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Private Banking analysis published in Nov 2008

Private Banking analysis published in Nov 2008

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Broad Brush 1 Private Bkg 08 11 18 Document Transcript

  • 1. The Broad Brush Number 1 11 • 2008 A regular analysis of strategic marketing issues in the European investment business Factories, Homes & Cottages A new look at the architecture of Private Banking in Europe W A elcome to our first edition of The Broad Brush. In each s the dust eventually settles on the financial landscape, we will aim briefly to describe a selection of the issues in there will be two businesses less damaged than most: a one area of the investment landscape across which we roam Private Banking and Wealth Management. in our varied strategic research assignments. Asset management groups will seek out these firms more than We are very grateful to SEI, a leading global provider of ever as potential buyers of their funds. The more resilient large outsourced asset management, investment processing and financial institutions will seek to acquire them for their ‘sticky’ investment operations assets. And investment bankers requiring fresh challenges solutions, for making the will set up new boutiques to compete in this market - always findings in this edition assuming they have grasped that ‘product pushing’ is no longer possible. SEI’s mission is to help firms in this space excel in the the name of the game here as it was in their old territory. delivery of advice, investment mangement and other wealth The first of our four sections focuses on the simple but management services while growing revenue, allocating capital important point that the market is not homogenous. Existing effectively, and managing risk. classifications give little clue to the underlying patterns. We This Summer our help was requested by SEI to explore the suggest a new Segmentation into ‘Factories’, ‘Cottages’ and changing landscape of wealth management in Europe. In order ‘Homes’ (Stately- or Retirement-, take your pick). to help it position itself for greatest success in these markets, This segmentation in turn unlocks new insights into the way SEI asked us to add to its understanding of the strategic trends that private banks and wealth managers relate to their clients, and relevant issues in onshore and offshore private banking how and where they operate, and how they seek to grow. and wealth management. Some outputs of this project are These themes are explored in three further sections on shared with you in the following pages. Offshore and Onshore, Discretionary and Advisory, and Please look out for further editions of The Broad Brush on the Hunt for Scale. topics such as: Developments in DC Pensions, The Shift from Please do give us your feedback. Products to Solutions in Asset Management, and Distribution of Offshore Life Insurance Products. Nils Johnson and Magnus Spence Spence Johnson is a specialist provider of marketing intelligence. Our research products and consulting 15 Abchurch Lane, assignments support marketing, sales, and strategic planners across the investment business - in asset London EC4N 7BW UK management, life & pensions and wealth management. +44 20 7112 2131 www.spencejohnson.com
  • 2. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 Summary Segmentation Section 1 Page 3 Private banks and wealth management firms are not a homogenous group. There are a wide variety of business models. But the existing and conventional segment categories do not fully explain the distinct behaviours which exist. Research which we have recently carried out for SEI suggests that among the many available indicators, that there are three key measures which provide the clues – the net worth of clients, the number of clients, and type of mandate (discretionary/advisory). Using these we have found coherent patterns. There are three main groups which emerge: Factories, Cottages and Homes. No doubt further sub-categories can be developed, but these are the main ones. This categorisation unlocks insights into the way that banks relate to their clients, how and where they operate, and how they seek to grow. These themes are explored in the following sections. Offshore and Onshore Section 2 Page 7 Most banks service both onshore and offshore clients, although most specialise in one direction or the other. The desire for offshore services is tax and privacy driven – the desire for secrecy is not the same as desire to avoid tax. The Factories have the highest proportion of offshore clients. Some say offshore is growing fastest, others the reverse. Discretionary and Advisory Section 3 Page 11 If we were to select one single feature which was most important for understanding the behaviour of any Private bank or wealth management firm, it would be the proportions of its clients’ assets which are Discretionary and Advisory. Most banks are a mixture, but most focus on one or the other. Only one of our three segments, Homes, is focused on discretionary