of the financial crisis.

In the past few years, an increasing number of private bankers have set up their own wealth management boutiques, eager to expand their existing business in an independent outfit, finally free from all the politics and conflicts of interest often occurring in larger organisations.

On the other hand, rich individuals and families, disappointed by the poor service they were given by some private banks during the crisis, are increasingly seeking independent advice and personalised service, which smaller players claim to offer.

Often specialising in niche areas or client segments, these smaller institutions rely on banks to provide all banking products and services for their clients. These include custody of assets, financing and trade execution or leverage, as well as the provision of asset management products.

“Independent wealth managers are living in a sort of symbiosis with the banks,” says Stefan Jaecklin, head of the wealth and asset management practice in Emea at Oliver Wyman in Switzerland. “I don’t think they are a threat to them, but they are effectively complementing the service provision. All of the major banks are providing services to them through dedicated teams and they are making good money.”

“Servicing external asset managers has been one of the fastest growing areas of the bank over the past couple of years, as assets in this space have grown by five to 10 per year,” says Martin Rubi, head of the UK external asset managers at Credit Suisse. “I am very much convinced that the success story of the last couple of years will continue.”

Currently, independent wealth managers, as opposed to private banks, manage around 10 per cent of the entire wealth in Europe, according to Credit Suisse’s estimates. In Asia, this percentage is believed to be around 1 to 2 per cent, which underpins the higher growth potential of this segment. “At the moment, LatAm and Asia are the regions that are growing the fastest in our area,” says Mr Rubi.

Any private bank aims to retain the management of clients’ assets, but if the client decides to leave the bank, trying to hang on to their assets by keeping custody is a good alternative, especially as profitability margins for servicing asset managers are close to the traditional private banking business, says Mr Rubi.

It is no surprise that private banks, which have been servicing this segment for many years, are continuously enhancing their services to get a bigger slice of the pie.

“First of all you have to get the basics right, it is very crucial in this business,” states Stefan Kolb, head of PWM private portfolio services at Deutsche Bank. The German Bank, which has been providing services to independent wealth managers for the past 10 years, has seen “very stable growth” in this space, with assets and revenues rising by between 10 and 20 per cent year on year.

If the “basics” concern efficient provisioning of order execution, custody of the assets, lending facilities, IT access to accounts and reporting, clients are expecting increasingly higher service quality standards, says Mr Kolb.

“Since 2008, increasingly wealthy families ask to book assets in multiple jurisdictions in order to diversify their country risk,” he says. This is for example when they fear specific countries may not meet their debt obligations or have a strong exposure through their business to a single country or to overcome any possible capital transfer restrictions.

To meet this demand, a few challenges have emerged at organisational level. The first one is to coordinate the local booking facilities, in order to offer a one-stop service to the independent wealth manager, says Mr Kolb, adding that Deutsche Bank can book clients in Europe, US, and Asia from seven different countries.

Another issue is that related to reporting. Reports typically covers asset performance, asset allocation and risk control, need to be Mifid compliant and are increasingly customised. Today, IT systems must allow consolidation of portfolios across multiple jurisdictions, so that wealth managers are able to control asset allocation and check accounts from a number of locations.

Servicing wealthy families is a global business, but it is still a challenge for a global private bank to provide the same service standards from all jurisdictions.

“It’s clearly a challenging task, in general, to provide consistent service across multiple regions,” state Mr Kolb. In order to enable clients to book in multiple countries, there must be local booking facilities and teams providing the same service standards. This is not easy. Also, local regulation may be more restrictive in certain jurisdictions than in others.

Today, most private banks catering to independent wealth managers offer IT access that is country specific. The more systems independent wealth managers have to use, the more challenging it is for them to be up to date on clients’ assets and service them well, he explains.

One global access across multiple booking platforms requires investments in IT systems and a global perspective on the development of this business by the bank’s senior management, rather than a focus on each single location. For the last couple of years, Deutsche has offered the option to have one global IT access across multiple booking platforms but demand is just building up, says Mr Kolb.

Having a global network is necessary, but what is important is to be able to structure the bank’s business in a way that reflects a holistic view on clients’ wealth, explains Credit Suisse’s Mr Rubi. For example, an independent wealth manager having an established relationship with the Swiss branch may be allowed to open a new relationship with the branch in Singapore without having to renegotiate pricing and terms of agreement. Thus, when booking in Singapore only $5m (€3.8bn) of its total $100m assets at the bank, they will not be penalised when negotiating pricing with the Asian hub.

