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January 21, 2013updated 05 Jun 2017 11:24am

Educating the wealthy

Seen by many as a political and economic hybrid that left Soviet-style central planning behind for a free-market economy, Poland is now an exciting market, albeit with some challenges. Elsa Buchanan analyses the Polish wealth sector, which despite a lack of sophistication, is young, active and adventurous

By Elsa Buchanan

Seen by many as a political and economic hybrid that left Soviet-style central planning behind for a free-market economy, Poland is now an exciting market, albeit with some challenges. Elsa Buchanan analyses the Polish wealth sector, which despite a lack of sophistication, is young, active and adventurous.

For centuries, Poles have filled candle-lit city streets on 29 November to have their fortunes foretold, following ancient traditions surrounding the night of "Andrzejki" (Saint Andrew’s Eve).

As their country struggled and shifted from Soviet-style socialism to a liberalized economy, Poles’ fortunes have changed significantly – mostly for the best, but not without teething troubles.

"The market has really changed a lot," says Mariusz Pawlak, partner at Lorek Pawlak i Wspólnicy (Lorek Pawlak family office), whose multi-family office manages the wealth of 21 families with assets totalling PLN500m (around $162.15m)

After the collapse of the Soviet Union and its large state-owned and controlled industrial firms, Polish entrepreneurs in the newly independent Republic of Poland started their businesses "from nothing," says Pawlak.

In 1991, the Warsaw Stock Exchange started its operations. Small businesses were set up throughout the decade and the first companies were introduced to the public market.

Youthful industry

The private banking industry is equally youthful. Bank Handlowy -formerly named Commercial Bank, and now operating under Citibank- was the forerunner in the private banking services sector, when it first offered its services in 1993.

It was followed by BRE Bank in 1995 and Bank Pekao in 1997, with foreign banks such as Raiffenssen bank, Deutsche Bank, BNP Paribas and Fortis bank following suit soon after. UBS was the first Swiss bank to tap into the Polish wealth market, opening a representative office in Poland in 2003.

Since 2000, those small-scale investors have quadrupled their assets, says Pawlak.

UBS investment bank and wealth management’s managing director and country head for Poland, Michal Dobak, explains that today, family owned companies contribute almost 50% to Polish gross domestic product (GDP) employing more than half of the working population in Poland.

The bulk of the country’s high net worth individuals’ (HNWI) wealth ($139bn by 2011 year-end) came primarily from entrepreneurship, mainly in retail, fashion and luxury (15%), fast-moving consumer goods (FMCG, 11.7%) and manufacturing (11.5%), according to global wealth consultancy WealthInsight.

Today, Pawlak adds, top managers from foreign companies or large Polish companies who started out 10-15 years ago also add to the country’s HNW population.

Rising, numbers in conflict

While industry members know where the wealth comes from, there is a lack of consensus about how many Polish HNWIs there really are, with wealth managers agreeing that good data is difficult to collect.

Pawlak says he has found wealth numbers ranging from 77,000 people holding over $1m to around 8,000 people holding over $10m in Poland. The head of private banking division at UniCredit subsidiary Bank Pekao, Micha? Waleczak, estimates there are between 30,000 and 50,000 Poles with more than PLN1m ($318,000) in financial assets excluding real estate.

Global consultancy WealthInsight has a more conservative view. Its research, Poland 2012 Wealth Book: The rising star of Europe, suggests there were just over 28,400 HNWIs (who own more than $1m), and 487 ultra high net worth individuals (UHNWIs, who own more than $30m) in the Baltic state in 2012.

It said Polish HNWI numbers grew by almost 12% on a year-on-year basis in 2012, fuelled by a 24% rise in the local stock market. However this rise came after an 8.2% decline between 2007 and 2012. This drop was influenced by a 45% decline in the local equity market, a 27% drop in the local residential property market and a 26% depreciation of the local currency against the US dollar over the same period.

Before the global financial crisis, consultancy firm KPMG said that the country’s HNWI population increased by nearly a third between 2006 and 2008.

Varying thresholds

UBS’s Dobak says the decline by the sharp increase in initial public offerings (IPOs) and merger and acquisition (M&A) transactions "negatively affected" the amount of new cash available for private banking services.

According to Waleczak, nearly every bank in Poland has different thresholds to allocate clients’ banking services, which makes it difficult to determine real wealth numbers.

Part of the Italian UniCredit Group, Bank Pekao has total assets under management of PLN7.9bn (or $2.53bn) and services clients with, and over, PLN1m (around US$318,000), while other banks offer their services to clients with much lower or higher thresholds (PLN200,000 or around $65,000, and PLN4.15m or $1.3m, respectively).

Disparities in thresholds are typical in Poland, explained Professor Joanna Pietrzak from Polish market research and analysis consultancy Qualifact, in her 2006 report Guidelines for the development of private banking services in Poland.

