FT SPECIAL REPORT

Private Banking
Tuesday May 7 2013
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High returns attract rivals in search of sanctuary

Daniel Schfer finds institutions from other parts of the industry are turning to the sector, though even here margins are being squeezed

Mr Abouhossein estimates the average return on equity in wealth management stands at a healthy 35 per cent over three years. At the same time, onerous regulation will push down returns in investment banking an area spoiled by stellar returns in the pre-crisis years to a mere fifth of that figure. This might help explain why, after years of sniffing at wealth management, former money-spinning investment bankers are pushing into this area of operation more forcefully. Universal banks are rediscovering wealth management at a time when other business units are under threat. Swiss bank UBS, the worlds most profitable wealth manager, became the prime example last year when it curbed its investment bank by giving up global ambitions in most of its fixed income trading. This was all in a move to strengthen its core private banking unit. Banks are lured not only by high

Inside
Strategies Wall Streets big names aim to woo affluent clients
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Competition increases The wealth industry is not a risk-free zone

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Global private financial wealth, valued at about $123tn in 2011, is expected to expand
returns but also by a steady client asset growth rate. Global private financial wealth put at some $122.8tn in 2011 by the Boston Consulting Group is expected to expand further. This expansion is mostly driven by emerging markets. Here client assets are expected to grow 5 per cent annually over the next three years. That said, not all is entirely rosy in wealth management. Even this most reliable of businesses is facing several headwinds, ranging from margin pressure to a political clampdown on offshore havens. Concerns about banks safety and stability, a shorter investment horizon and low interest rates have all impacted clients decision making, says Paul Patterson, deputy chairman of
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Technology The next generation of clients forces pace of change

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he business of storing and investing rich clients money remains a bright star in the banking industry firmament, especially at a time when other once-profitable parts of its universe such as mortgage lending and trading are looking decidedly bleak. Wealth management has been a boon for a sector that, in the past five years, has been shaken by numerous scandals, suffered increased pressure on its revenues and endured a regulatory crackdown on pay, leverage levels and culture. Banks that provide a wide range of services, the so-called universal banks, as well as pure-play investment banks, including Goldman Sachs and Morgan Stanley, and traditional private banks and asset managers are all seeking refuge in a business model

that promises revenue growth and steady earnings, as well as high returns with low risk. Kian Abouhossein, analyst at JPMorgan, wrote in a recent client note that the theme for 2013 within the banking universe is wealth management, which, he said, was in our view the most attractive and undervalued business compared to areas such as retail and corporate banking, investment banking and custody. Christopher Wheeler, his counterpart at Mediobanca, was equally enthralled when he called wealth management the fastest-growing segment of the financial services industry. Bankers and investors alike are enticed by the areas high returns at a time when profits in other businesses have come under enormous strain.

Emerging markets Questions hang over fate of eastern ambitions

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Consolidation Fragmented market offers huge opportunities for mergers

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Haven feels pressure to conform with global data sharing rules

Switzerland

James Shotter considers the Alpine nations response to global influences

For a long time the Swiss tradition of bank secrecy was a potent calling card for the countrys private banks, helping them to draw in money from all over the world. In recent years, however, it has become a millstone around their necks. Since the financial crisis, governments desperate for revenues have been cracking down aggressively on tax havens, and Switzerland is firmly in their sights. The Alpine nation initially sought to counter pressure from the EU to share data automatically about the offshore accounts of EU citizens by, instead, negotiating a series of bilateral treaties. These let private banks clients preserve their anonymity in exchange for paying a oneoff penalty charge and submitting to withholding taxes in future. While this approach led to agreements with the UK and Austria, it failed with Germany. The German parliament rejected a treaty with Switzerland last December after more than a year of to-ing and fro-ing. The pressure from across the Atlantic has been no less intense. The US authorities are investigating at least 10 Swiss banks for allegedly helping US citizens evade taxes. In January, the investigation claimed the scalp of Wegelin, Switzerlands oldest private bank, which was forced to close after pleading guilty to aiding tax evasion. A month later, Switzerland signed the foreign account tax compliance act, or Fatca, thus finally yielding to US demands that Swiss banks should automatically share information about offshore US clients with the tax authorities on the other side of the Atlantic. Perhaps the

biggest blow came in April, when Luxembourg and Austria, whose own opposition to automatic data exchange has hamstrung the EUs efforts to force Switzerland to share information, indicated that they were also reconsidering their stance. As soon as the EU reaches a common position on data sharing, Switzerland will come under extreme pressure to move in the same direction, says Christoph Schaerer, a tax expert at PwC in Zurich. In a sense, that is even more significant than Fatca, as the EU market is more important for Swiss banks than the US, Mr Schaerer adds. The final outcome of the concerted international pressure is clear, says Martin Brown, professor of banking at St Gallen university in Switzerland. Bilateral deals wont be the global solution for tax affairs. It will be automatic information exchange.