Investments in an IT platform are a key differentiating factor, he states. Part of the bank’s technology solutions include “sophisticated online tools” and its private Swift network interface allows daily data reconciliation, as data related to any transaction done through the bank on clients’ behalf are automatically fed into the asset manager’s portfolio management system. This portfolio management interlink is offered through the eight booking centres the Swiss bank has around the world, out of the 14 different locations from which it services independent wealth managers. The team will consist of 400 plus people, once group’s subsidiary private bank Clariden Leu is integrated into Credit Suisse.

Competitor UBS Wealth Management is also investing heavily in technology in the financial intermediaries space, especially in the growth regions. Reto Marx, UBS Wealth Management’s regional head of financial intermediaries in Asia Pacific, recently announced the bank is ploughing back a fifth of the revenues generated by the business in Asia Pacific into its dedicated IT platform. This is in view of the tremendous growth potential of the booming wealth management industry in Asia and the fact that first generation of private bankers may soon decide to go independent and start their own businesses. Around 11 per cent of the entire wealth booked at UBS WM is managed through financial intermediaries, which are serviced by around 400 people from 25 locations in 14 countries.

INDEPENDENT REVIEWS

“The reason why private bankers decide to start up their own shop is because they often can’t identify with the bank’s shareholders needs,” says Oliver Wyman’s Mr Jaecklin.

In Switzerland, where independent wealth managers have a very long tradition, there are thousands of them, each having a different business model, and they manage a total of SF500bn (€414bn) in total assets.

Whether independent wealth managers can always completely align their interests to those of clients’ may be questionable, but increasingly these boutiques find their raison d’être in the independent advice they give to their clients and their ability to independently review services and products by screening a significant number of providers.

“Independence is the value proposition for many independent wealth managers; this is much more in the focus today than it has been in past,” he says. “But wealth managers need to build up in-house capabilities in order to prove they can deliver their promises.”

Plurimi Capital, a London-based independent wealth management and investment advisory firm set up in 2008 by two ex Credit Suisse private bankers, has established a platform of six custodian banks – Credit Suisse, BNP Paribas, Deutsche Bank, Crédit Agricole, UBP and UBS – and around 20 investment banks.

“Clients keep their assets with which ever custodian banks they choose to work with and in any jurisdiction,” says Sharon Thomas, managing director and responsible for the Russian client segment. “If we get uncomfortable with the credit risk of a bank, than we can quickly move clients’ assets into another custodian, it gives choices and gives the ability to be nimble and to react quickly to any market event.

“From the client’s point of view, it is better not to spread themselves too thinly. For personal financing, such as a mortgage for residential properties, or more esoteric types of financing, such as yacht financing, private banks always want to see a substantial private banking relationship first, before they provide financing support,” adds Ms Thomas.

When it comes to portfolio financing, though, it is the buying power of the institution behind each individual client that counts. “We have agreed terms upfront for any of our clients on portfolio financing, particularly on certain types of products, so we have a flat pricing for all of our clients which is based on the size of the relationship with Plurimi,” she says, explaining how this benefits, for example, some of her Russian clients who would normally struggle to get a good price on borrowing.

The same open architecture concept is applied on the products side. “Many private banks say they offer best of breed products, but typically they are selling the bank’s products. We are totally independent. Once we have identified a client’s investment objective and risk profile, we ‘shop around’ several investment banks and source the best ideas that are being offered at the time,” says Ms Thomas.

Equally, an independent firm can meet its entrepreneurial clients’ business needs, for example by partnering with the right investment bank, without having to comply to any specific bank’s minimum size limits for a deal.

“You become the trusted adviser for the clients, finding the right providers and the right solutions for them, regardless on whether your strength is wealth management, investment banking or fund management,” explains Adriano Lucatelli, managing partner at Swiss wealth management firm Reuss Private, which he co-founded three years ago with eight partners, after several years in private banking at UBS and Credit Suisse.

When selecting banks, factors that enter into the equation range from operational efficiency, global booking and execution capabilities to product innovation, advisory capabilities, legal know-how, credit rating, as well as brand recognition and end client preference, explains Mr Lucatelli. What is also vital is that a private bank is able to offer a Chinese wall between the team servicing these independent wealth managers and the division of the bank servicing high net worth investors, to avoid any conflict of interest, he says.

Sometimes, relationships with banks are built over time to meet clients’ needs and preferences, and become too numerous. Multi-family office Stonehage, set up in the 1970s, has relationships with 200 banks around the world. These are “far too many” according to Ari Tatos, chief operating officer at the group, even for an organisation that services over 1000 families.

“There is a cost to this extreme open architecture,” he says, “as it is costly and time consuming keeping the relationship open.” With his ideal number of banking relationships at “not more than 50”, Mr Tatos explains that, in practice, the group approaches a dozen core institutions in the first instance. These are mainly European banks, apart from exceptions such as RBC. “They are large, good quality global players that have come through the crisis well,” he says, mentioning Credit Suisse and Barclays Wealth.

