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February 11, 2014updated 05 Jun 2017 11:21am

Exclusive: Boutique firms snap up ‘orphan’ clients

Private banking is undergoing a radical transformation in the wake of mass regulation, forcing some large players to retrench and offering smaller to medium-sized players and canny private equity firms a slice of the private banking pie.

By PBI Editorial

Private banking is undergoing a radical transformation in the wake of mass regulation, forcing some large players to retrench and offering smaller to medium-sized players and canny private equity firms a slice of the private banking pie.

The advent of strict regulation has forced a number of large players to re-consider their commitment to private banking and, in some cases scale back or bow out altogether. Merrill Lynch sold its international wealth management business to Swiss bank Julius Baer in 2012, and last year it emerged that Credit Suisse would scale back its private banking operations in as many as 50 countries. Most recently, Barclays made around 100 private bankers redundant as part of a wider strategy to scale back its wealth business by about 130 countries to just 70 by the end of 2016.

Market participants believe there are opportunities for alternative players, including boutique private banks, private equity firms and entrepreneurial online platforms, to pick up ‘orphan’ clients from these players, as well as new clients. Despite ongoing retrenchment in private banking, it is estimated by consultancy firm Oliver Wyman that personal financial assets will almost double over the next ten years to reach $394 trillion by 2022, a growth rate of 6.7% per annum.

The driver of this industry shake up is, unsurprisingly, regulation. The onslaught of a plethora of regulation, including the UK’s Retail Distribution Review, the Foreign Account Tax Compliance Act (FATCA) and the European Union’s Markets in Financial Instruments Directive has forced some players to scale back their ambitions in private banking, and triggered a wave of consolidation.

The effect is more keenly felt in certain markets, such as Switzerland where the pressure for consolidation continues to rise, according to a 2013 report by consultancy firm KPMG. It estimates a decline in the number of private banks of around 25 – 30% by 2016, due to regulatory and political challenges.

Swiss banks in particular have been affected by the introduction of FATCA, which will force non-US financial firms to collect and send information on their US clients’ accounts to the US authorities. The regulation will come into force in July – any firm that refuses to comply will be forced to withhold a third of its US client income.Ajay Rawal, managing director at financial industry advisory service firm Alvarez & Marsal, said that the pressure is mostly felt in Western Europe where a number of private banks have experienced outflows.

"There is a huge shift in terms of regulation and tax scrutiny, and at the same time margins in the business have come under pressure, not least because of the low interest rate environment," he said.

An army of orphan clients

Large banks including Barclays are expected to shift focus to their wealthiest customers in order to trim costs and improve profitability. Last year, Credit Suisse bought Morgan Stanley’s private wealth management business in Europe, the Middle East and Africa, which includes about 60 client managers that serve the ultra wealthy.

But a growing army of orphan clients at the lower end of the wealth scale represents an opportunity for boutique banks to pick up new clients and assets. Duncan Lawrie Private Bank recently told Private Banker International that the bank is attracting clients with liquid assets of £250,000 plus, and sees future opportunity to pick up clients in the £500,000 – £1 million wealth range.

"Now that the larger banks are focusing on ultra-high net worth individuals it is an underserviced space, so we see great opportunity there," he said.

Meanwhile, Societe Generale Private Banking Hambros is another boutique bank that has decided now is the right time to build out its business. The UK private bank announced last month that it has hired 16 new client relationship managers, with a further 12 managers and five investment and support staff to be recruited this year.

The bank has also reorganized its London-based Russian team to focus more closely on Russia and the Commonwealth Independent States, said Christophe Billard, group commercial director at SGPB Hambros.

"We are focusing on our core private banking services for clients with £1 – 50 million of assets. We are not rushing to the ultra high net worth segment, this is not necessarily where SGPB Hambros is well known for its presence."

The bank has benefited from the deluge of redundancies at larger competitors.