This revolution poses several problems for Switzerlands private banks. The first is outflows. Last autumn, Jrg Zeltner, head of UBSs wealth management division, said these could run into hundreds of billions for the SFr2.7tn ($2.9tn) Swiss offshore banking sector as a whole. Analysts expect the

Some banks are already altering their fee structures to remain profitable
process to continue for at least two more years. This dynamic is unlikely to pose too much of a problem for Switzerlands giant banks, UBS and Credit Suisse, says Teresa Nielsen, an analyst at Bank Vontobel. UBS and Credit Suisse

Closed doors: Wegelin pleaded guilty to helping US clients avoid paying taxes on $1.2bn of assets EPA

have roughly SFr1.6tn and SFr800bn of assets under management [respectively]. Even if they suffer outflows of SFr10bn-Fr20bn, it will not hurt them, she says. For Switzerlands large undergrowth of smaller private banks, the outflows are far more of problem, because they lack a global scale to replace the haemorrhaging money with inflows from faster growing markets. This problem is compounded by the higher compliance costs that a climate of greater transparency will demand. In its full-year results, Credit Suisse revealed that in 2012 new regulatory initiatives cost the bank an extra SFr49m compared with the year before. Such sums are loose change for a bank of Credit Suisses size. For smaller banks, they are not. Some private banks are already altering their fee structures to remain profitable in the face of such changes. The execution-only mandates that were once highly profitable for banks and were often a popular destination for untaxed money are likely to play a far smaller role in their revenue streams in the future. Instead, banks are trying to shepherd clients towards advisory mandates for which, as well as being charged a flat fee for basic services, clients pay more for extra services. Such mandates, says Ms Nielsen, are the future of Swiss private banking. However, the problem, says Prof Brown, is that not all of Switzerlands smaller banks possess the expertise to offer the services necessary to command extra fees. Those that cannot do so are likely to end up being bought by competitors, he predicts. Other observers are less optimistic. No one wants to buy these assets at the moment, because they dont know what they are getting, says one. It is more likely that small private banks that get into trouble will go bankrupt.

FINANCIAL TIMES TUESDAY MAY 7 2013

Private Banking

Wall Streets big names aim to woo affluent

Strategies Tracy Alloway looks at differing approaches of two brands to the market

n an office in downtown Dallas a mortgage specialist is reviewing loan applications, while in the leafy suburban town of Purchase, New York, a loan underwriter is processing a jumbo-sized mortgage. Neither of these employees work for Bank of America, Citigroup or any of the traditional big mortgage lenders. Instead, they are working for the private banks of Goldman Sachs and Morgan Stanley. The Wall Street names are best known for the investment banking and trading activities of their star bankers. But for the past four years they have been expanding two muchmore sedate businesses: wealth management and private banking. If you look at the capital usage, if

you look at the regulatory framework and the steady earnings, you can see why wealth management is in vogue, says Doug Ketterer, the head of Morgan Stanley Private Wealth Management, referring to the trend of Wall Street institutions to target wealth management and related businesses for profit growth. Theres an immense number of advantages to having wealth management, including that $130bn of [bank] deposits. The private banks collect deposits from the two companies wealth management clients while also extending loans to those same customers and, in some cases, to corporate clients. The earnings generated from managing clients wealth tend to be more

Doug Ketterer: You can see why wealth management is in vogue

reliable than income from trading, which is susceptible to big booms and busts. Deposits offer a stickier form of funding that can help see banks through times of crisis. While both have been developing their private banks and wealth management businesses, they are targeting vastly different income brackets. Goldmans private bank held about $46bn worth of deposits at the end of 2012. Morgan Stanley had $131bn. Goldman focuses on the extremely wealthy, unofficially those with a minimum of $10m in investible assets. Two-thirds of its 600 private wealth management financial advisers are based in the US. We only have an ultra-high net worth business, says Tucker York, global head of Goldmans private wealth management division. Morgan Stanley has sharpened its focus on the market since it agreed to buy retail brokerage Smith Barney from Citi in 2009. Now, Morgan Stanley has some 16,000 financial advisers, with 350 wealth management specialists dealing with the very rich. Weve made a strategic bet on wealth management at this firm, whereas if you look at some of the other banks, its more of a complementary business, says Mr Ketterer, who also runs field management for Morgan Stanleys thousands of nonprivate wealth management financial advisers. Goldman and Morgan Stanley can trace the roots of their current private banks to 2008, when they officially converted to bank holding companies. The move gave them access to the Federal Reserves

