Private
banking – who needs it?
Wood panelling, smooth chaps in pinstriped suits,
smart-looking cheque books – so what, asks James Featherstone?
You’re aspirational. Of course you are, otherwise you
wouldn’t be reading Investment International. You already
have a fairly competent banking service – perhaps you
bank with a UK high street bank’s international division.
You have deposit accounts, credit cards, currency accounts,
a bit of advice here and there from the nice people at head
office in Jersey. But now is the time to get a bit more –
some more icing on the banking cake.
Private banking, with its high levels of service and attention
to your financial detail, is the answer, isn’t it? But
doesn’t it cost more for not much extra benefit?
The proposition that private banks offer potential customers
is that they will pay attention to their entire financial life
in a proactive way, and not just offer a series of basic banking
fixes for everyday life.
Eric Barnet, group head of private banking at SG Hambros, a
London-based but international private bank, says that the main
thing on offer that sets up the whole relationship is an upfront
assessment of the individual client’s entire financial
needs.
“One of our relationship managers will sit down with a
new client and work out exactly what his or her investment needs
are, what his risk profile is [how much risk he or she is prepared
to tolerate in a portfolio] and what his general long-term financial
life requires. Then we will tailor a package of banking and
investment to meet those needs.”The position of a relationship
manager is key in private banking. Although ‘lesser’
banking services – so called ‘mass affluent’
banking for instance – purport to offer relationship managers,
mostly that means a slightly harassed individual on the end
of a telephone who has hundreds of other clients to deal with.
Most bona fide private banks will limit the number of clients
each relationship manager has to under a hundred. “In
one case, one of our managers has just two clients – although
they are both billionaires, to be honest,” says Mr Barnet.
The idea is that a relationship manager in a private bank will
genuinely know a client’s financial life and be able to
structure investments and banking accordingly. They will not,
in theory, be simply shunting a client into a pre-prepared set
of structures to save time. A savvy new client – as you
will be, of course – will ask a bank touting for your
business how many clients each relationship manager has on average.
But how far down does the advice go? Mirv Muralitheran, head
of private banking at Investec Bank in the Channel Islands,
says that, barring such things as legal and tax advice relating
to specific jurisdictions, a private bank like Investec will
be able to – indeed want – to have as much to do
with structuring of a person’s entire financial life as
possible. “In fact,” he says, “we’d
like to manage as much of a client’s assets as possible.”
That, he continues, is as much to do with the usefulness of
seeing the entire picture of a client’s wealth pattern
as getting more business for the bank. “It’s just
easier that way,” comments Mr Muralitheran. “we
are in the business of structuring a client’s whole financial
life, so the more the better. That’s what we do.”
One potential problem is in comparing private banks’ performance.
With, say, an investment fund in a particular sector, a client
can compare its performance against an internationally recognised
benchmark to see if his own fund is performing well. With private
banks no such benchmark is available. Although crude measures
such as assets under management by the bank are obtainable,
they are of little use to a client. Nowhere is there a straightforward
measurement of how well a private bank has done in managing
overall client assets.
Eric Barnet from SG Hambros explains that a ranking like that
would not make much sense. “You wouldn’t be comparing
apples with apples. Private banks tailor each portfolio to each
client. So while it makes sense to compare portfolios that have
similar ratios of equities, bonds, cash and so on; if each one
is unique, as private banking portfolios are, comparing overall
bank performance will tell you virtually nothing.”
Mr Barnet goes on to explain that strict performance measurements
are by no means left out of the picture. At the start of a private
banking relationship, a client and his relationship manager
will agree on certain performance measurement parameters in
advance. At the end of the year, the portfolio’s performance
can be measured against them.
Private banking online
The internet has proved to be a mixed blessing for
the world’s private banks. More than one private banks
had its fingers burned during the dot-com madness of recent
years. One in particular – Banque Vontobel of Switzerland
– nearly went bankrupt, had to write off $122 million,
lost senior managers over the problem, and ended up ignominiously
having to close its entire internet operation down. The path
has not been smooth for other more fortunate banks either.
While a few private banks, such as the two Swiss giants Credit
Suisse and UBS, offer a rantge of niche products online, generally
the attitude of the world’s private banks has been negative.
But the idea of offering private banking of a sort over the
internet was – and remains – a good one, the execution
has tended to be execrable.
The banks though that they could use the technology to tap into
a juicy new client segment – the nearly rich, or ‘mass
affluent’ a valuable asset base. Yet few have found way
to profit from using the internet in this way. The main problem
has been to persuade clients that they will be getting anything
like the same level of service and attention to detail that
they would enjoy in face-to-face dealings. “People want
a physical presence at the end of the telephone, or across the
table,” says Andy Maguire of banking consultancy the Boston
Consulting Group.
But the private banks have not abandoned the internet altogether.
Many run exclusive internet-based services for their richer
private clients – with upwards of $1 million to play with.
Credit Suisse Private Banking and UBS Private Banking offer
investment services for online for affluent clients. Both have
a range of online tools that allow clients to trade on major
stock markets as well as track funds, bonds or their favourite
shares. Both have also been quick to adopt an ‘open architecture’
approach, which basically means they offer other company’s
products as well as their own.
In part, the banks have adopted an internet strategy so as to
head off a threat from discount online services. The logic goes
that anyone smart enough to have made a lot of money will be
smart enough to buy funds and other financial services cheaply
and quickly online, thus bypassing private banks’ more
expensive services. The so-called “mass affluent”
market segment, which is in effect a feeder stream for the genuinely
rich clients the banks want, is even more likely to ‘do
it themselves’ and bypass the wood panelling altogether.
The basic advice for tech-savvy potential clients to probe a
prospective private bank closely as to what their online offering
can do – if they have one at all.
some questions you should ask
1. How many clients, on average, does each of your
relationship managers have
2. What will be the average management fee you charge, and tell
me upfront what – if any – extras I’ll have
to pay for
3. Tell me how well your equity managers did over the last five
and ten years
4. How far down will your advice go? Can I get property advice
from you? Alternative investment advice? Tax advice?
5. Are you going to sell me off-the-peg investment funds, or
will you actually manage tailored assets, like individual stocks
and bonds?
6. How available are your relationship managers? How can I contact
them? When can I phone them?
7. What can I do over the internet?
Just
what will they do for you?
Sometimes, a good private bank will do more than
just give you a posh credit card.
Private banks will sometimes offer such things as art advice
as well as employ staff that can help wealthy clients with
the purchase of big-ticket luxury goods, such as a 200-foot
yacht, multi-passenger aircraft, or 50,000-acre ranch.
These so-called softer services also include access to lawyers
who help families to figure out succession issues, private
investigators who vet the suitability and criminal of staff,
as well as access to people who will manage family businesses
that the new generation has no interest in running. Some involve
fees, but many are offered for free.
Bank of America's private bank, which focuses on the wealthy
in the US, is building a reputation for financing personal
aircraft and yachts. It has a staff that keeps track of what
new products and services are coming on the market. Each year
the bank holds several seminars to keep clients aware of trends
and innovative financing methods. BofA's private bankers will
help clients to determine whether buying a Gulfstream jet
makes sense over taking a fractional spot from a private aircraft
provider, or whether renting a boat in Cannes for the summer
is better than buying.
One of the more delicate services that BofA provides allows
families to keep assets that the younger generation has no
desire to manage. If your family became rich from a ranch,
BofA will provide ranchers to run it. It can even find an
oenologist to help make wine at your vineyard.
Alan Rappaport, president of the private bank, says: "We
do employ ranchers and we even run a vineyard for a client.
If we do not have enough resident expertise, then we contract
people."
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