Private Banking in Europe

Serious Wealth

Lynn Bicker

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415129770
• eBook ISBN: 9781134793068
• Topic: Business
• Subtopic: Business General
• Index: Business

Private banking is one of the highest growth and most profitable financial businesses in Europe. A large proportion of the market remains untapped and the 1990s are likely to bring significant expansion in developing countries.
Private Banking in Europe provides new insights into the private banking industry, its growth and future, and emerging opportunities for private bankers and their clients. It debates the importance of global and local service; the potential dichotomy between the wealthy and the successful, and considers the private banking industry. A comparison of key players and their chosen markets and strategies is complemented by an exploration of the growth of intermediaries and unexpected competitiors. The work also includes a study of non-European influences. The book offers a valuable insight into private banking, through the eyes of the bankers themselves. The final chapter is devoted to private bankers' own view of their industry, their competition and future directions.

1

INTRODUCTION

To start at the beginning: what is private banking? Definitions abound: the provision of wealth management services; wealth protection for the high net worth individual (HINWI); the offering of investment services and products to support wealthy individuals’ needs. Most people in the banking sector understand that private banking is at the far end of the scale from retail banking; it is something which rich people will happily pay for, in the expectation that they will preserve and possibly increase their fortune.

Some definitions of private banking show a growing reliance and emphasis on private banking ‘products’, an approach carried over from the mass market and the corporate sector, both of which are transaction-oriented. This is one thing that private banking is not.

In truth, private banking is any service the client wants it to be. Be it wealth management, money transmission, portfolio management, the delivery of a yacht or walking the dog, private banking is the ultimate client-led business.

Originating in the mercantile economies of the Renaissance, private banking is the oldest manifestation of money management. When the Dutch republic accepted the validity of trade and commerce, it also established the basic needs of its traders, those successful progenitors of modern business. They required a bridge between trade and finance - ways of keeping their family fortune safe, of raising loans, of investing wisely. Through the centuries, wealthy folk turned to bankers for help not only in managing their affairs, but also in exploiting the commercial value of their inherited land.

With industrialisation came a greater need for finance capital, and many of the Swiss private banks originated as houses organising the financing of infrastructural labour. The Genevan banks identified an early need to specialise, and went for the top end of the market as deposit banks - looking after their private clients.

During the twentieth century, political and ideological developments, and the increasing efficiency of instruments of destruction during the two world wars, created enormous growth in the need for lending. Banks grew, as did their bureaucracy; the man in the street needed volume transactions, which appeared to be the most profitable business focus. Many banks lost interest in the wealthy and the highly individualised service they required.

The complexity of modern life drove the need for specialist advice more and more, and private banks with their concentration on taking deposits from wealthy individuals and families and managing their investments - for a fee - built successful and profitable businesses. So profitable, in fact, that in the less happy days of the early and late 1980s, their sister banks woke up to the fact that this was a sector where good return on capital could be expected. Extremely good, in fact.

Over the last 15 years, it seems that every man and his dog see private banking as the place to be. Competition has increased, with traditional banks jostling for business alongside global universal banks, and with niche players moving smartly around the big boys’ ankles to create their own success.

Today, the private banking market is growing, but so is the number of interested parties. Pressures on costs and margins are increasing, and as clients become more knowledgeable they expect ever-greater absolute performance. They would like pricing transparency, too, a concept private bankers prefer not to move into.

The capital requirements of private banking are not high, although any diversion of capital into off-balance-sheet activities has an impact on capital adequacy ratios. The human capital investment is much higher: a service-led business delivered to demanding clients needs highly professional practitioners, and to provide them with adequate and ideally leading-edge tools to do their job. Bankers agree that ‘we're all in the relationship business’, and high quality relationship management is a prerequisite for success. More than many other sectors, private banking is also a knowledge business. It depends both on ‘who’ and ‘what’ the private banker knows.

As the world becomes a small place by virtue of communications media and infrastructure, the established private bank faces new competition from ‘disintermediaries’: clever constructions of investment management and advice which get in the way of the relationship between client and banker. While the sector relies on its traditionally staid, comfortable and secure image, it is becoming as affected by rationalisation and fragmentation as other industries, and must consider flavours of advanced management thought in order to provide future profits. Private banking is an activity that relies on long-term thinking.

MARKET ATTRACTIVENESS

One problem presented by a growing and attractive market is its very attractiveness. Seen as rich pickings for many varieties of banker and financial services provider, the market has produced a proliferation of new players. The return on capital is high, although entry barriers are also considerable: plush premises, expensive and high quality people, and superb information technology capability are minimum requirements. Add in an international presence, and the associated telecommunications, and it is clear that getting into private banking is not something to be taken lightly. Once in, the player has to be there for the long term. Cost of customer acquisition is high, with a norm of ‘revenue-neutral’ for the first year of the relationship. Since the whole thrust of private client services is towards a long-term and ever-deeper relationship with the client, perhaps spanning generations as well as a variety of family branches, it is not an undertaking for those merely seeking a quick profit.

For those prepared to stay, however, private banking is a lucrative if highly competitive business. Most activity is off-balance-sheet, and therefore does not use massive capital after the initial investment; almost all income is fee-based, and the charges in the industry range between 0.8 and 1.5 per cent of assets managed.

With that kind of return on a repeat fee basis, it is little wonder that the big banks see private banking as a profitable diversion. Global reach, established telecommunications and information technology, significant existing investment in trading and portfolio analysis capability: all these factors mean that they already have many of the necessary ingredients for success in the private banking market.