liquidity facilities but it came at the cost of increased regulation. Weve been lending money to private clients for decades through the margin process, says Mr York, referring to the practice of lending clients money against a percentage of their assets. We wanted to lend [on a non-margin basis] even before we became a Fed-regulated bank, he says. Goldman obtained an industrial loan corporation bank charter in 2004, years before the company converted to bank holding status. The reason for that was to grow our private wealth business. We didnt think what people need is another checking account. There are subtle benefits to having a private bank combined with a growing wealth management business. For example, Morgan Stanley has been emphatically promoting cross-selling, or the idea that bankers in the companys institutional securities business will be able to distribute various products to thousands of the mass affluent. Both of the companies have shifted much of their derivatives portfolios to the banking units. Using the bank subsidiaries, with their more stable funding and higher credit ratings, allows them to post less collateral with counterparties and make more money on derivatives trades. At its heart, lending money to wealthy customers is simply a potentially lucrative activity. Our clients, if theyre not doing lending here, theyre probably doing it somewhere else, says Mr Ketterer. Now we have a real private bank built for us with $130bn of deposits. Its a huge, huge growth area.

High returns attract rivals

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RBC Wealth Management. Tighter regulation and a global crackdown on tax evasion are hitting the sector hard. This is particularly the case in Switzerland, where more than 10 banks are under investigation by US authorities for allegedly helping its citizens evade tax. Earlier this year Wegelin, Switzerlands oldest bank, said it would close down after pleading guilty to setting up a tax evasion scheme for US clients. Its suggestion that its conduct was common in the Swiss banking industry sent shockwaves through the country. The tax crackdown and know your customer regulation, which forces banks to assess the origin of a clients wealth to avoid money laundering, have heaped additional compliance costs on lenders. One of the biggest problems, particularly for small banks, is to shoulder the huge costs associated with information technology to help them be compliant with consumer protection, know your customer and tax transparency rules. This becomes an even bigger problem in fast-growing emerging markets, where the nature of a clients wealth is often difficult to assess. The tougher line on tax has prompted European and US clients to return money from offshore havens, exacerbating a rift between western and eastern markets. The gulf is set to deepen further in the next few years as emerging economies create the new wealthy, driven by a rapid expansion of the middle classes in countries such as China, Hong Kong and Singapore, and in smaller markets including Vietnam and the Philippines. This means that a continued outflow of client assets from Europe is set to go hand in hand with growth in Asia and other emerging markets. Clients wishes regionally to diversify their counterparty risk adds to this trend. While a UK client would previously have had relationships with four domestic banks, he or she might now keep only one domestic account and choose three wealth managers in other jurisdictions. There is also a trend to diversify the asset

base itself much more decisively, both geographically and in terms of products. The greatest challenge to all wealth managers is the same as for other sectors: the dire economic situation, particularly in Europe. There is a great tendency to overemphasise the regulatory pressure, whereas the key issue really is the economics, says Philip Mallinckrodt, global head of private banking at Schroders, the asset manager. While returns on equity have held up well in wealth management compared with a sharp drop in other areas of banking, private banks have not quite escaped the continuous global economic uncertainty that has slowed down trading, caused persistent low interest rates and prompted clients to horde cash. Despite the growth seen from emerging markets, it is no wonder that revenues in the sector are

There is a great tendency to overemphasise the regulatory pressure

still almost 15 per cent below their 2007 peak. This lacklustre economic backdrop and ultra-low interest rates have pushed down margins and have made it ever more difficult for wealth managers to promise decent returns to clients. The drop in margins is exacerbated by the fact that fees in growth markets such as Asia, and those made from the fast-growing number of clients in the super-rich bracket, are generally lower. That could change quickly, should the waves of liquidity that have been pumped into the market by central banks in the past few years push up consumer price inflation and, in turn, interest rates. Mr Abouhossein likens the wealth management operations of global banks to a call option on such a scenario. In effect the banks are betting on hopes that equity trading volumes will rise, a better market performance will drive fees and higher interest rates will, ultimately, improve margins.