business. Most Factories and Cottages are heavily weighted towards advisory business. Firms which have predominantly advisory clients reveal quite different economics and drivers to firms with predominantly discretionary clients. For example discretionary clients are said to be much more profitable, and many banks have been trying to increase their discretionary books. But very wealthy clients are seldom discretionary. Advisory clients offer the advantage of providing a lower ‘market exposure’ risk, which means that in any market downturn advisory clients are less likely to blame their bank. Which in turn may explain why advisory bankers in the current climate seem slightly less agitated than their discretionary focused competitors. Hunt for Scale Section 4 Page 16 There is a big hunt for scale going on among Private banks and wealth management firms. In an environment where growth may no longer come through stock markets, the need to maximise efficiency is paramount. The industry is clearly being ‘industrialised’. But it is the Homes who need to see the benefits of scale most, since they seek client volume in a way that Cottages, in particular, do not. One measure in particular reveals most clearly the variety of attitudes towards scale – the number of advisers per client. We are very grateful to SEI 2 for allowing us to publish these findings
  • 3. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 1.1 Segmentation ● Variety There is an endless variety of business models There is an endless variety of business models in wealth management. This is not a homogenous group, it is highly varied. A sample of the variety is shown below. This prompted us to develop a more meaningful categorisation. This variety is not a bad thing. Examples Descriptions given in interviews Far from it, it shows a lively landscape. But it does make it difficult to analyse. As observers We are one of only fourteen ‘real’ private banks Partnership in Switzerland – unlimited liability partnerships. of the industry we must attempt to compare groups of firms, and We’re a private bank, but we’re much closer to a Multi family this grouping is problematic. multi-family office style business than we are to office a private bank. One thing we found above all was that the conventional descriptions We are part PRIVATE Bank, part INVESTMENT Private for grouping firms are not Manager, part Family OFFICE. So we call Investment adequate. So for this project we ourselves a PRIVATE INVESTMENT OFFICE. Office have developed our own which more accurately (in our view) We are an integrated broad wealth management Integrated and service, becoming trusted advisors to very high reflect the way firms actually broad end families behave. Our model can be described as customer Intimate, holistic intimacy with holistic premium service. The term private bank is very poorly defined. Asset Most private banks, like us, just want to manage management assets. only Our Swiss model: primarily advisory brokerage, Swiss model and very traditional Swiss private banking We offer what we call integrated wealth Holistic management - some people call this holistic wealth management We are a global bank serving upper high net Global lifestyle worth, international, commercial and lifestyle clients. We offer all the Private Banking core services: Core services banking, advisory, investment, and credit. We are not an investment bank, we are not an Aggregation asset manager. We are not a distributor. We are an aggregator. We are very grateful to SEI 3 for allowing us to publish these findings
  • 4. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 1.2 Segmentation ● New ways We suggest new ways of segmenting By scoring each firm in a sample of 25 banks on ten features, we could scan visually for similar patterns. Three groups emerge: Factories, Cottages and Homes. Each group has clear common behaviour. Scores for each firm interviewed 10 Highest score 9 8 7 6 5 4 3 2 Lowest score 1 Net Worth Clients Mandate Domicile AuM Ownership Employees Offices Urgency Most of the ten features we scored were not helpful in assessing differences. The 10 1. Factories chart above appears to show just a 9 jumble of differences. 8 • High number of clients 7 • Usually high in advisory But by isolating the first three in the 6 chart – the net worth of clients, the 5 • Example UBS number of clients, and type of mandate 4 (discretionary/advisory) – we can see 3 patterns emerge. 2 10 We suggest there are in fact three 1 9 Net Worth Clients Mandate groups, Factories, Cottages and Homes, 8 each with the broad characteristics 2. Cottages 7 shown here. 6 High net worth clients Factories are the larger firms, but include 5 Low number of clients a variety of models. Cottages align 4 closely to Family and Multi- Family offices 3 Example Lord North Street in terms of commonly used terms. 2 Homes are mostly smaller, and tend to 1 Net Worth Clients Mandate be more focused on discretionary clients 10 than the other types. We are tempted to 9 call them ‘retirement homes’ because 8 their clients are often more elderly. 3. Stately or Retirement 7 Homes (‘Homes’) 6 5 • Low in advisory 4 3 • Lower net worth clients 2 • Example Rathbones 1 Net Worth Clients Mandate We are very grateful to SEI 4 for allowing us to publish these findings