"Financial conditions imposed to Polish customers in private banking services are much milder than in the West," she says.

Waleczak explains that the ‘loose’ entry criteria of private banks may also be due to the fact that most wealthy Poles are still sitting on mortgages and loans they took out to create their wealth, and with illiquid wealth, "the figure of real millionaires goes down drastically", he says.

School of hard knocks

Polish wealth managers have not had it easy of late. Grappling with clients’ post-crisis risk aversion, Poles’ love of basic deposit investments, and lack of investor sophistication are common complaints.

"What differentiates the Polish market from other European ones," says Waleczak, contrary to many other markets, "[is that] we do not have a lot of inherited wealth".

As Waleczak explains, the origins of wealth are "split 80-20", that is, 80% is first-generation wealth, while the rest is inherited. These numbers, however loose, are shared by family office partner Pawlak.

By the end of 2012, most of the wealth came from companies’ revenue or dividends but for a minority, "the rare ones" says Pawlak, the recent sale of shares or companies also added value to HNWIs’ wealth.

The years 2008 and 2009 are mentioned by many wealth managers as the trigger to a sharp U-turn in the way private banking was viewed in the country, says Waleczak.

"Investors are much more risk-averse than people in other markets; they are looking for products that somehow guarantee the capital’s investor a less risky return," he says.

Indeed, with the wealth market "still in its infancy", when the financial crisis hit in 2008, Poles lost considerable money when mutual funds went "horribly down" because HNWIs were not properly informed about the risk incorporated with investments in these financial products, says Pawlak.

"It damaged the banks’ reputations and the risk appetites of Polish clients," says Pawlak, and so, many HNWIs changed their investment strategies.

"There was much more pressure on financial institutions in the Polish market to sell their products, so it gave us a chance to differentiate the family office from private banking services," says Pawlak, "but the crisis, in our perspective, is a very good reason to convince clients to turn to a family office."

First family office

Pawlak and his partner Rafa? Lorek started, what they claim, was the first family office in Poland in June 2010, and say Polish HNWIs are generally not sufficiently "financially educated".

Even though the top 10-15 wealthy Poles had in-house family offices, up to 2010 most of the HNWIs would not recognise the family office concept as such.

"Instead, they would associate it with private banking. It was the same to them [so] we had to explain the idea that a family office is not another financial seller."

Pawlak continues: "When people are afraid of the financial outcome and the lack of prediction for the future…[they are more ready to turn to independent advisers]…to take care of their assets and show them to right strategies."

Wies?aw Oles is president of the Board of Forum TFI – a new family office which is due to open in March after recently receiving Polish Financial Supervisory Authority approval.

"We think that timing for launching this product right now is perfect. Firstly, financial institutions acting mainly from Switzerland having established presence in Poland lost many clients and are currently more focused on their internal problems," says Oles.

Pawlak also confirms that the neighbouring Czech and Hungarian markets follow the same pattern: "Wealthy entrepreneurs see they cannot make money on the financial markets and coordinate financial activities, so they are in need of a family office to teach them and help them manage their assets."

Made in Poland – "living in the zloty zone"

Most wealth managers concur that Poland performed "better than expected" through the recent financial crisis, and although the state did not experience a drop in GDP during 2008 and 2009 (the country’s GDP actually rose by 18.6% between 2007 and 2012), economic growth declined from 5.1% in 2008 to 1.6% in 2009, according to WealthInsight.

"Over the last five years, Poland became a ‘Green Island’ in the European turmoil," says Dobak, while Waleczak adds that this overall situation with the Polish economy is irrespective of the fact that the country is very much dependent on the European market, especially on Germany.

Indeed, due to its geographical position, size, market position and exposure to Central and Eastern Europe (CEE) markets, Polish private companies are targeted by top international corporations, says Dobak.

He adds that the situation has led to a sharp increase in the number of acquisitions, "which together with the consolidation process in several sectors creates a significant number of liquidity events and wealthy individuals."

And as Waleczak explains, Poland’s competitiveness -through its interest rates and currency- is a direct cause for the country’s "differences".

"People can easily deposit money in bank accounts and have a return higher than the inflation and therefore generate profit in the 4 to 5% range, depending on the bank," Waleczak says.

The Polish stay local

And with such interest rates within the country, Bank Pekao’s head of private banking says it is not surprising that "a majority of people that have money in Poland, live in Poland, earn in Poland and spend in Poland."

UBS’s Dobak says that the large share of assets deposited in Polish banks creates a situation where assets have a limited diversification in asset classes, geography and currencies.

And, with local clients faced with services and products developed predominantly for retail and mass customers, UBS’ country head for Poland says there are very little tailor made solutions for individuals.