FINANCIAL TIMES TUESDAY MAY 7 2013

Private Banking

Entrants find the wealth industry is not a risk-free zone

Competition The area is more cyclical than many imagine, reports James Shotter
niversal banks never forgot wealth management, but rarely have they found it so appealing. The most striking example of this interest came last October, when UBS unveiled a radical plan to wind down risky parts of its investment bank and rebuild its strategy around its core wealth management arms. However, the Swiss group is by no means the only interested party. At the end of 2009, Barclays launched Project Gamma, an investment drive designed to boost client assets significantly by the end of this year. Deutsche Bank has also made concerted efforts to boost its private banking arm and, in November, Credit Suisse, already one of the worlds premier wealth managers, said its private banking division would use a bigger share of the banks capital in future. The attractions of this portion of the banking world are not hard to spot. It offers the prospect of growth, good returns, and has traditionally been far less volatile than the riskier activities pursued by investment banking divisions. And, because of tough capital requirements imposed by the Basel III rules, which the industry says make some investment banking activities uneconomic, it consumes relatively little capital, a consideration that featured in UBSs strategic overhaul. We needed to adapt our business model in order to improve returns, and to get out of areas in the investment bank where we were sub-scale, says Sergio Ermotti, chief executive. But we also had to factor in all the regulatory changes from Basel III, to subsidiarisation, to resolution regimes

Margins suffer as rich hoard their cash

Crisis fallout

Daniel Schfer finds managers are waiting for an interest rate boost
Wealth managers have fought an uphill struggle against an erosion of their previously stellar pre-tax margins ever since the financial crisis started in 2007. Over that period this gauge of how much revenue a private bank makes on assets has been under constant pressure. The reasons for this are many, and include a persistently low-interest rate environment, sluggish client activity and a shift in assets under management towards emerging markets. Margins have been under pressure since 2008 thanks to low interest rates and regulatory constraints. But deposits still remain attractive from a return on equity and funding perspective, says Paul Patterson, deputy chairman of RBC Wealth Management. The ultra-low interest rates, particularly in Europe and the US, have been one of the factors that have pushed down margins as invested assets earned lower returns. Another reason for the squeeze on margins is the at least temporary fall from grace of complex financial investments such as structured products, whose opaqueness used to go in tandem with their high margins. The drop in client activity, as the wealthy sat on their hands and preferred storing their riches in cash rather than daring to invest it during the economic and financial turmoil of the past few years, has compounded these woes.

which make it more attractive to focus on capital-light businesses, such as wealth management. A further attraction for universal banks, says Kinner Lakhani, an analyst at Citigroup, is that wealth management offers opportunities to collaborate with other business areas, such as investment banking. Very wealthy individuals are often entrepreneurs who own a substantial business, he says. The dream deal for a universal bank would be to help such a client crystallise the wealth via an initial public offering supported by the investment bank, followed by the private bank subsequently managing the wealth. Yet, despite such obvious attractions, wealth management is not a risk-free pastime for universal banks. For one thing, says Mr Lakhani, while it is still less volatile than investment banking, the business is more cyclical than many imagined before the financial crisis. He says: It is a market-related revenue business. When economic conditions are tough, client activity and managed assets fall, as the financial crisis has showed. He adds: And on top of this, the cost base in wealth management is less flexible, as variable compensation is lower than in investment banking. Wealth management is also not without its regulatory risks, especially when governments around the world are cracking down aggressively on tax evasion. No one knows this better than Switzerlands host of private banks, more than 10 of which are being

Flight to safety: the Swiss group is one of many interested in expansion in the sector

EPA

The sector has a lot going for it but you have to be able to stay out of trouble

investigated by US authorities for allegedly helping rich Americans dodge taxes. Wealth management has a lot going for it but you have to be able to stay out of trouble, says one senior private banker at a large global bank. This does not come cheap. The internal systems required to help banks ensure that the money they are managing comes from legitimate sources can cost millions to establish. But the cost of getting into trouble is higher still. In 2009, UBS paid $780m to US authorities after admitting helping US citizens evade taxes. Nor is the process of establishing a wealth management business easy, says Christopher Wheeler, an analyst at Mediobanca. The barriers to entry are enormous. It takes a very long time to build a brand and a client network, especially in Asia, where the growth is. Acquisitions are risky because there is a chance the financial advisers you have acquired will leave, taking their clients with them. Mr Ermotti takes a similar view. You need more than just a brand, you need the capability to serve this type of client. You need rock-solid capital, you need research and advice capabilities which we have invested a lot in and you need scale and global reach. As a result, he believes, newcomers will struggle to challenge banks that are already well entrenched in wealth management. We are not complacent about the competition, he says. But it is unlikely that many new competitors will be able to move into this market.