  • 5. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 1.3 Segmentation ● Services Factories tend to offer the broadest range of services As you might expect Factories distinguish themselves by offering a wide variety of services, while Cottages and Homes focus on investment. Services offered 100% 75% 50% 25% 0% Factory Cottage Home Investment Trusts Tax advice Banking Lending Custody Other Comments given in interviews The chart shows how varied the factories are, offering their clients Some Factories This is the key to the success of the big banks everything from investment to trust maintain you who have gathered so much more assets in and tax advice, banking and lending have to have a recent years. They have easy access to (credits). wide offering specialists and a credible and wide collection of offerings. The smaller Cottages and Homes are much more focused. As one told us, You have to offer a wide range. If you don’t offer credits, for example, then others can have a “generally very wealthy clients don't hook into your clients. If others have a hook need input on Trusts and so on - they into your clients it becomes that much more are already in place”. difficult to maintain the client relationship. But Cottages and Generally very wealthy clients don't need input Homes generally on Trusts and so on - they are already in place. avoid trying to If they do, we introduce them to legal experts. compete with We don't pretend to have specialist legal lawyers, and knowledge. don’t want to provide low Most of our clients, in the wealth profile we’ve margin services talked about, have accountants and lawyers like Banking and advising them. Credits. Our major value offering is service. Not tax. We try to give to a soup-to-nuts service. But we don’t do everything, for example credits. Clients do not want a bank offering. That is not what they are interested in. Banking is not an attractive proposition. Commodity services like credits, credit cards, and chequebooks do not make money, but are nonetheless high risk, because they can ruin your reputation overnight if you get it wrong. We are very grateful to SEI 5 for allowing us to publish these findings
  • 6. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 1.4 Segmentation ● Homes Homes focus on discretionary, onshore and less wealthy A key factor distinguishing Homes is that their clients tend to be onshore, discretionary, and are less wealthy than those of the Factories and Cottages. Client base by domicile and mandate scores Factory Homes are clearly much 10 Offshore Home more focused on onshore Comments given Cottage assets, which in turn tend in interviews to be more discretionary. Factories and Cottages 2 We live in a sort of virtual, R = 0.1222 Offshore domicile global world. Because are the reverse. we’re advice led, we ’re upper high; we ’re upper of the upper where we ’re Homes are also much pitching, we ’re 5 international. (F -1) more focused on less wealthy clients, as shown in the lower chart. This is The discretionary side of the business is the one again in contrast to that ’s growing. The demand coming from the Factories and Cottages 45 to 55 year age bracket who tend to have much onshore in the UK is a Onshore huge area. (F -17) higher average AuM per 0 client. Very wealthy 0 5 10 Advisory Mandate client base also tends to Discretionary Advisory indicate a high proportion of Offshore activity. Client base by domicile and net worth scores Factory Offshore 10 Home Comments given Cottage in interviews 2 R = 0.3145 Our client, being the upper wealth, Offshore domicile international, by definition, they have an international lifestyle. These clients tend to be 5 serviced offshore. There are very few truly global clients. Below about £10m. most client ’s needs are for Onshore domestic onshore services. 0 0 5 10 Client Net Worth Lower Higher We are very grateful to SEI 6 for allowing us to publish these findings
  • 7. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 2.1 Offshore and onshore ● Tax driven The desire for offshore services is tax and privacy driven The days of tax avoidance are (most say) now gone – offshore is now mostly used by those seeking tax efficiency and privacy Comments given in interviews Companies are increasingly using offshore By moving assets Offshore clients are often said to centers' as a way of owning their businesses offshore, clients be highly international, and in through what are called ‘tax blockers’. This is can delay tax, need of international financial based on the principal that tax authorities never and achieve services. This includes tax saving go up the whole chain other legal tax advice and services like Trusts. related Offshore activities are nowadays particularly advantages. While most insist that regulatory relevant, for those who want to be or who can and