And he was surprised by the response from
Alfredo Setubal, director and vice-president at Brazil’s largest
domestic private banking franchise.

“He told me, number one, you need to have
best-in-class systems, processes and controls,” Souza told Private
Banker International.

“Number two, focus on the people you need to
attract, and you need to retain the best people in the industry.
And number three, develop a good relationship with clients and
nurture a good relationship with regulators.

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“So it was very insightful for me, coming from
an organisation where we were focused on P&L [profit and loss],
short-term results.

“I asked him ‘What about P&L?’ How would
he classify the importance of P&L? And his answer to me was
simple. He told me obviously that P&L was extremely important,
but said he did not know any single example in the long term of a
sustainable company that did not have these three elements.”

Itaú-Unibanco is majority owned by two
families, the Moreira Salles family, which had been in charge of
Unibanco, and the Setubal family, which founded Itaú.

“We know a lot of examples of companies that
are very successful in terms of delivering results in the short
term but are not sustainable in the long term,” said Souza.

“So this for me is a very good illustration of
what I call the family-owned versus the corporation-led model. At
the end of the day they [the families] are managing their wealth,
they are not managing their budget or their P&L for the
year.

“I think in this business we need to try to
have alignment of incentives – incentives for the bankers,
incentives for the bank and incentives for the clients.”

Itaú-Unibanco, which became the biggest
private banking business in the southern hemisphere after the
merger of the two banks in March, has been rapidly expanding its
business.

A source told PBI in June it was looking to
acquire a $30 billion book of client assets outside Brazil by the
end of 2009. The source said the strategy would involve making a
series of smaller deals in markets including Mexico, Chile and
Columbia.

The bank has a 40 percent market share of
client assets under management in Brazil and is focusing its
expansion by gaining clients outside its domestic market.

In March, PBI reported Itaú-Unibanco was
awaiting an all clear from the Swiss authorities to set up an
office in Zurich, Switzerland. It would be a 100 percent offshore
business, allowing Latin American clients to book assets in
Switzerland and give them the ability to take advantage of Swiss
investment opportunities.

It has yet to receive the green light for the
venture, but expects to establish a 30-person team there soon.

Souza said the current economic climate was
challenging, even in quickly growing markets like Brazil, but that
it presented an opportunity for private banking models to be
revised and improved.

“The angle I wanted to highlight is I believe
that, despite the challenging era we are facing, I think I prefer
the concept to see this as a glass that is half full,” he said.

“Why I am saying this? I think it is a
tremendous opportunity for us to basically reveal, to adjust, and
eventually to build a new and sustainable business model for our
industry.”

Souza said he had experienced the financial
crisis from two different angles as an employee of an established
wealth management player in UBS, and an emerging business,
Itaú-Unibanco.

“I am not trying to say one is better than the
other,” he said.

“In reality my purpose here is to show that
each player has tremendous advantages and we cannot forget that,
and also that each player has lessons to learn from the other type
of player.

“Established players, obviously not all of
them, but for some of them their brand was probably the main asset
they had for many years.

“The UBS name was a tremendous door-opener –
everybody wanted to talk with the top players in the market. Now
they have their brand question, their brand has been degraded.
Emerging players now have a unique opportunity to penetrate this
market.”

Conflicts of interests are seen to be an issue
for the bigger banks, which manufacture a lot of product in house.
While many claim to be open architecture – a business model where
advisers are free to choose best-in-class products from outside the
bank as well as inside – there is a general consensus most are only
paying lip service to the concept.

Souza said emerging players, like
Itaú-Unibanco, tended to have a more limited product range and
would rely more on outsourcing products, which was closer to the
open architecture approach.

He said Itaú-Unibanco kept its product
offering focused because the bank wanted to perform adequate due
diligence on the products they offer – something which is difficult
to achieve using a supermarket-style approach to offering
funds.

“In an emerging player the offering is much
more focused, and it is focused because the ability, the capacity
that an emerging player has to basically provide all types of
products and services is limited,” said Souza.

“Emerging players rely a lot on open
architecture. This is the easiest and the quickest way for them to
be competitive in the market.

Because of the scale of their businesses, the
world’s largest private banks have an advantage in spreading their
technology investments over a larger asset base, Souza said. He
mentioned Credit Suisse as having particularly impressive capacity
in this area.