One senior wealth management executive estimates that clients on average currently hold almost 30 per cent of their assets in cash. We dont make any money with that, he says. Another tricky problem for wealth managers is that any new money is primarily flowing into their emerging markets business, where margins are much lower than in the US and Europe thanks to higher operating costs. Analysts say gross margins in Asia have sometimes halved when compared with pre-crisis years. Swiss bank UBS, for example, has reported gross margins on invested assets of 76 basis points in Asia in the past year, which

Asian clients are active traders, they like taking a few punts
Christopher Wheeler Mediobanca
compares with 89 bps in Europe. The scramble to win the super wealthy as clients acts as a further drag on margins. For UBS, the margin on extremely wealthy clients last year was 52 bps. At the same time, global banks cost structures have ballooned in recent years, in a trend that exacerbates the margin squeeze. Scorpio, the consultancy, says the cost-to-income ratios of banks wealth management arms, the inverse of their margins, have risen from 62.8 per cent to 80.6 per cent in Europe over the past five years, and from 66.6 per cent to 77.2 per cent in the US. However, there is hope

conditions for wealth management will improve. For one thing, there is the potential uplift from any future rise in equity trading volumes, which have stayed low throughout the postcrisis rally. We believe the current downturn in wealth management is very cyclical in nature, Kian Abouhossein, analyst at JPMorgan, said in a note to clients. Judged by the depressed trading levels, the growth potential should be large. In 2012, volumes traded on the S&P 500 were 55 per cent lower than five years earlier. Most analysts think that lower margins in Asia are a cyclical rather than a structural phenomenon. Once the economy picks up, says Christopher Wheeler, analyst at Mediobanca, profitability will follow suit. Asian clients are active traders, they like taking a few punts, he says. A first indication of that has already been visible in UBSs first-quarter results, where the Asian gross margin jumped to 89 bps, on a par with that in Europe. But the other potential boost to margins higher interest rates seems like a more distant hope. The US Federal Reserve has indicated its zero interest rate policy would continue for some time, and the mixture of stalling growth, record unemployment and damped inflation in the eurozone will probably prompt the European Central Bank to also keep interest rates low for a while to come. But the inevitable interest rate rise, when it does finally arrive, will act as a turbo-driven engine to the worlds wealth managers. We would have a significant revenue and margin uplift from an interest rate rise, RBCs Mr Patterson says.

Next generation of clients forces pace of IT change

Technology

Jennifer Thompson says better systems can help improve customer relations
Any retail high street bank chief will tell you that IT investment and development is critical in maintaining loyalty in a fast-changing market. For example, it allows customers to check balances on mobile phones before making a purchase. The picture in private banking, whose members compete on the strength of their brand and the personal services they provide, is more fragmented. A big chunk of their offering is in the white glove service, says Matthew Thomas, partner in investment management at KPMG, referring to the faceto-face advice offered by wealth managers that private banking customers know and trust, and typically work with for many years. However, thats not necessarily tracking what customers want. Doing nothing about this latest technological revolution is not an option. Where they once primarily catered to long-established old money clients, many private banks have started to note the number of Generation Y clients in their 20s and 30s among the customers they have attracted over the past couple of years.

These are young and digitally savvy individuals, some of them technology entrepreneurs. The new generation of private banking customers has grown in a different way, says Nicolas Debaig, head of strategy and business development at ABN Amro private banking. They have different expectations. The sector has mainly regarded technology as a cost and a support function, not as a means of competing. Such attitudes are changing. People are the mainstay but IT is now playing a more and more important role, adds Mr Thomas. Technology investment offers an opportunity for individual banks to shine in customer service as well as risk management. For a while, technology has been a big deal for private bankers and potentially a key differentiator, says Ralf Dreischmeier, global leader of the information technology practice at Boston Consulting Group. Better technology can assist wealth managers with risk and compliance by recording how they interact with clients and documenting agreements or discussions about risk appetite or investment exposure. Investing in platforms and software could help smaller banks scale up quickly if they add a significant number of clients. The costs of investment are typically in the range of at least tens of millions of

pounds or dollars, unproblematic sums for big private banks. Barclays, for instance, has dedicated about two-thirds of Project Gamma, a 350m investment programme in its wealth and investment management business, to IT. One innovation was the launch last year of voice recognition technology in its telephone banking services, a move aimed at personalising the service and reducing call times that have been lengthened by standard security checks. Were trying to use technology to get some of the