anti-terrorist pressures have successfully be taxed on a remittance basis. signalled the end of tax avoidance This means that they are taxed eventually when they bring the assets onshore, but in the in most European offshore meantime are able to postpone any tax. locations, some beg to differ and argue that “offshore is still used to a large extent for hiding money”. In my view, offshore is still used to a large Tax avoidance extent for hiding money. I have seen estimates may not have which suggest that half of the money in disappeared Switzerland has never been declared to a tax completely authority anywhere. Offshore clients are internationally mobile; Offshore clients working away from their home country or have are often said to business interests in several countries. be highly international, Our client, being the upper wealth & and in need of international, by definition, they have an international international lifestyle so they tend to be serviced financial services offshore. Clients come to us because, through us they can access the world. We live in a sort of virtual, global world. It’s on and offshore both. For the offshore clients, if you’re a Kazakh or a Another Russian or a Peruvian for instance, and you’ve frequently put your money in Zurich, you’ve normally done mentioned need it for a reason, and secrecy is part of that was secrecy reason. It’s not necessarily about tax, but in some cases it’s about not wanting people or your government to know, because they might shoot you. There are several other reasons, apart from plain fraud, why assets are moved offshore. General secrecy is definitely a factor. So also is secrecy from one’s own relatives. There are still clients from less developed countries with high tax regimes who use offshore assets as ‘run to the airport’ money - a safety factor. We are very grateful to SEI 7 for allowing us to publish these findings
  • 8. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 2.2 Offshore and onshore ● Secrecy Desire for secrecy is not the same as desire to avoid tax Many in the industry now talk about the need for privacy or secrecy as a key driver of offshore business. They can quote many examples of how an individual might want secrecy whilst still not trying to avoid tax. We captured three short case studies: Case Study A Case Study B Case Study C Why German clients like Switzerland Four legal reasons why assets are Why some people want money to be moved offshore secret There are several reasons why German clients like to use Swiss private banks. There are several other reasons, apart If you’re a Kazakh or a Russian or a from plain fraud, why assets are moved Peruvian for instance, and you’ve put They aren’t looking to hide their offshore. your money in Zurich, you’ve normally assets, and are quite willing to be done it for a reason, and secrecy is part completely open and transparent, and to 1. General secrecy from authorities is of that reason. pay all taxes. This also applies to clients definitely a factor. from the Emirates. It’s not necessarily about tax, but in 2. So also is secrecy from one’s own some cases it’s about not wanting people What they are looking to achieve is to relatives. In many cases, it is easier for or your government to know, because spread their assets by geography, so in a family to keep its assets offshore to they might shoot you. many cases they will have some of their avoid disputes between family members. assets in Switzerland, and some They are cultural reasons: local crime 3. Inheritance tax avoidance is another elsewhere. and local fiscal corruption. We have major factor. clients who don’t want statements mailed They are also looking to spread their risk 4. I have heard of people living in less to them because they don’t want the by currency, and Switzerland is a natural secure countries who keep their assets postman to see it. They’re worried the home for some of their assets. offshore to avoid kidnapping risks, which kids will get kidnapped. Switzerland also has a stable are prevalent, for example, in South So it can be very simple. government, which is appealing to people America. from Germany who have memories of Most UK clients are less worried about very unstable governments in the past. secrecy - leaving tax aside, there are less people who are going to abuse it. By and Another factor is that many wealthy large the risks of being got at by your Germans and other Europeans are government or your local warlord or coming to live in Switzerland. A lot of whatever are limited in most parts of Formula One drivers now live around London! Lake Geneva, for example. Another factor is that they like the fact that Swiss bankers are more international and better educated. We are very grateful to SEI 8 for allowing us to publish these findings