Billard said: "Last year, there have been changes at some of our competitors and a realignment of strategies, which led to downsizing. That gave us an opportunity in terms of hiring."

Family-owned private bank Weatherbys is another smaller firm that has also taken advantage of downsizing at larger competitors to pick up talent. Duncan Gourley joined the bank towards the end of last year from Barclays Wealth, to build out the bank’s growing base in Scotland. The bank started life in 1770 offering services in racing banking, but now caters to those with net assets of at least £3 million or an annual income exceeding £300,000.

A report published last year by market research group Ledbury Research found that the retrenchment at larger private banks was pushing clients to "more traditional, family-owned wealth managers" that can offer a more bespoke service.

The report concluded that client satisfaction among smaller financial advisers was approximately 80 percent, almost double than at larger international providers.

Private equity money pours in

But it is not just boutique banks that are hot on the heels of orphan clients. Private equity firms such as Permira Advisers are also eyeing up the private banking and wealth management space.

Stefan Jaecklin, head of the wealth and asset management practice for Europe, the Middle East and Africa at Oliver Wyman, said that falling prices of wealth management institutions is attractive private equity players.

"Large banks considering acquisitions are very concerned about the liability of non-declared cross border money…which could lead to reputational problems. Private equity firms do not have the same reputational issue as private banks," he said.

Permira is currently in talks to acquire Deutsche Bank’s loss-making private banking business, Liverpool-based Tilney Investment Management, which caters to those at the lower end of the wealth bracket, known as the ‘mass affluent’.

Permira most recently bought UK wealth manager Bestinvest which manages around £5bn of assets, and said in a statement that the wealth management sector remains very fragmented with a number of subscale firms with under £3bn of assets.

Philip Muelder, partner at Permira said that there is a huge opportunity for firms like Bestinvest to go after ‘orphan’ clients.

"I estimate there is £150 billion of assets with orphan clients who have been thrown out the door by existing providers or have just decided to leave because they weren’t looked after."

Permira is exploring "half a dozen" potential acquisitions, and intends to acquire one wealth management business per year over the next five years, said Muelder. The private equity firm is eyeing up a range of options, including standalone businesses for sale and teams of wealth managers that are "looking for new homes."

"We do not think that firms with between £1 – 3 billion of assets are sustainable. Many incumbent participants have decided that this sector is no longer for them and are looking for new homes for clients and assets," he said.

The key to success for boutique banks and other small to medium-sized players lies in offering the mass affluent a suitable online product, say market participants.

Indeed, SGPB Hambros bank is looking to tap into mass affluent customers in the £500,000 – £1million wealth bracket, and is building a new electronic platform as part of ‘Project Linkup’. The platform, which will build out electronic banking and investment solutions for customers, is expected to be completed in 2016, and is part of the bank’s five-year IT plan to upgrade core business systems and online risk control tools.

Rob Hetherington, senior vice president at consultancy firm Capgemini said that the challenge for private banks is the high cost of the service model that includes expensive advisers and private bankers.

"New direct, execution-only propositions eliminate altogether the need for private bankers or advisers to service clients and [allows] them to use a self-service model," he said.

But despite the lucrative opportunities to link up ‘orphan’ clients with execution-only platforms, small and medium-sized firms still face a number of obstacles.

Compliance costs have increased for private banks both large and small, as regulators insist banks ‘know their customer’, said Jaecklin.

He said: "The required retrenchment for smaller to mid-sized banks has been tougher to execute. In principal, it is more difficult for them to adapt than for larger banks.

"But if a small sized bank really focuses on a small set of cross-border countries then I do think they have an opportunity."

Duncan Lawrie is one such bank that is focusing on a specific set of goals, one of which includes providing services to Indian high net worth individuals that have a footprint in the UK.

Unlike their larger competitors in the boom years, boutique banks are taking it one step at a time to gradually expand but still retain the exclusivity that comes with being boutique.

Farah Khalique

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