A PBI roundtable on business models held in London brought together some established and up-and-coming members of the wealth management community to talk about the future of their industry. This edited passage highlights the main exchanges on open architecture, advice and structured products.
William Cain, editor, PBI: The one-bank model has been endlessly criticised in the industry. Lending to entrepreneurs in this environment is considered particularly risky. Is it wise to steer clear of this type of business until conditions improve?
Matthew Spencer, head of intermediaries, Credit Suisse, UK private bank: I hope you would consider Credit Suisse to be one of the businesses that got the one-bank model right. It was a process started by our former CEO Oswald Grübel, who has recently taken over at UBS. For it to work, you really need support and buy-in from the very top of the business.
That has to filter down culturally. If a one-bank model doesn’t work it’s because divisions and departments don’t trust each other enough to refer their business to one another.
At Credit Suisse the one-bank model is ingrained in the culture. We don’t feel you can advise very wealthy clients and entrepreneurs without having a one-bank model and the ability to refer your client and find the best solutions to their issues and requirements.
We feel the success of that strategy differentiates us and that is a view held by our clients and those who deal with us.
John Evans, editor-at-large, PBI: Can open architecture survive the downturn, with the extreme pressure on banks to maintain margins and revenues?
Andrew Fisher, CEO, Towry Law: I don’t think any bank that manages money in-house with its own fund managers is open architecture – it is half pregnant, which is kind of tricky.
As margins get squeezed, they will say we are better at the things we weren’t good at and we will do more of it. I think it is a busted model – either you are open architecture, you don’t manage money in-house, or you are not. If you look at our assets under management last year, net of the market, they improved 20 percent because clients were happy with the model.
Rupert Phelps, director of family office services, BNY Mellon: Looking at the universal banking model, and either managing money in-house or not, presumably if you are a client of bank with a one-firm, one-bank model, that has wealth management, but also an asset management arm, presumably what you are saying is that they couldn’t have even 1 percent of their clients in those products… That is a very purist view.
David Scott, CEO, Vestra: I feel there is this slight conflict between the advisory side and manufacturing. With independent financial advisers (IFAs) in the UK, a lot of the smaller businesses are really struggling on the investment side and they’re looking to outsource that more and more.
A lot of them are having a reality check, and asking themselves what they do – do they just advise their clients very well in a traditional IFA role in terms of structuring and planning and actually just pass out the investment management? We are certainly seeing a lot of that among the smaller IFAs.
Evans: Vestra is rather larger than a boutique, but is this a marketplace undergoing such structural change that businesses like family offices, boutiques and more holistic hedge fund managers have a good chance to pick up business as clients review their relationships?
Scott: I think there is. A lot of boutiques that set up are seen as in opposition with the big global banks, but I don’t see it like that.
I think they have got great expertise and great capability, and I feel my role as the independent person is to say that maybe UBS and its one-bank model is very good – but if my client has a debt requirement I should be able to decide whether its them, Credit Suisse, Investec or Deutsche, for example, and I think independents have a strong place in the market place. But it is very much about working with other people because we are not a bank, we can’t lend money. The reaction from lots of banks is they are very willing and ready to do it.
Cain: So you’re saying you see boutique, advisory firms offering advice on the one hand and global banks acting as product manufacturers on the other?
Scott: I do see it like that. Of course there will still be clients who want to have a relationship with a big, global firm, but there are pressures.
David Poole, UK head, Citi Private Bank: I don’t think there is a right or wrong model, it depends on the integrity of the individual and the relationship they have with the client and the way they operate within the institution in which they’re employed.
If advisers can’t deliver solutions to clients for whatever reason, conflicts of interest etc, then things need to change.
But as the long as the firm you’re working with works in the best interests of the client, whether it’s a global bank or a boutique, I think it comes down to the integrity of the relationship with the client concerned and that the service provider, i.e. you, the private banker, sits on the same side of the table as the client.