  • 9. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 2.3 Offshore and onshore ● Factories The Factories have highest proportion of offshore clients Factories we spoke to have the highest proportion of offshore business. The Cottages are also very offshore focused. Factory Client base by domicile of firms interviewed Home Cottage 10 High offshore 5 High onshore 0 Factories tend to have clients who are wealthier, and more in need of the of offshore tax saving services, or have the need for privacy. Clients of Homes are happy to keep their assets onshore. As one Home firm CEO told us, “There are very few truly global clients. Below about £10m most client’s needs are for domestic onshore services.” We are very grateful to SEI 9 for allowing us to publish these findings
  • 10. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 2.4 Offshore and onshore ● Growth Some say offshore is growing fastest, others the reverse There are quite different views on the growth of offshore. Even the major consultants cannot agree. Many see it growing still, both in Europe and in the new centres such as Singapore and Dubai, while others suggest that the real growth story is onshore. Comments given in interviews Offshore is growing - people and capital are both becoming more international. The mega wealthy are mostly Grow offshore. The advantages of tax avoidance are diminishing. more McKinsey was saying eighteen months ago that onshore wealth management was going to grow at a faster than rate than offshore wealth management and is now saying that he was wrong, and it is going to be even. My onshore guess is that the next prediction is going to show that offshore is growing faster than on, because of the economic situation. To be honest, we thought that the offshore business was dying. About two years ago, we were considering closing our [UK Channel Islands location] office. There was no growth and our view that the loss of offshore tax benefits would continue to be eroded. Offshore The new business coming from domiciled British is nearly all onshore. We’re getting more and more onshore as time goes by In a number of countries, the second and third generation want more use of their money and not to hide it and this in turn drives the need for onshore business Germans, who use Swiss private banks extensively, aren’t looking to hide their assets, and are quite willing to be completely open and transparent, and to pay all taxes I do believe that the trend is for more money to go onshore than offshore. Frankfurt is a very big booking centre for us for Germans who don’t want to hide anything. Grow The new business coming from domiciled British is nearly all onshore. We’re getting more and more onshore as time goes by. less than In the meantime you’d be well advised to spend the profits building onshore businesses, and in our case we onshore will do that. We are very grateful to SEI 10 for allowing us to publish these findings
  • 11. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 3.1 Discretionary and Advisory ● Differences Discretionary and Advisory are quite different businesses If a bank has mostly advisory clients it is a quite different business to one which has mostly discretionary clients. For example, its client loyalty, cost base and regulatory risks are all quite different. Private banking consists of a range of services. You see them described in different ways by different commentators. One approach is to see four main offerings: Investment, Banking, Lending, and Wealth Structuring, as shown in our schematic below. We have done this so that we can show our definition of the word advisory, as being a sub-set of the investment offering, and not a reference to wider advice on other matters such as tax. Discretionary means that the bank decides where to invest, advisory that the client does this. There is a middle ground, which is explored more over the page, where both do it. The reason for making this distinction clear is that it is a vital driver of a banks client approach, and its economics. As we summarise below, if a bank has mostly advisory clients it is a quite different business to one which has mostly discretionary clients. For example, its client loyalty, cost base and regulatory risks are all quite different. Private Banking Advice and Services Investment Banking Lending ‘Wealth Structuring’ Discretionary mandates Current accounts Loans (credits) Company formation Advisory mandates Deposit accounts Credit Cards Foundation formation Execution only mandates Payments Trust administration Custody mandates Cheque books Tax advice Cash management Retirement/estate planning Philanthropic planning Definitions of investment mandates Life assurance etc Client/bank Bank Client decide together decides decides Advisory Discretionary ‘Active’ Execution advisory only Client Interaction Lower Higher Discretionary and Client Stickiness Higher Lower advisory appear to be Regulatory risk Lower Higher different businesses Market related risk Higher Lower altogether Profitability Higher Lower We are very grateful to SEI 11 for allowing us to publish these findings
