Private banks come to terms with vastly changed status

Another is a shift towards safer asset classes, with an emphasis on preserving capital rather than making money, although as the year comes to an end there is more of a sense of clients opportunistically moving cash back into selected stock markets, particularly the US. Additionally, there is a move towards managed money, and away from trading – and certainly away from leverage, which for the moment is something of a swear-word in private client portfolios.

Clients continue to expect a broad suite of services from their private bankers – estate planning, tax, will, and increasingly a certain amount of corporate advisory, particularly for family office clients – and in this regard private banks do still have an advantage. Commercial banks can set up premium divisions to target clients but it takes time to offer advice across the full range of their needs beyond the more obvious investment requirements.

Some private banks are re-evaluating their client mix and are looking afresh at their minimum entry levels. Some groups are moving to higher minimums, in the $10-20 million range, to try to counteract falling margins. This is partly a reaction to the influx of commercial banks and other operators into the $1-10 million bracket, bringing down potential fees in that area. At the same time, though, the net wealth of many clients has plunged in the last 12 months – particularly those who stayed invested in the stock market – so many clients have, be default, fallen below floors that might previously have kept them out of providers’ services. That means the decision for private banks on client selection and retention is a complex one.

There are also likely impacts on the fund managers who seek to distribute through private banking channels. Some believe that there is a move towards more open architecture taking place, partly because it’s what clients want, and partly because fluctuations among top managers mean that concentration risk (using the same provider not only as an advisor and distributor but a manufacturer too) is becoming a more acute concern for clients.

Private banks vary in the way they evaluate mutual funds for distribution. Some make the decision at head office in Geneva or New York or Frankfurt and approve funds globally; others consider the decision at a local or regional level, and some do both. Some invite suggestions from fund managers, others instead approach fund managers with what they want them to build (and again, some do both). But as a general rule, products that are low-risk and preserve capital are in favour today, much more so than the esoteric and illiquid asset classes that had started to become fashionable by 2007. Fund managers shouldn’t expect the credit crunch to bring any reduction in the amount of their fee that gets lopped off by the private banks: 40 to 60% is still typical, depending on the assets raised among other things.

Still, whatever the ructions of the last year, there’s little question that wealth management in Asia will be a sensible business to be in for the long run, both in terms of the private banks themselves and the fund managers who target them. Capgemini – with what is now likely to be somewhat dated data – logged 2.8 million high net worth individuals (those with over US$1 million in financial assets) in Asia in 2007, up 8.7% on the previous year; between them they had $9.5 trillion under management, up 12.5%. There were also over 20,000 ultra high-net-worths – those with over $30 million in assets. It will become clear in the next 12 months just how many of these were cash rich or leveraged rich, but there will still be a considerable client pool. And, while Asian stock markets have been more badly hit than those in the developing world, economic growth in key economies like China and India remains very strong. Additionally, Asia’s entrepreneurial tendencies lend themselves well to the need for private banking advice.

So, the opportunity is still there, and still alluring. But with declining trust, unpredictable markets and increasing competition, business has rarely been tougher for private banks.