IT platforms remain a work in progress for
many emerging players, and it is more difficult to segment clients
because of this. Souza said banks like his former employer, UBS,
could segment by client size, geography, lifecycle or even
lifestyle, and had the front office technology to support the
relationship manager.

At the same time, this provides challenges,
because it can mean decisions and advice was formulated a few
layers of contact away from the client. He said one of the benefits
he found at Itaú-Unibanco is that the senior management is closer
to the front office – and therefore the clients – at all stages of
acquisition, maintenance and retention.

Personnel tended to be more motivated at
smaller operations he added, because remuneration and particularly
bonuses were more aligned to an individual’s performance.

“At the established players, they have a
tremendous talent pool, however the level of motivation and loyalty
has been severely affected,” he said.

“The discretionary compensation law has been
questioned basically… they end up asking, ‘Why should I pay for
somebody else’s mistakes that happened in a different area, in a
different region of the world? Why should that impact on my
bonus?’”

Souza said this, along with a loss of
management credibility at some institutions, had made relationship
managers more likely to move around, allowing new businesses a
chance to acquire better people than normal.

“Emerging players have a unique opportunity to
attract a greater talent pool,” said Souza. “They have the
opportunity to implement a compensation model that aligns the
interests of the bank and employee much more predictably.”

Souza said Itaú-Unibanco was focusing on five
areas in its private banking business:

• Brand

While the Itaú-Unibanco brand is new
and not especially well recognised outside of its core domestic
market, it is focusing on developing its international business and
is already among the top 15 banks by market capitalisation
globally.

The bank’s history in its domestic market and
reputation helped it attract net new money of 23 percent in 2008,
with assets under management improving 15.1 percent. Its net new
money figures put it ahead of market leaders like Bank Sarasin, at
19.2 percent; EFG International, at 13.4 percent; and Credit
Suisse’s Asia-Pacific division, at 12.2 percent (see PBI 251).

• Client-centric
strategy

More than 50 percent of private
clients rely more on their own research and knowledge than their
relationship manager’s (RM), according to PricewaterhouseCoopers
research. Souza said this reflected a lack of trust in RMs.

He said one of the key ways for institutions
to build that trust was in the frequency of contact with clients.
Itaú-Unibanco was looking at a more team-based approach and away
from banker-centric relationships because it creates a “more
institutional, visible and consistent experience”.

• Compensation

Souza said the bank was introducing
a compensation structure which had a greater percentage linkage to
longer term goals. In particular, Itaú-Unibanco is moving from a
revenue to a return on assets target.

“We believe the compensation has to be
win-win,” he said. “This is what we call internally as
yield-to-client and yield-to-bank. Yield-to-bank is basically
return on assets, yield-to-client is the investment
performance.

“We are measuring the performance of every
single client, every single banker, and we are comparing every
client that belongs to the same risk profile among different banks.
We want to understand why a banker with clients that have the same
risk profiles can deliver better results when compared with his
peers.

“We believe in a predictable compensation
model that is transparent and linked to performance; performance of
the bank and performance of the client. It has to be long-term
driven and long-term payout.”

• Regulatory
environment

The impacts of changing regulatory
pressure have not yet been fully felt by private banks.

Over 100 tax information agreements have been
signed by different jurisdictions over the course of 2009 and there
will be a greater need for institutions to have a good local
knowledge of the markets they operate in.

For example, in Latin America, Argentina has
17 percent of its wealth held onshore compared to Brazil with 50
percent, demonstrating that even neighbouring countries require
very different approaches.

• Allocation to
non-traditional jurisdictions

Souza said there was an increasing
willingness for clients to allocate assets to emerging regions like
Latin America, and for Brazilian clients to move more capital to
other countries in the region and also Asia.

“Brazilians today when they are investing
offshore, they have 5, 10 percent of their assets in Mexico or in
Chile,” said Souza.

“I see a tremendous opportunity actually for
the combination of Asia and Latin America. Latin American investors
really want to be a part of what is happening in Asia and I believe
the opposite is true.

“I believe many Asian investors would like to
invest in Latin America but they don’t know how, they don’t know
how to do that. I see a tremendous opportunity here to combine two
institutions with expertise in each one of the jurisdictions.”