  • 12. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 3.2 Discretionary and Advisory ● Middle ground Discretionary and Advisory are not black and white terms There is a middle ground, where clients and bank both contribute to investment decisions. This middle ground is populated with examples of hybrids. Part of the reason for this is that banks are trying to gradually shift their clients into a discretionary mandate. In the Case Studies below we make the point that the terms Discretionary and Advisory are not ‘hard’ - many firms offer semi-advisory and semi-discretionary services. This is partly because some clients like to work this way. For example many very wealthy clients will resist handing over complete control in a discretionary mandate, but seek active input in the form of investment ideas from their adviser. A significant factor here is the desire for many banks to try to build their discretionary and shrink their advisory books, to increase their profitability. Hybrid investment solutions are often ways for a bank to help transition clients from right to left on the spectrum shown below. Advisory Discretionary Case Study B Case Study C Case Study A Two semi-discretionary solutions for clients Different types of Clients who are untrusting, who won’t delegate discretionary clients but needing advice Clients are less and less willing to delegate. We A discretionary client who wants We have discretionary and real have two ideas on that. to know precisely why he advisory clients, and then decided to make this investment clients who are the ‘middle The first is ‘partial delegation.’ We can decision at that moment and way’. manage certain parts of the portfolio that the wants to hold direct equities and client is not able to deal with by himself, for wants to hold cash, he wants to Real advisory clients use us for example alternative investment. To select five hold something else, invest in execution only.* hedge funds is not that easy for a client. And the commodities and so on, is client takes care of the rest of his portfolio. completely different thing to ‘Middle way’ clients do not somebody who's happy with trust discretionary managers The second is ‘semi-delegation’ - not the templated model. but they need advice because discretionary, not advisory, but between. they do not have the Instead of signing a discretionary mandate that At Church House, a private bank sophistication to make their lasts for ever, the client could sign the mandate in Yeovil, they have three unit own decisions. There are a lot for one month, and one month later he can trusts. Their managers are, like this. We cannot do decide to sign again. This has the advantage for basically, relationship managers. anything without the advisory the client that he won’t get his banker calling Depending on what you want, clients’ approval, so we spend every day. Also it solves the problem you get you get a combination of those a lot of time talking to them when a client tells you that he is aggressive, and three unit trusts. That is a and gaining that approval, to then the market goes down, and then he wants template, and that's the scale. enable them to make to change his approach – not so easy with a investments. discretionary mandate. We are very grateful to SEI 12 for allowing us to publish these findings
  • 13. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 3.3 Discretionary and Advisory ● Unpredictable Mandate type is vital, but is often overlooked. Why? We have argued that the distinction between Discretionary and Advisory client mandates is a key factor in determining the character of a bank. But amazingly this distinction is not often made by industry observers, possibly because the measure is difficult to get or to predict. The distinction Mandate type vs AuM between advisory and discretionary is a vital Other evidence * Evidence from this project clue to the nature of 100% 10 any Private Bank, but Advisory it is very difficult measure to obtain. Possibly as a result many industry studies Mandate ignore it – a big R2 = 0.0901 5 mistake in our view. R2 = 0.2341 Nor is this measure easy to predict from the outside. For 100% example, as our two Discretionary charts show, it is not 0 0 5 10 £0 £20 £40 correlated either to AuM £m Aum size of AuM, nor to the average net worth of Mandate type vs Net Worth of Clients clients. Other evidence * Evidence from this project 100% 10 Advisory Mandate 2 5 R = 0.0142 R2 = 0.0014 100% Discretionary 0 £0 £3 £6 0 5 10 Net Worth £m Minimum Assets * Top ten UK private client wealth managers. Source: Landsbanki Securities estimates. Private Client Wealth Management report, October 2007. We are very grateful to SEI 13 for allowing us to publish these findings