Waleczak says: "Here in Poland, there are only a few people who use the currency investments," because, he explains, the number of Poles who think globally (those whom he describes as running international businesses) and perceive their assets through their valuation in euro or dollar is very limited.

"They do not approach the European or global markets for the sake of a return. Basically they are living in a zloty zone."But Poland’s "centrification" is not all bad news, and family office partner Pawlak says it is positive for his sector. "For us the biggest advantage we offer is the Polish language, and the knowledge of culture of these clients," he says.

Out with the old

For many Polish wealth managers, the future after 2013 with its receding global tail risks and flattening national interest rates means a push towards portfolio diversification.

Pawlak suggests asset holders invest "as closely as they can to their actual businesses and avoid complicated products"; while Waleczak expects the appetite for investments in mutual funds to slowly grow.

Waleczak explains that with a changing culture of trading investment products, the extreme cases of selling investment products to uneducated investors will diminish.

"In 2005-2006 people were selling mutual funds like health products, calling clients up, telling them this exciting new equity fund had been generating 30% returns, and asking ‘Why don’t you buy it?’ It was like that here."

He concurs there was no education, no information on the risks, or any guarantee that investors would see those returns, "Basically, it was a sell-and-run situation."

Now, Poland is under MIFID, the EU’s Markets in Financial Instruments Directive, which provides harmonised regulation for investment services across the 30 member states of the European Economic Area.

Contrary to past years, referred to as uncivilised by Waleczak, every institution is obliged to run sales suitability checks providing a larger protection of the clients while monitoring and reviewing them. Other measures to limit commodity price speculation could also be set by 2014.

"If we are selling mutual funds," he says, "we are legally obliged to present all the available information, most of all, about the risks involved with the performance of the fund, and to check advancements of the product are fully correlated with the knowledge of the client."

"The situation that used to occur in the past, where people would sell extraordinarily complicated structures or 20-year products to retired people without any kind of economic background, is gone for good," he claims.

Has private banking suffered from the "sell-and-run" attitude? "Not really", Waleczak says, but Polish customers are now more aware of the importance of the position and the stability of business partners, confirms Dobak.

UBS’s country head acknowledges the significant improvement in the quality of Polish private banking in the last 10 years. "Most of the wealth that is available today is ‘clean’ and properly taxed with visible origin. Poland practically became a developed market in this period reaching high, western standards," he says.

Wealth transfer mentality shifts

And, along with private banking standardisation, Pawlak confirms a change in the way HNWIs view wealth transfer to the next generation.

"Along with the passing time, the structure of 80-20 originators of the wealth and people who have inherited is changing," he says.Polish HNWIs, both current and past, are now bequeathing their fortunes and assets to "sons and daughters, who might not have the same knowledge in running the business".

The second generation are often educated at top European and US schools, says Dobak, and they are "well prepared to take the lead".

Waleczak sees an opportunity. "Today we have to introduce the service of wealth managers to these people, who are benefitting from the assets that were generated by the parents in the past," he adds.

UBS’s Dobak also recognises that founders of business are becoming more aware of the importance of succession planning.

"The topic which for many years was unknown, due to lack of wealth, is now seen as a key element in many private firms," he says.

The country head for Poland explains that in the future, "with an educational process, better understanding of possible solutions, and better cooperation with international banks – we are expecting assets to be even more widely distributed abroad."

"The bigger the diversification, the better"

In terms of investments, Waleczak sees asset holders with a greater risk appetite, because the younger generation is willing to take more risks, but in a controlled way.

Pawlak says he is optimistic about Poland’s wealth growth, and is advising clients not to focus on only one kind of asset, but abide by "the bigger the diversification, the better" motto.

In 2013, he will advise clients to look at exchange-traded funds (ETFs), "while using the family office as a partner who shows [clients] that to increase the security of an allocation, they can also buy assets outside of Poland."

This prospect is shared by UBS’s Dobak, who says that the competition, which is now often between local banks, "will have a greater international aspect and private banking clients will be looking for world class services," outside of Polish borders.

Pawlak recommends local investors be aware of international markets such as South America, "where there is power for people to grow in their economies", and Asia, (excluding Japan) with India, Malaysia, Singapore and China topping the list, but he emits some reserve for the latter, "because it is not transparent".

The family office head also lists Great Britain and Norway, but says he would avoid allocating assets in other countries in Europe such as France.

"We are also helping clients not to be too emotional about buying gold, as they are generally scared of investing in the precious metal, as they consider it does not have a fundamental value," adds Pawlak.

Finally, the family office partner says he will also advise clients to follow the return to equity trend and look at HFT (high-frequency trading, or algorithmic funds) which was left untapped, but strongly warns to stay clear of investing in fixed income.

Poland’s success might not have been foreseen on St Andrew’s eve before 1989, but as more wealthy Poles increase their financial sophistication, wealth managers have plenty of work to get on with.

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