Insiders wryly note small banks are not burdened by unreliable legacy IT systems
awkward modern realities out of the way, says Matt Smallman, vice-president in charge of the client experience at Barclays. Meanwhile, ABN Amro has concentrated on developing technology around its core systems relating to customer relationship and portfolio management, developing an online tool that allows clients to see the exposure of their portfolio. Can smaller banks compete? Some insiders wryly note that at least they are not burdened by legacy IT

systems that can wreak havoc in the event of glitches. Many analysts regard outsourcing, or small groups sharing an IT platform with other businesses or alongside a bigger bank, as the only economically feasible route for such organisations. When it comes to efficiency in the back office, that is almost the only way they can compete, argues Mr Dreischmeier. Others suggest they could make their online offering stand out with distinctive apps, which cost thousands of pounds to develop rather than millions, and can be used to tailor the customers experience to their individual needs. One small business that has developed its own system is Weatherbys Bank, which grew out of a seventh-generation familyowned firm dedicated to horseracing services. It was granted a bank licence in 1994 and has had no trouble developing its own IT platform, thanks to its unusual heritage. This meant it had a pre-existing IT business to manage a database of the pedigree of foals born in the UK and Ireland. Even for those who currently find themselves ahead in the technology stakes, continuing innovation and investment are essential. You need to update, says Roger Weatherby, chief executive of the bank that bears his name. Theres always something to add to.

Contributors
Daniel Schfer Investment banking correspondent Paul J Davies Asia financial correspondent James Shotter Switzerland and Austria correspondent

Jennifer Thompson Retail banking correspondent Adam Jezard Commissioning editor Andy Mears Picture editor ivind Hovland Illustrator Steven Bird Design For advertising details, contact: Ceri Williams, on +44 (0)20 7775 6321, email: ceri.williams@ft.com, or your usual FT representative. All FT Reports are available on FT.com at ft.com/reports Follow us on Twitter at twitter.com/ftreports All editorial content in this supplement is produced by the FT. Our advertisers have no influence over, or prior sight of, articles or online material.

FINANCIAL TIMES TUESDAY MAY 7 2013

Private Banking

Questions hang over eastern dreams Search is on

Emerging markets Wealth in the region is being accumulated at a staggering rate, says Paul J Davies
sia became the focus of ambitious global banks in 2009 as they unleashed a wave of investment across the region. After the financial crisis in the west, it was their best hope for profits or growth of any kind. That commitment has come into question as head offices have begun to ask when all the investment and costs they have incurred will pay real dividends. In investment banking especially, where an early flood of large listings from China has entirely dried up, job cuts have been heavy and banks are struggling to find the business model that works best as regulations bite and regional markets fracture. Some in private banking may be facing the same kinds of questions after the heavy investment of recent years particularly in the costly poaching of relationship managers in the hope they will bring a fat roster of high rollers with them. The competitive landscape is changing a lot of the big banks are rethinking the model and everyone is looking again at the sustainability of the cost-income model, says Kaven Leung, chief executive for North Asia at Julius Baer, the Swiss private banking group. He adds: Those that have been throwing money at bringing people in to win these big clients either have to come up with some very smart products relevant to their clients otherwise taking a product-push oriented approach, which weve seen in the past, can ultimately take them further away from client trust or they have to rethink what they are doing. He says the industry will continue to grow in Asia, although consolidation will continue. Julius Baer has been a primary actor in that consolidation, paying up to SFr860m ($922m) to acquire the international wealth management business of Bank of America Merrill Lynch and taking over a chunk of Australian bank Macquaries business, too. Swiss rival Credit Suisse has been active and acquired the Japanese business of HSBC. The potential prize in Asia remains as bright as ever for private banks the economic growth in much of the

for rare beasts

Recruitment

region means wealth is being accumulated at a staggering rate with about 15 per cent growth a year in China alone, according to industry estimates. On top of this, most of the wealthy still do relatively little with their riches. Of the more than $14tn of private wealth in Asia outside of Japan, only about $3tn of that has found its way into private banks, say consultants at Oliver Wyman, a global management firm Meanwhile data provider WealthInsight has predicted Singapore will overtake Switzerland as the worlds

biggest private wealth centre by 2020. This is driven by money not just from China and the east, but from around the globe. In Asia, the wealth is often quite newly minted and even when it is not it has still mostly remained caught up in family businesses first and property second, leaving little for the banks to target as money to play with. By some estimates, more than a third of listed companies and above 50 per cent of market capitalisation in Asian stock exchanges are family controlled businesses. But changes