  • 14. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 3.4 Discretionary and Advisory ● Growth There is no consensus on growth of discretionary For every respondent who told us they thought their discretionary client base was growing the fastest, we were told by someone else that it was their advisory clients who are growing most. Comments given in interviews Many Factories would like to have We much prefer discretionary clients who are easier to manage. more discretionary business Advisory relationships are much more difficult to hold onto. They find advisory work to be Advisory are the clients who take up most of our time, and who Grow demanding and less profitable cost us the most. Discretionary firms agree – they No one wants the headache of dealing with advisory clients. Most prefer discretionary mandates of us want discretionary clients. The Discretionary firms see Discretionary is only about a third of the market today, and continued growth in this business probably growing. Discretionary Some Factories think the opposite – Some of the smarter banks (like EFG) actually try to avoid discretionary is risky and discretionary altogether - recognising that there are quite big risks unattractive, and is shrinking for the bank when markets turn down. We saw no evidence of a shift taking The proportion of our AuM in discretionary is going down. Clients place from advisory to discretionary are less and less willing to delegate. We don’t aim to develop – if anything the opposite discretionary portfolio management as a priority. Some Cottage firms agree – they I think there’s a little less demand for discretionary investment think most new money is Advisory today, the new money wants to be a bit more hands on. Shrink Some Cottages have seen benefits in We needed a more diversified business mix, so we started to build actively growing their advisory side a transaction based book. Now some Discretionary firms are I think we should build an advisory desk. A lot of people have a thinking the same way very transactional attitude to their money. Many Factories would like to have more discretionary business. They find advisory work to be demanding and less profitable. But despite the desire of many firms for this to happen, we saw no evidence of a shift taking place from advisory to discretionary. If anything the opposite was more prominent. For example, some Factories say that discretionary is risky and unattractive, particularly in the current market conditions, and is shrinking. After all advisory business offers the advantage of providing a lower ‘market exposure’ risk, which means that in any market downturn advisory clients are less likely to blame their bank. Which in turn may explain why advisory bankers in the current climate seem slightly less agitated than their discretionary focused competitors. We are very grateful to SEI 14 for allowing us to publish these findings
  • 15. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 3.5 Discretionary and Advisory ● UK differences Discretionary may be particularly high in the UK Why is it that UK banks seem to be so much more reliant on discretionary business than those in Switzerland? Rather backing up our point that not enough analysis is being done on the discretionary/advisory distinction, no one seems to know the answer to this question. Swiss Sample by location of HQ 10 Advisory UK Other 5 Discr. 0 Within our sample a high proportion of the UK firms had low exposure to advisory, high to discretionary, unlike other nationalities. Comments given in interviews No one seems able to tell us why It is possible In Switzerland we are primarily advisory but discretionary business is apparently that the UK is here in London we are 100% discretionary. so much higher among UK Private quite unique in Banks than Swiss ones. being heavy in We have looked at taking our UK-style model to discretionary Europe, but the actual culture of the type of Some say that this is because UK business investment we do is not as prevalent as it is money is ‘lazy’, although others here. disagree, vehemently, on this point. UK onshore discretionary money is often old, Our sample included many Homes in ‘lazy’ money – unique to the UK. the UK, but few in Switzerland, and The US clients tend to want more advisory this may have distorted the measure. services. Whereas I think the UK guys, they’re Discretionary may be abundant all time deprived, and don’t seem as interested. among smaller Home-type banks focused on onshore clients in Switzerland, and elsewhere, especially in Germany. Others If anything, UK money is more sophisticated, on disagree. They average. Plenty of quite financially aggressive, say UK far from lazy, entrepreneurs use discretionary discretionary for a portion of their assets - because they're assets are not time poor and/or want their money managed in ‘lazy’. It is also a customised or specialist discretionary likely that mandates. discretionary is also in The average for discretionary assets in abundance in Switzerland is about 50% in the firms I know. other countries, we just haven’t I do believe that the trend is for more money to seen it in this go onshore than offshore. Frankfurt is a very project big booking centre for us for Germans who don’t want to hide anything. There is more and more onshore business from Germany. UBS has done very well there. We are very grateful to SEI 15 for allowing us to publish these findings
