After the stampede by clients to the
safety of banks perceived to be most sound, what private bankers
are starting to call a ‘flight to advice’ is going to be the next
real test of who will flourish in much more demanding markets in
the wake of the credit crisis.

With the disappearance of the easy returns of the past five years,
those firms which can offer blue-chip advice to clients, ranging
from investment portfolio management through to complex personal
affairs, will prove the winners, it is contended.

Sebastian Dovey, managing partner of the influential Scorpio
Partnership consultancy said: “The conventional wisdom is that the
flight to strong safe haven banks represents a magic formula for
success.

“I am convinced, however, that the real determinant [of success] is
going to be a flight to advice,” he added. “This is going to be a
market where low or indifferent-quality private banking services
just won’t make the cut.”

Warwick Newbury, chairman of SG Hambros Bank and a veteran of
international private banking agreed.

He said: “The unchanging fundamentals of wealth management, really
sound advice to clients, are going to come into their own
again.”

Other bankers believe the first real test for advisory skills will
come as clients start to move out of safe havens like cash,
government bonds and gold in order to rebuild wealth if confidence
spreads that the global banking bailouts are really working.

“Potentially, there will be a lot of money waiting to see where
best to go,” one London-based private banker said. “There is no
real clarity yet of where to invest it, particularly as many
clients will still be nervous over a high exposure to
equities.”

Provisional data shows just how the net worth of the rich has been
decimated this year, even before the near meltdown in September and
October. Boston Consulting Group believes that this year will see
global wealth measured by assets under management relapse to about
$100 trillion, after reaching nearly $110 trillion at the end of
2007.

HNW numbers tumble

Researchers MDRC calculated that the number of HNW individuals in
the EU fell by 5.2 percent in the first half of 2008 to 2.6 million
(see chart below).

The UK, Ireland, France, Spain and Italy, countries which are
seeing sliding real estate to various degrees, are among the worst
affected, it found.

Among the many challenges facing wealth players after the crisis
will be a propensity for clients, shocked at the decimation of
their portfolios, to switch advisers regardless of previously good
advice.

This is already being detected by a new US study. The overwhelming
majority of wealthy investors in the US plan to take money away
from their current adviser, a survey by consultants Prince &
Associates suggests.

Some 81 percent of investors with $1 million or more plan to
switch, and an even larger number — 86 percent — plan to tell other
investors to avoid their adviser.

Prince found that client irritation is especially high at the
‘brand’ firms — large brokerages and banks. Fully 90 percent of
clients of brand firms plan to take money away from their adviser
and 70 percent plan to leave the adviser altogether. That compares
with only 29 percent for the boutique, local advisory firms.

Client retention crucial

Faced with this, an all-out campaign by wealth players on client
retention is going to prove vital, particularly among those firms
where there have been doubts over their ability to survive the
crisis, as client loyalty wanes.

Significantly, the historical average of about three different
advisory firms for a higher net worth individual could climb to
many as five or more, in addition to wealth-related legal and
accountancy advice, say bankers.

This demand for advisory diversification would also match the
recent drive by investors to broaden the range of financial
institutions in which they deposit funds to guard against the
collapse of any one bank.

Some even look for the emergence of a ‘manager of managers’ – a key
adviser who would coordinate a client’s overall investment
relationships among a number of institutions – in a reworking of
the old central ‘trusted adviser’ model.

These trends could favour smaller banks and investment boutiques
with an investment speciality as clients look for performance as
doubts about the whole financial system start to ease.

Michael Maslinski, at consultancy Maslinski & Co in the UK,
believes that there could be a shift of power towards independent
financial advisors, particularly those where senior staff have a
substantial stake in the business and where there is continuity of
personnel.

Boston Consulting’s Victor Aerni, global leader for wealth
management cautions that small wealth players should be mindful
that powerhouse firms, although deeply scarred by the crisis, “will
eventually regroup and step up their efforts to bolster their
brands and reclaim their market share”.

But what will most be preoccupying senior wealth industry
managements in coming months is the threat of haemorrhaging
profitability amid declining revenues after clients’ huge shift
towards cash and government bonds.

In a flight to advice, firms will all have to work harder to
demonstrate “they create added value for clients”, said
Aerni.

Senior bankers expect to see the crisis marking the end, at least
for the foreseeable future, of excessive top management pressure on
advisers to push internally-generated investments in order to
maximise commissions – in favour of some new business models based
around a full advisory approach.

For a number of firms, generating the skill-sets to provide
top-level portfolio and estate-planning advice will prove too
demanding, say bankers. And with clients resisting higher fees,
these firms may find upgrading the quality of their advisers just
too expensive.

Private banking shake-out

This argues that a shake-out in private banking, resulting in the
demise of marginal players and those over-reliant on banking
secrecy, will be well underway in 2009.

“There will be a consolidation of the private banking industry”
said SG Private Banking Singapore and South Asia head Pierre Baer,
quoted by Reuters.

“There will be a redistribution of players, a concentration of
players and a restructuring of players.”

Still, the turmoil promises as many opportunities as it poses
challenges, bankers agreed.

One could be the disappearance of as many as half of the estimated
10,000 hedge funds operating in the $2.2 trillion alternative
assets industry, amid investor disenchantment over returns.

Switzerland’s Union Bancaire Privee has been cutting its exposure
to hedge funds, according to Christophe Bernard, its head of asset
management. If hedge funds, designed to produce absolute returns,
are down by about 10 percent by year-end, then their basic function
“will have died”, Bernard contended.

This should give the private banking industry a huge opportunity to
step in and offer a range of other investment opportunities.

Hedge funds lost an average of 4.7 percent in September, the
biggest monthly decline since August 1998, according to data
compiled by trackers Hedge Fund Research. That brought their fall
to 9.4 percent over the year so far.