Overhaul of business models top task for private banks in 2017

Private banks preparing for 2017 are not expecting an easy ride. Far from it, there is a steep realisation emerging that they must transform both operating models and remuneration structures.

The largest players of all – particularly the Swiss giants – will be seeing in the New Year of 2017 with fundamentally flawed business models, based on lucrative wealth management departments financing struggling investment banking divisions, believes Ray Soudah, founder of M&A and wealth consultancy MilleniumAssociates. 

“We are seeing a creeping takeover of investment banking by wealth management,” draining the profitability of one healthy business line to subsidise its ailing cousin, he says.  “With this particular symbiosis, the more upmarket you go, the more you need investment banking and the less profitable it gets.”

When it comes to entrepreneurial clients – now the prime target of all major private banks – just 1 per cent do a deal in M&A or corporate finance which requires expertise of an investment bank, despite claims of many universal banks that wealthier private clients typically require sophisticated capital market-style services. Moreover, private banking clients who do need investment banking are just as likely to source this from rivals at a cheaper price.

The days of easy wealth management money, sourced from constantly rising assets, are behind us and the best thing banks can do is split themselves up, moving away from the integrated “one bank” model, suggests Mr Soudah.

Far eastern front

Asia remains a key battleground for private banking. With more than 2,800 wealth management employees in the Apac, including 1,000 client advisers, UBS is Asia Pacific’s largest player and expects to continue hiring strategically, as well as expanding its “scale and footprint” across the region. CEO Juerg Zeltner talks of “exciting plans” for China, Taiwan and Japan. Other European banks have not been so successful there however, with Société Générale, Coutts and ABN Amro having pulled out, in the face of strong competition from regional players such as DBS and Bank of Singapore, which are scooping up business and acquisitions. 

“European banks are exiting Asia primarily because they have problems at home, not because they have failed in Asia, even though they have not been remarkable there,” says Mr Soudah.

“These disposals have to be placed in the right context, namely the need for these groups in the wake of the financial crisis to focus on their core expertise, coupled with reduced profitability of their private banking activities,” says Shelby Du Pasquier, head of the banking and finance group at Geneva lawyers Lenz & Staehelin. 

“The current changes in the tax and regulatory environment further led these groups to reconsider their business model and the outlook of their offshore strategy.”

Huge investments in technology are also dampening once healthy profit expectations. “The fintech threat is biting at the edges, it costs money to big banks and they don’t yet know if it will pay off,” says Mr Soudah, with major players spending many millions on technology, rather than outsourcing for a fraction of the price. 

This unsustainable business model is likely to lead to at least one, and probably more, of the “big five” Swiss banks being taken over in either 2017 or 2018, believes Mr Soudah, “because cost-driven institutions have not been able to embrace the new generation in a new world,” and more synergies must come into play. 

The bigger ticket

Until then, in order to boost fees, private banks will encourage clients to move from smaller scale managed portfolios to bigger ticket private equity and real estate deals, while hedge funds continue to lose their once omnipotent status.

“Endowments may be sticking it out with hedge funds, but for family offices, it is seen as a black box,” says Phil Higson, vice-chairman of the Global Family Office group at UBS.

“There was a lot of enthusiasm pre-2008, but that was followed by side-pockets and disenchantment with performance among investors.” 

Lack of liquidity continues to be a problem when investing in event-driven hedge funds, even eight years after the last major financial crisis. 

“If you woke up the day after the Brexit vote, you didn’t know what the performance of your hedge fund would be like until a few weeks after, when you got your net asset value,” says Mr Higson. “As the beneficial owner, you want to know what has happened after Brexit, but there is a time lag and it takes a few weeks to see the reaction. It’s frustrating for asset owners and there is still a black box feeling.”

It remains very difficult for private banks to recommend hedge fund exposure due to this ongoing experience, especially after events of geopolitical importance, which appear to be occurring with increasing frequency.

But while hedge funds are being given the cold shoulder by wealthy families, the trend to investing in “alternative” assets, including real estate and private equity, already in full swing, is expected to increase its penetration during 2017.

Rather than invest in equities diversified across several continents, investors prefer to use banks’ in house expertise to choose direct real estate investments in Europe, North America and Asia.

Banks trying to build an attractive offering for their private clients find the new wave of alternative assets fits better into their cross-generational business-friendly image than the old luxury label of must-have, exclusive hedge funds.

“Real estate and private equity plays right into the succession planning theme, which is all about the wealth of future generations,” says Mr Higson. 

“The more entrepreneurs you have in your client book, the more they will want private equity,” with banks now spending “as much time trying to be relevant in the illiquid space as the liquid.” 

Currently, some banks are managing to hang onto clients by tempting them into these higher margin strategies, but many customers are now more likely to desert if their bankers’ fees are too high and returns too low, with a number of other options quickly proliferating. These include investing with family offices, independent advisory services and cheaper, tech-led robo-advisers.

Hybrid model

Although there are advocates of purely digital services, Charlotte Ransom, chief executive of NetWealth Investments, expects the future of wealth management to be dominated by “hybrid” firms, combining robo and human elements.

Initially, she spoke to most high street banks to see if she could help them implement a more digitally-focused service for private clients, but found too many barriers in the end and decided to set up a stand alone service.

“They all said that [digital] was one of their strategic priorities when we approached them in 2013, but it became clear that it would be very difficult to implement with any speed, as they had a very complex legacy infrastructure,” says Ms Ransom, who then became more interested in the robo-advice concept being pioneered by UK group Nutmeg, after being introduced from the US.