“The big advantage with this approach is that you have substantial assets with them, you know who to speak to and they take you very seriously. Having worked with them for a number of years, they are also more flexible in understanding your clients’ requirements.”

In screening banking partners, the key criteria to consider are the quality of the bank, in particular the attitude and approach the institution has towards risk, and how well capitalised it is.

The range and pricing of services are also essential, in particular services on the operational side. For example, it is crucial to assess what kind of processes banks have to approve a loan for a client, be it complex internal procedures or more streamlined ones. “In particular, when it comes to lending, banks that have had bad experiences during the credit crisis have typically centralised their processes, with the result that the decision making process has become hugely cumbersome,” notes Mr Tatos. “The banks that had better risk management procedures have been able to leave the decentralised decision making in place.”

Similarly, account opening procedures can be very straightforward or very complex.

When it comes to custody services, what is important is the ability to access and view electronic data, in granular enough detail, so it can be fed into their system through straight through processing. “Moreover, in today’s tax compliant world, another key differentiator is whether the bank understands the tax complexities of the jurisdiction the client is based in,” says Mr Tatos.

It is useful today to be able to book assets in all the jurisdictions and a bank with a global business is valuable. However, banks are typically very good in one jurisdiction or in one area only, he explains.

“Banks might be global, but they don’t have the same systems in the global operation. For example in some jurisdictions you can’t get the data electronically to link STP into accounting systems. Also, the range of services a bank offers can vary from jurisdiction to jurisdiction and in quality. That’s where we play a very important role, as we understand these subtle differences and approach the right banks in the right jurisdictions to get the best service for our clients.”

Independent wealth managers, as opposed to private banks, manage around 10 per cent of the entire wealth in Europe, according to Credit Suisse’s estimates

In Asia, independent wealth managers are believed manage around 1 to 2 per cent of the region’s wealth

Bridging the gap

The desire to be independent, to service clients on an open architecture platform and expand his business, drove Tarek Khlat, until 2008 managing director and group head for the Middle East at Credit Suisse London, to leave and set up his own boutique, Crossbridge Capital, together with team member Jean-Pierre Aoun.

Having built a $2bn wealth management portfolio, representing a significant portion of the London office’s Middle East activity at Credit Suisse, he was eager to capture the increasing wealth of other emerging markets.

“It is quite difficult to grow the business within the confines of a big bank, where they compartmentalise you as the Middle Eastern desk, the Asian desk or German desk,” says Mr Khlat, CEO at his firm.

Middle Eastern clients obviously still represent the majority of the total firm’s assets today. “The goal is to reduce the proportion of Middle Eastern assets on total assets quite significantly, as other geographical components, such as Turkish or Russian assets grow.” This has been achieved by hiring small teams of people servicing wealthy clients in growth areas of the world from other banks.

“Many existing clients stated they had reached their allocation towards Credit Suisse and to get a bigger share of their wallet; we needed to step away and be independent,” he explains.

Around 90 per cent of existing clients at Credit Suisse followed the team at Crossbridge Capital, but it was a “seamless move” as clients’ assets were left in custody at Credit Suisse.

In addition to wealth management services, Crossbridge provides merchant banking and corporate advisory services to its clients, who are principally entrepreneurs.

“We focus very much on the overall advice to our clients, not just on wealth management, and we can help them to buy, to sell, to merge, to restructure or to optimise their business. We have got the ability to create almost a mini-one bank,” he says, borrowing the expression coined by its ex-employer.

Banks in general fail at the first hurdle because they are too big, they are too political and it is never clear who owns the relationship with the client, he says. A deal is either too big or too small, as there is a minimum threshold in terms of the fees the banks need to generate before they are willing to take on any transaction. Moreover, the bank may have no appetite for a particular risk, if a deal for a client involves the bank’s balance sheet.

“Rather than just relying on one bank’s balance sheet, we go out and look for the best solutions for clients,” says Mr Khalat. The firm partners with nine custodian/private banks and 10 investment banks. Among the custodians are Julius Baer, who is also a minority funding shareholders of the firm, Credit Suisse, Deutsche Bank, but also banks such as Standard Chartered and Bank of China.

The firm opened an office in Singapore in 2010 as part of its goal to expand into emerging markets. “Singapore has turned out not just to be a good location to target India, South Asia, but also a lot of clients from Middle East, Russia or other places are very comfortable today to have their assets booked in Singapore”.

Moreover, banks in Singapore offer a 24 hour service, whereby clients can call them at anytime, whereas in Zurich, past six o’clock phones can ring forever, he says. “The labour pull there is incredibly driven. From a service perspective, Singapore is way ahead of Europe.”