Hong Kong luxury: wealth in Asia is often newly minted AFP

are under way that will provide opportunities for banks. Bernard Rennell, chief executive of north Asia for HSBCs Private Bank, points to Hong Kong as an example of an increasingly complex wealth market. A lot of the citys rich people are getting older and so are becoming more concerned with preservation of wealth, not to mention business and family succession planning. It is also a matter of where the family money is. A decade ago, 95 per cent of a wealthy Hong Kong familys assets would have been in the former UK colony, he says. But clients have become increasingly international, owning properties in the US and London, for example, and having subsidiaries of their businesses in several different markets and financial assets that are distributed around the world. Hong Kong families have increasingly complex cross-border issues, not just in their businesses, but also in succession and tax issues, Mr Rennell says. Japan is starting to go the same way, he adds. Some of Japans richest families are now moving more money offshore. Its a handful, not a rush. Japan is becoming an opportunity. This is because wealthy people elsewhere are underinvested in the country after more than a decade of economic stagnation, and they are closely watching the ambitious attempts at reflation by the government of Shinzo Abe. Gary Dugan, chief investment officer for Asia and Middle East at Coutts in Singapore, says local investors have been largely absent from the countrys recent and strong stock market rally. While non-domestic investors have accelerated their buying, retail investors have accelerated their selling, Mr Dugan says. In a single week last month, retail investors sold Y650bn ($6.6bn) while foreigners bought a similar amount. A more important development, at least for the private banks, would be if the countrys wealthy began to move significantly more assets offshore. Within Japan, more money is starting to come offshore but, like everything in Japan, this will not happen overnight, says Julius Baers Mr Leung.

Job cuts in other sectors may benefit talent spotters, says Daniel Schfer
Poaching a large wealth management team from a smaller Asian competitor may have seemed like a real coup for one big universal bank. But within two years the team had disintegrated and most of its relationship managers had moved on, taking many of their clients with them. This tale underlines some of the problems in hiring and staff retention in a rare part of banking where there is still strong active recruitment. Finding the right people is difficult as the necessary skills, including strong interpersonal relationship building, knowledge of compliance and risk and useful extras including foreign languages, make such creatures rare beasts. With universal banks, investment banks, traditional private banks and asset managers looking to expand their wealth management businesses, banking is in the middle of a talent war. It is particularly prevalent in Asia, although even in Europe and the US banks are continuing to poach from each other. Europe has become a particular hotspot as those banks that are expanding are looking at a market where the largest institutions are in the middle of huge strategic shifts and restructurings. RBC Wealth Management is one of these fast-growing companies, having tripled its number of relationship managers in the past three years. It aims to increase staff numbers further within two years. We are recruiting mainly from European competitors

because many of them are retrenching, have reputational issues or have had a change in strategic leadership, says Paul Patterson, deputy chairman of RBC Wealth Management. We look at it as [an] opportunity. We are recruiting a lot of relationship managers who have become disenchanted with their current employer. Private banks, meanwhile, have turned to other means. Barclays wealth management unit has a three-year scheme that aims to retrain accountants and engineers. The talent pool is simply too shallow, one senior banker says. Poaching investment bankers has become a strong trend. Deleveraging, cuts in pay and economic strains on business models have prompted disillusioned investment bankers to look at areas they would not have considered before. This model has not always been successful. One private bank said it had made many such hires for a while but then discovered the discrepancy in culture and skills made it difficult to integrate the incomers. In Asia, the problem for private banks is to retain staff in a competitive market where careers are often built on short-term moves. Andrea Isler, head of human resources at Coutts International, the private bank owned by Royal Bank of Scotland, says the profile of a relationship manager has changed in the past decade. A successful candidate now needs to have the right attitudes towards compliance and risk, as well as being a team player. There is also a move to recruit back-office staff from investment banks in areas such as IT and human resources, who used to be paid more but who now find the trading areas they supported are not as lucrative as they once were.