We all know that in the long run, if the firm you’re with gives you the wrong kind of advice – end of relationship. You can only do that for so long before your business model fails.
Scott: There is enough space for everyone in the marketplace. Some people want to fly first class, some want to fly business class and others want economy. It doesn’t necessarily relate to how much money you’ve got – I know very wealthy people who would never fly first or business class, but that’s their choice.
Poole: That’s what makes a market – clients can choose what they want.
Fisher: Relying on integrity and decency… I think you are right, but one of the problems working for a large bank, where you are non-core, or your profits are the rounding error of the losses in the corporate bank, is that sometimes the bank puts pressure on advisers and that’s certainly the case at Merrill Lynch, UBS, Credit Suisse, Citigroup – in fact every bank I have ever come across. Actually, it isn’t a very good model, but it’s not a terribly bad model. It is really a question of whether or not the client can discern between the two.
Scott: That is where transparency comes into it, because people did not understand the costs involved in structured products and that there was clearly a short term revenue gain with up to 4 percent revenue up front instead of 0.75 percent over the next five years. That is the issue which all businesses face to a certain extent, but there is a huge pressure.
Warwick Newbury, chairman, SG Hambros Bank Limited: I would refute the idea of all global banks acting as product manufacturers. SG Private Banking is not part of the SG investment bank, and perhaps that’s an important differentiator.
We use the investment bank and Société Générale’s well known expertise in derivatives to help us. In other words, we go to them with a problem and ask them for a solution but – as we use open architecture – we don’t deal in a structured product without checking the price around the market place.
Even if SG has come to us with the solution, if we feel that any part of that structured product is not completely transparent or the pricing is a bit high we will go to another bank. Probably about one third we source from SG and two thirds externally, so it is a very real open architecture although we are part of a global bank.
The other thing that has received some criticism is leverage, but you cannot say that leverage is always bad and that you always have to make margin calls at the wrong end of the market. That is only if one has been selling or encouraging leverage at the wrong time.
Most clients who wanted leverage were deleveraged well before ‘Armageddon’ arrived so we have had no credit problems. I believe that as a bank we are able to offer clients all services in-house. SG Hambros Bank Limited has been extremely profitable in the last 12 months. We had a record 2008 and we’re having a record 2009 to date. Acquisitions we’ve made over the last couple of years have helped, boosting AuMs. The margins on the treasury side and banking business are very healthy.”
Dr Markas Gilmartin, managing financial consultant of AWD Chase de Vere’s new Advanced Wealth Management consultancy: We talked about leverage. Warwick was absolutely right, it is a useful mechanism under the right conditions and when well managed.
However, we have known for a long time that there are natural limits to the level of debts one can hold.
You only have to go back to James Tobin’s Nobel-prize winning work of the mid-1980s – probably the best piece of financial research ever – to see there is an optimal debt level over the extended time horizon. His analysis suggested that the optimal structure was 12 to 1.
And having leverage of 30-40 to one is an outrage, akin to dumping lead in the streets. At the height of this sensation, that’s what was going on at some of the top investment banks.
Cain: Reputation is at the centre of the private banking business model, and HSBC has preserved theirs better than most. What has been the key to managing that, bearing in mind HSBC has been hit by its share of problems?
Tony Joyce, head of marketing, HSBC Private Bank: I think the point on reputation is about being consistent. We relaunched the brand with a new campaign earlier this year, but actually we are not saying anything fundamentally different to what we’ve been saying for many, many years and to me that is the only really convincing form of brand marketing in this sector.
I would have been horrified if we had had to change direction and talk about doing things differently because of the crisis. We certainly haven’t done that and I would strongly resist anyone from HSBC Private Bank talking about commitment to clients at any stage.
I would take that as a given, and I have been surprised by how many people have taken that tone over the past few months and felt the need to go public about commitment.
From left: Andrew Fisher, Towry Law, Matthew Spencer, Credit Suisse, Dr Markas Gilmartin, AWD Chase de Vere, Tony Joyce, HSBC Private Bank