Private crunch?
4 Aug 08
Research by the accountancy giant Deloitte shows the very rich may not be getting the service they want from high-end financial managers
by Ian Harper
High net worth individuals and the institutions that purport to manage their money are becoming increasingly far apart, according to Deloitte.
Calum Thomson, the head of Deloitte’s wealth management arm, says: “The European wealth management industry has been the darling of financial services, achieving around 25 per cent returns on equity after tax. With the economic environment in a much less favourable state, the big question is: ‘Has the industry put the good times to best use?’”
Apparently not. Thomson goes on: “Unfortunately, our research shows that not all wealth managers can claim to have fostered better relationships with their clients. Many high net worth individuals entrust other external advisers to manage their wealth managers; evidenced by a relative increase in execution-only services over discretionary mandates. This presents a key challenge to an industry where the most profitable client relationship is that of ‘trusted adviser’.”
Sebastian Cohen, financial services researcher and the author of the report, identifies several key areas that wealth managers need to address to win back the trust of their clients. These include:
• Ensuring that client relationship managers share privileged information with colleagues so that it is not lost if staff leave;
• Investing more in improving client understanding of what they offer and how it helps;
• Encouraging team work to improve client access to the banks’ broader financial expertise.
Not unexpectedly, none of the wealth managers we approached admitted that they had got it wrong or could do it better.
Among the stalwarts of private banking we spoke to were HSBC, Barclays, Bank of Scotland, Morgan Stanley and the RBS subsidiary, Adam & Co.
You might think that HSBC Private Bank was spot on, judging from the growth in its clients and assets under management. Joss Mitchell, director of HSBC Private Bank Scotland, said the UK arm had 2,679 private client accounts in 2007 compared with 2,580 in 2006 and 1,480 in 2005, while assets under management, £5.8 billion in 2007, were up from £4.25 billion in 2006 and £2.6 billion in 2005.
The story is similar at Barclays Wealth, which, Mark Little, regional director for Scotland and Northern Ireland says, is the leading UK wealth manager by client assets. He says: “Our total global client assets as at 31 December 2007 were £132.5 billion, a 14 per cent increase over 2006. In the first five months of 2008 we have signed up around 1,700 new clients representing a significant inflow of new assets.”
At Bank of Scotland Private Banking, Kevin McLeod, head of business development, says: “Our commitment to provide a flexible but commercial approach to each client’s differing requirements has enabled us to grow our business substantially over the past six months, despite the economic pressures.”
Michael Pagliari, the CA who spearheads Morgan Stanley’s Scottish efforts, says: “Over the past few years, we’ve seen an increase not only in the number of high and ultra-high net worth clients but also in the amount of assets they represent.”
If there is one factor that ought to distinguish a private bank, it must be personal service. HSBC’s Mitchell says: “Our ratio of clients to managers is lower than the majority of other private banks, at 30/40:1. Depending on the complexity of the clients they service, that number can drop further.”
Kevin Cassidy, head of Allied Irish Bank’s private banking arm in Glasgow says: “Each client has two dedicated private client managers providing financial advice and support for short, medium and long term financial planning. They manage internal processes and report progress personally to the customer. In addition, our private client managers have direct access to experienced client support team members such as independent financial advisers.”
But how do the private banks ensure clients get a personal service plus access to more specialist services? HSBC’s Mitchell stresses the role of relationship managers and says: “Mutual understanding, respect and, most importantly, trust, are the key ingredients between the client and the private banker. I also believe that every client should have a solicitor, accountant and private banker working as a team with one goal: to give the best advice available, locally and globally. Private banking provides a professional one-stop-shop approach where advice can be brought together.”
Dealing with the departure of a trusted client-facing employee can be crucial. David Cathie, managing director with Adam & Co, says it is important for the bank to be seen as bigger than any individual and that the client experiences no deterioration in service when a key employee leaves. The important thing, he says, is to work in teams: “Our latest client survey shows that 73 per cent of clients know the name of their relationship manager’s assistant.”
Pagliari at Morgan Stanley echoes this: “We engage with clients on a team basis, rather than as individuals. It delivers continuity, [and] ensures that the advice received by the client has been debated and tested internally.”
Jamie Younger, a partner with Edinburgh accountancy firm Chiene & Tait, says: “I very rarely hear a complaint against a private bank but I hear an awful lot against the mainstream lenders. In nearly all cases, tax impacts on wealth management strategy so it is vital that a tripartite team relationship exists between the private bank (who do not normally offer tax planning services), the tax adviser and the client.”
However, as the world changes so do client needs. There are probably three main forces at work – the growing globalisation of wealth, the desire to pass that wealth down tax- efficiently, and the credit crunch.
The wealth of an increasing number of people is bound up in assets and activities in more than one country. As the adverts tell us, HSBC claims to be “the world’s local bank” and Mitchell says its service “is linked to our 94 private banking offices around the world and offers clients one of the most globally comprehensive private banking capabilities anywhere.”
At Barclays, Little says: “We are capturing growth internationally through leveraging Barclays Capital connections in the Middle East and Far East, as well as developing wealth presence in European countries where Barclays has a retail network, such as Spain and Portugal.”
After a long bull market and seemingly endless economic growth, the potential of the credit crunch to create strongly diverging views between client and wealth manager poses a major challenge for the private banks.
According to the recently published 11th Annual World Wealth Report from Merrill Lynch, millionaires appear to be defying the credit crunch, falling property prices and a slowing world economy.
Nick Tucker, executive director at Merrill Lynch says: “This year’s report found that the number of high net worth individuals, and the amount of wealth they control, continued to increase in 2007. We expect the environment to remain challenging over the next six to 12 months but long term, the trends remain intact.”
Nevertheless, the credit crunch may encourage high-net-worth people to be more cautious and less receptive of the sort of advice offered in more bullish times.
The Bank of Scotland’s McLeod notes that a shifting economic climate has brought more complex and flexible demands from Private Banking clients. He says: “People are not investing in the same opportunities as before – they want to be more selective, put their funds or investments with people they can trust and build strong long-term relationships with.”
Chiene & Tait’s Younger says: “We deal with a lot of clients who own land, property and art – which tend to be long-term investments that clients hope will ride out the current cycle of depression. Stock market portfolios are being positioned defensively, even, in some cases, to the choice of which bank to hold cash with to limit credit risk.”
At HSBC, Mitchell says: “Wealthy individuals require as much wealth preservation as wealth creation. There will increasingly be a focus towards the medium and long term from an investment standpoint and less of a focus on short-term opportunities. Our clients tend to be asset growers and as such they need to be comprehensively advised as to the overall implications of specific opportunities that they are looking at.”
The credit crunch may well have a key a role in what Deloittes found to be a relative increase in execution-only services. As Little at Barclays puts it: “Market sophistication and volatility mean that clients have to have greater diversification and better asset allocation within their portfolios. Today’s clients expect far more breadth and depth from their wealth manager than was the case ten years ago.”
For Pagliari, innovation is the key: “We think the levels of sophistication among clients will continue to grow. The wealth managers who will succeed are those who can deliver not only sound investment advice, but access to innovative and market leading investment products.”
The fact is that the wealthy are no more prone to throw their money away than anyone else. On the contrary, they are probably less inclined to do so.
For the big private banks – the wealth managers arguably under the most pressure to deliver short-term performance – the real test may still be to come.
IAN HARPER is a freelance business journalist.s