NetWealth decided to combine this form of digital offering with “the type of things you expect to find at a top-class wealth manager,” she says.

“You are giving your money to somebody else to manage, so you want to know that accounts are secure,” says Ms Ransom, adding that access to advisers is also an essential feature for wealthy clients. 

“When people ask me about fintech, I always tell them we are a lot more ‘fin’ than ‘tech’. Nearly 80 per cent of our clients have come to see us in person during the onboarding process.”

This emerging hybrid model has long been favoured by wealth think-tank Scorpio Partnership. It is not a question of fast-paced digitisation versus a highly personalised private banking service, says Seb Dovey, Scorpio’s co-founder. “It is a question of aligning the best resources to fit the need in a commercially viable way.”

NetWealth's 35-55 core professional demographic embraces both the mature executive and also reflects the industry trend of targeting younger clients, who are in turn seeking advisers and relationship managers in touch with their own life choices embracing philanthropy, climate-friendly portfolios and impact investments.

“If you really take it seriously, you need to provide a good service around philanthropy,” says Heiko Specking, former head of philanthropy at Credit Suisse, now an independent adviser to charities including Light for the World, which concentrates on improving eye healthcare to disadvantaged children in Africa.

Some major banks, including UBS, have built big teams around the trend to charitable giving, but these have often been based around increasing sales rather than offering advice, he says, however praising the likes of BNP Paribas and LGT for a more thoughtful approach to the role of philanthropy in private banking.

“I have been talking with all the big banks and a lot of them still look on this as a tool to sell products; very few understand this a an approach to better understand the client,” says Mr Specking, who advocates banks use philanthropy to help bond with customers.

“If you are bonding with a client, you get to hear information which a client adviser has never heard, plus also you get to engage with the next generation.”

Creating such empathy between client and adviser is crucial, says Mr Specking, allowing a bank to unite a family’s essential values with both its investment policy and business growth strategy. “If you don’t have this discussion, you are losing out,” he says. 

“Banks in the old days stayed with their clients for centuries,” but family offices are slowly getting the upper hand when it comes to client loyalty. “Wealthy people are much more trusting now of a family office than some random banker who changes around every six months.”

Banks, especially those in his native Switzerland, must totally restructure their offer to private clients if they are to preserve market share, he believes. “Bank secrecy is not coming back, so we need to find a new value proposition.”

This will involve a radical overhaul of training, recruitment and remuneration of staff, reckons Scorpio’s Mr Dovey. “The assumptions made by many business models of their future expected revenues are simply out of step with the direction of fees, costs and margins,” he says. 

“The elephant in the room for the corridors of power is facing up to the evidence of costs versus the return of the traditional distribution channel of the private bank.” 

London lives on

Despite the huge number of financial firms prioritising the UK market, demand among wealthy clients for effective London-based wealth managers remains high, says Richard Killingbeck, CEO of WHIreland, which recently announced a strategic partnership with major Middle Eastern investor Kuwaiti European Holding Group.

The demand comes from both overseas investors looking to London as a wealth management hub and also UK clients seeking both structuring and management of assets, with succession planning an increasing concern. 

“A wealth manager should help clients cascade that wealth down the generations with as minimal tax impact as possible,” says Mr Killingbeck.

Unlike some other commentators, he believes London will become an even more important financial centre post-Brexit, with regulation increasing, as the authorities ensure London is a safe place to do business, with new rules likely to run parallel to any EU changes.

DBS’ digital dreams

Wealth managers must keep digital initiatives at the core of their strategy if they are to be successful in 2017 and beyond, believes Su Shan Tan, group head of consumer banking & wealth management at Singapore’s DBS Bank, which recently took over ANZ’s Asian private banking business, hot on the heels of its buy-up of the SocGen franchise.

Following the bank’s pioneering project to develop predictive intelligence with IBM, DBS is planning to enable its clients “to bank conversationally” from their preferred mobile messaging app, says Ms Tan, who is working with US-based Kasisto, which created the technology behind Siri, Apple’s voice-assistant, to deliver this project. 

But she also wants to empower her bankers to communicate better with clients. “Our RMs will be equipped with sophisticated tablets, which provide functions such as real-time investment insights and portfolio information to facilitate meaningful conversations with clients,” says Ms Tan.

ABN Amro’s Asian adventure over

After much soul-searching, Jeroen Rijpkema, CEO of ABN Amro Private Banking International has decided to sell off its Asian and Middle Eastern private banking franchise, managing $20bn in client assets, to European rival LGT.

“Our earnings model is more and more under pressure,” admits Mr Rijpkema, citing increasing cost of both regulatory compliance and technological advancement.

“If you don’t want to be marginalised, you have to either outperform the market significantly or combine forces,” says the Dutchman, further explaining how the decision was made at the post-IPO bank.

The question asked in his recently completed strategic review was whether his business could significantly advance, simultaneously, both in its North European heartlands and in faster-growing markets to the East. The decision was made that it was too difficult to achieve serious critical mass of $50bn plus in Asia and therefore to consolidate closer to home. Lacking the investment banking firepower of Swiss rivals UBS and Credit Suisse, Mr Rijpkema decided the Asian adventure was over.

From 2017, he plans to “scale up” his European private banking operation, focusing on the Netherlands, Belgium, Germany and France, with a new emphasis on digital communication.

Post-IPO, there is a new-found confidence at the bank, says Mr Rijpkema and “a feeling overall of pride and gratitude to clients, staff and society at large”.