MARKET PRESSURES

The established players trade on their reputation, history and connections. With pedigrees of two or three hundred years, a number of the traditional Swiss private banks, for example, have long been the confidantes of the rich and influential, and maintain their solid reputation assiduously. Secrecy, or at least confidentiality, is another key factor, not solely for protection from legal and fiscal requirements, but often simply to maintain protection from the prying eyes of others. Of course if you are a HINWI - a high net worth individual - you want to remain so, and therefore the reputation of your financial advisor is crucial. So is the image, which is clearly portrayed by the attention to very smart buildings, antique furniture and original works of art. Most private banks gain a high percentage of new customers via referral, which means that ‘connections’ are extremely important.

Global, or at least international, reach is another plus for those established in private banking. Apart from being in touch with their clients as and when needed, presence in the major financial centres is essential. Of equal importance is influence within that community, whether as holder of a stock exchange seat or leader of a banking committee addressing a specific issue. Relationship between client and advisor is of course based on service, and benefits mightily from the perception of peer-to-peer value.

For prospective new entrants, entry barriers also include the requirement for a long-term strategy, largely service-led. Some of the newer players have driven their gains in market share by the creation of a range of products not apparently available, or with such good performance, from their competitors. Their ‘new ideas’ attract investors with a greater degree of tolerance of risk; younger HINWIs have studied at major universities and business schools; entrepreneurs are often well versed in the possibilities of portfolio management, if not experienced, and the general increase in available, published advice and information for investors, on an almost daily basis, has its own effect in raising financial awareness.

Getting out of the sphere of private banking has almost as many barriers as getting in. Quick profit takers need not apply: profits are long term, depend on stability, trust and development of the client-advisor relationship, and pulling out does not augur well for any future attempt to get back into the market. Private banking can also create demand for other ‘full-service’ provision: Citibank's credit exposure risk analysis service, for example, has application for businesses owned by the HINWI, as well as the investment portfolio.

The profitability of the business continues to attract substitutes to the market, though. These include fund managers; lawyers, accountants and other professionals; traditional stockbrokers and investment management houses; and a range of products which can be picked off the shelf. It is in this area of substitution that the market for private clients begins to be more segmented: movement down the scale shows far more product-orientation, with a dash of service. The listings of fund movements in the Financial Times illustrate the variety and number on offer, a high proportion of which are sold through direct mail or advertisement.

A fairly recent development has been the ‘fund of funds’, and manager of managers (see Chapter 8), although memories are long in this business, and scandals of 20 or 30 years ago still serve as a gating factor for some of these products.

Linked to growing sophistication and expectation among clients is a degree of self-financial-management, too. It is accepted by banking professionals that clients are not likely to put all their eggs in one basket any more. By spreading their investment portfolios, they of course increase the competition between service providers, but as at least one banker says, ‘We hope to attract clients by one of our core products and then bring them completely into the fold.’

2

THE PRIVATE BANKING MARKET

The market for private banking services has been described as one which ‘will take care of itself’. What private banking provides is a service, as defined by customer requirements; as the world continues to polarise between rich and poor, it is clear that more people are indeed becoming wealthy, and are therefore open to private banking services. The scope of the market is, however, extremely difficult to bound, and to size:

•it is global, though needing local focus;

•it services wealthy individuals who may range from ‘thousandaires’ to billionaires;

•its client base is made up of individuals who are generally reticent in admitting the extent of their wealth;

•clients have a range of differing requirements as a result of their position in the wealth lifecyle, and the environment in which they live.

This presents a problem not seen in other banking areas: identification of the size of the market. Every private bank will agree that the market is huge. Citibank figures in 1988 suggested that available assets amounted to $7.1 trillion, spread among some 3.1 million potential customers. Research by Chase Manhattan Private Bank in 1993 estimated that private wealth worldwide totalled more than $9.6 trillion, an increase of 35 per cent in five years, while McKinsey's figures suggested a private banking market size of $2 trillion in January 1991.

Establishing the location of the market as well as its size is also problematic. Countries in the Pacific rim, agreed by most economic commentators to be the engine of growth, are certainly producing growing numbers of HINWIs. The ABN-Amro Bank estimates that the size of the private banking market in Asia, excluding Japan, is $400-500 billion.

Chase's research indicates that around six million individuals worldwide have disposable assets of more than $250,000. Of these, probably a third maintain their financial assets offshore.¹ Around 2.6 million of these have liquid - i.e. available for in...

Table of contents

• Front Cover
• PRIVATE BANKING IN EUROPE
• ROUTLEDGE INTERNATIONAL STUDIES IN MONEY AND BANKING
• Title Page
• Copyright
• CONTENTS
• List of tables
• Executive summary
• Acknowledgements
• 1 INTRODUCTION
• 2 THE PRIVATE BANKING MARKET
• 3 GETTING , KEEPING AND SERVING CLIENTS
• 4 EUROPEAN PROFILES I
• 5 EUROPEAN PROFILES II
• 6 THE INFLUENCE OF NON - EUROPEAN ACTIVITY
• 7 INTERM EDIARIES AND A NEW COMPETITIVE THRUST
• 8 SECURITY AND COMPLIANCE
• 9 DILEMMAS
• 10 WHAT THE BANKERS SAY
• Appendix 1: How the UK security systems work
• Appendix 2: Money laundering pointers
• Appendix 3: EC Directives affecting private banking activities
• Appendix 4: The players: who, where and what?
• Index