Fragmented business offers huge potential for mergers

Consolidation

Banks around the world are seeking to strengthen their core activities, reports Daniel Schfer
A recent flurry of deals has spurred hopes that the private banking sector is on the verge of a renewed consolidation wave. In Europe, Credit Suisse this year pounced on Morgan Stanleys regional business. In a deal worth an estimated $150m, it bought the US banks European and Middle Eastern wealth management operations, with $13bn in assets under management, and doubled the size of its UK business in the process. Also in the UK, asset manager Schroders bought Cazenove Capital in a 424m all-cash deal that marked the biggest takeover in its history. In so doing it has absorbed a venerable City of London institution. While Morgan Stanley has taken leave of its undersized European unit, in its home market it is in the process of buying control of Smith Barney, the US retail brokerage, from Citigroup. It plans to take over the remaining 35 per cent of the business by the end of the year. It follows another US bank, Bank of America Merrill Lynch, last year selling its international wealth management unit to Swiss private bank Julius Baer. While there are many reasons for these deals, they have a common thread: banks around the world are seeking to strengthen their core businesses while disposing of non-core or undersized units. Universal banks seek to bolster steady-income businesses as they reduce their dependency on volatile trading revenues that are facing stiffer regulatory capital requirements. Large banks have singled out wealth management as

$bn

Global wealth management revenues

120 100 80 60 40 20 0 2004 05 06 07 08 09 10 11 12 13* 14* 15* * Estimate

Source: JPMorgan Cazenove

a revenue-generating area. They are lured by its high returns and its steady client asset growth rate as the worlds private financial wealth, valued in 2011 at $122.8tn by the Boston Consulting Group, is expected to expand further. At the same time, smaller banks struggle to cope with regulation that is pushing up compliance and information technology costs. A senior financial institutions advisory banker says: You will see more spin-offs from larger banks and smaller banks merging because of increasing costs for regulatory and IT investments. You cant be a small Maand-Pa bank to finance that. You need a certain scale. One example of such regulation is in the UK, where rules in the Retail Distribution Review ban financial advisers from accepting commissions from product providers. These rules, which came into force in January, are prompting a flurry of deals as hundreds of small independent financial advisers merge or sell out. In theory, there is enormous potential for mergers and acquisitions in a highly fragmented sector. Its top 20 participants worldwide only hold about 50 per cent of assets under management and no single bank has more than a tenth of the market. The combination of

margin compression and investment in IT means there is pressure to consolidate, says Philip Mallinckrodt, global head of private banking at Schroders. There will always be competitors who capitulate. The crackdown on tax avoidance could trigger an additional round of mergers, particularly between small Swiss banks struggling to find a business model in the changing regulatory environment. We believe increased regulation, tax treaties and

Private banks which lack the scale to expand in onshore locations will struggle
limitations on the offshore banking model would lead to further pressure on especially the smaller private banks, Kian Abouhossein, analyst at JPMorgan, said in a note to clients. Private banks, which lack scale or resources to expand in onshore locations, would continue to struggle in the new regulatory environment in our view. As a result we believe the trend of consolidation in the wealth management industry is likely to continue, with some business models becoming unprofitable, the note adds.

While many small institutions are likely to be absorbed into larger entities over the course of the next few years, the worlds biggest banks are more likely to be sellers of smaller units rather than looking to embark on large-scale takeovers or mergers. This is because regulators are wary of game-changing mergers and takeovers because of the continuing and fervent debate about banks that are too big to fail and worries about the stability of the financial system. Shareholders are unlikely to be benevolent towards dilutive and costly transactions that distract banks from their supposed task of handing back money to investors after years of hoarding cash to comply with tighter capital rules. Morgan Stanleys move to take over Smith Barney is a rare exception as the investment bank is diversifying while concentrating most of its wealth management efforts on its vast US home market. At the same time, there are a number of new entities emerging and entering private banking through acquisitions, namely sovereign wealth and pension funds. One prime example is Aabar Investments, the Abu Dhabi-based investment company, which bought AIG Private Bank from its parent company American International Group a few years ago for SFr307m. Another is the deal by Qatars al-Thani royal family, through their Precision Capital investment group, to buy the majority of bailed-out Franco-Belgian Dexias private banking arm for 730m. Bankers say wealth management is appealing to these long-term investors as it is a low-risk, high-return business that depends on decades-long relationships. There will, therefore, be more deals in the pipeline. What looks like a trickle, however, is unlikely to become a torrent in the immediate future.