Author: Wealth_Careers | Total views: 195 Comments: 0
Word Count: 1224 Date: Wed, 10 Dec 2008 9:45 AM

How Private Banks Can Withstand Recession

The industry today bears little resemblance to the one that weathered the previous recession 20 years ago. The products, the banking institutions, the locations, tax domiciles and even the perception of wealth have changed beyond all recognition. The wealth industry has more scale - and is potentially more robust, Graham Harvey, a senior associate at industry consultants, Scorpio Partnership, told WealthBriefing. Asset management solutions are more diversified than 20 years ago, he said.

Scorpio believes that the firms that will last relatively well through this recession will be those that offer fees, independent of product, for advice creating what it calls a healthy barrier between the two. However, as the proportion of firms currently offering fees for ongoing advice as a core of their proposition are such a small proportion of the market, this would require a truly colossal shift, said Mr Harvey.

The issue of public perceptions of wealth is very important. If the recession is deep and prolonged, there may well be a social and political backlash against the wealthy. Wealth managers will need new advisory solutions that take into account the fact that the offshore market has also changed beyond recognition since the last major recession, Catherine Tillotson, a partner at Scorpio, added.

Michael Maslinski, another prominent consultant to the wealth management industry, believes that the industry has become over reliant upon on the sale of high margin investment products to the detriment of basic traditional private banking. Private banks should think about refocusing on the banking aspect of private banking, Mr Maslinski said.

Phil McIlwraith group commercial director, SG Hambros private banking arm, agrees with that analysis. Being a bank is often seen as the less interesting side of being a wealth manager, but taking money on deposit, lending and providing other treasury services, including foreign exchange, brings you closer still to the client and other aspects of their needs, which is one reason why weve persisted with the model, said Mr McIIwraith.

The investment banking model is finished and many big names that have focused on private banking aligned to their investment banking model will fall by the wayside and others will re-emerge in different guises, said Nader Goodarzi, head of wealth management at Ansbacher.

Specialisation has become key as private clients have moved their assets from one firm to another, he said.

Niche players and mid-tier private banks such as EFG and Julius Baer will do well along with other similar pure play private banks and attract private client assets, Mr Goodarzi said. He also sees a growing role for family offices that manage multiple relationships on behalf of increasing numbers of wealthy individuals who do not want all their eggs in one basket.

Some firms and consultants predict that those firms with an unlimited liability partnership structure are more likely to withstand a recession. C Hoare & Co, the UKs oldest private bank founded in 1672, has remained independent where many of its peers have sold out to larger institutions, for example.

Our unlimited liability structure means that our partners stand to lose more than any client so there is an alignment of interests, said chief executive, Alexander Hoare. We are not answerable to external shareholders, so we are not pressed to meet any short-term profit objectives. We have chosen to have no products to sell anyway, he said.

Swiss-based Pictet & Cie, which is owned and managed by seven general partners who are personally liable for the bank's commitments, said in a recent announcement that this provides it with the freedom to pursue a long-term strategy, focused on developing stable relationships with clients, as opposed to following fads in pursuit of short-term profit maximisation.

There is speculation that recession will mark further fragmentation in the wealth management industry and that this increased competition will impact fees.

I can honestly see the investment management world changing completely and what recent events have shown is that no institution is sacrosanct. Assets will continue to dissipate and regional banks will pick up assets, Ansbachers Mr Goodarzi told WealthBriefing.

Clients are likely to see this as an opportunity to drive down their asset management fees. If firms are able to position advisory fee alternatives as a healthy alternative to pure product fees they may be able to defend margins added Scorpios Ms Tillotson.

And, according to Mr Maslinski, profits are likely to largely go out of the window short-term for those firms building a business asset for the future.

Tearing up targets needs to be a high level management decision, Mr Maslinski said. The firms that weather this recession most successfully will be those that tear up profit targets and focus on building the business. It takes 5, 10 even 15 years to build and reap the rewards of a loyal client base. Those firms that run around squeezing more money out of clients to meet targets will find that someone else benefits when the upturn comes, he said.

SG Hambros Mr McIlwraith acknowledges that fees are likely to come down in a recession due to assets under management falling in line with markets, but believes that there are other ways of meeting client needs such as extending credit, financial planning and structuring.

Every business has to deliver a return to stakeholders, but the benefit of a diversified business model is that we have other ways of keeping overall revenues in a straighter line, he said.

On the whole, experts are positive about the outlook for the wealth management industry. Mr Maslinski observes that the majority of firms are not cutting back in private banking, seeing it as an important discipline for the future.

Scorpio also believes that private banks are, on the whole, in a good position to weather the recession as to some extent, private clients are the only ones with any money at the moment. Those with cash will be looking for large deals on distressed assets and almost everything is distressed at the moment which puts private banks in an interesting position, said Mr Harvey.

There is some evidence to suggest that private clients are making substantial acquisitions in very select opportunities and this may generate M&A activity and lead firms to participate in increased co-investing activity.

While there will inevitably be fewer liquidity events, Mr Harvey believes that some private banks have a truly historic opportunity whereby they can facilitate the growth of their clients' businesses by lending to them. They can go back to being institutions that grow with their clients, he said. As much of the rest of the financial markets deleverage this is an opportunity for a select group of private banks with means to lend to separate themselves from the wider market.

Ansbachers Mr Goodarzi is also confident. I am hugely optimistic for the private banking sector. It is not leveraged and whereas investment banking is all about the one off deal, private banks do not rely on capital to create a revenue stream.

Those firms that are prepared to adapt to meet changing client needs in a recessionary environment look set to best withstand the storm.