  • 16. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 4.1 Hunt for Scale ● Nirvana There is a big hunt for scale going on Scale is the nirvana of private banking – virtually everyone wants to achieve more of it in some sense. Comments given in interviews People are in short supply and are You’re looking for scale. Most of all, for Across all types, very expensive, and yet they are the processing and administration in offshore there is an urge basis of all service. This conundrum centres, you want to get access to a broad range to pump more is being wrestled with in different of people, at cheaper rates, while preserving the volume through ways by all the firms we spoke to. As client privacy aspect of it. their models. one large firm told us: “What we have Shortage of to do is reduce the people cost and Everyone is looking to achieve scale. people is replace this with systems costs.” sometimes the (see Case Study, below) Scale is the toughest thing to do in this bottleneck. business, from what I can gather so far. Sometimes it is just shortage of Of course the very ‘high touch’ London is full of six to ten billion private client volume. Cottage firms dealing with small asset managers, and they’re not big enough. numbers of very wealthy clients are not trying to industrialise themselves, With a few more people, we can multiply our but even they crave greater assets under management by ten times before efficiency. we reaches our capacity constraints. But keeping relationship managers is a big challenge - if you get too big you can’t keep the relationship managers. If we do grow more, we must do this with But new technology and without also growing relationship technology and managers. We must be more scalable. This is a systems are also big issue for us. seen as the way to make progress. Case Study Three reasons why systems must be consistent around the world. Firstly for branding purposes so that the same delivery of reports and description of products is available to clients who are increasingly international. The second reason is control. We need to see what the relationship managers are doing. They must tow the line, we want to own the client. And finally, the third reason for consistency is that there must be a consistency between what the relationship managers do, because one bad apple can spoil the brand for everybody. The key is how to balance the need for personal service to clients with the need for achieving a consistent global offering. For Bank xxx industrialisation of private banking means ‘mass customisation’. This is the single biggest issue for the industry. What we have to do is reduce the people cost and replace this with systems costs. We are very grateful to SEI 16 for allowing us to publish these findings
  • 17. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 4.2 Hunt for Scale ● Homes Homes are most obsessed with scale We were told about the drive for scale in virtually all the interviews we conducted. The industry is clearly being ‘industrialised’. But it is the Homes who need to see the benefits of most, since they seek client volume in a way that Cottages, in particular, do not. Number of clients per Relationship Manager 1 400 3-400 100 7 <100 50 1 We have twenty I think a private If we had one I am amazed at how We once had 10 Well, each RM clients, and we banker will never hundred clients many clients some clients per probably looks have a team of be effective if per relationship private banks have manager, now its after about £40- twenty people they are serving manager, we per relationship 100, and clients £50m, and that’s to do this. more than fifty would be very manager. In our still get great probably three to clients at any happy, and in teams of two service. Maybe four hundred time. Obviously fact we are relationship in future we can clients, but it technology helps, nowhere near managers we are achieve 200 with varies. but it can only that yet but we aiming to have one technology. help so far. are working on it billion under In some Banking management spread models you across just twenty could have 300 clients. clients per relationship manager, but in others you would be limited to 20. Among Homes the trend is clearly to try to Among some Factories and Cottages with very HNW increase this number to 100 and above clients, there is less concern with this number Homes gave us evidence that they are focused on using technology to try to increase the number of clients per relationship manager, without reducing service levels. Some talked to us about having as many as 300 to 400 clients per relationship manager. Some factories would love to achieve this, but many others are less concerned with measuring scale this way, and say they cannot conceive of having more than 20 or 50 clients per relationship manager before it would harm their service. We are very grateful to SEI 17 for allowing us to publish these findings
  • 18. Factories, Homes and Cottages A new look at the architecture of Private Banking in Europe Number 1 • 11/08 15 Abchurch Lane London EC4N 7BW UK Telephone +44 (0) 20 7112 2131 www.spencejohnson.com nils@spencejohnson.com We are very grateful to SEI 18 for allowing us to publish these findings