dramatically since Private Banker International made its first
appearance in November 1987. Ian Orton*, editor in
chief of online service www.thewealthnet.com, was an early editor
of PBI. Here, he takes a look back over the eventful past two
decades.
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JK Galbraith in The Age of Uncertainty, published in 1977, wrote:
“Of all the classes, the rich are the most noticed and the least
studied.” The same sentiment could have applied just as well to the
financial institutions that served the rich.
For the fact was that although a myriad of banks, stockbrokers,
private client investment management firms and trust companies
existed to serve the needs of the rich in 1977, and had done for a
number of years, they hardly constituted part of the financial
mainstream. As a consequence, they tended to be almost completely
ignored by the financial media.
Nonetheless, this started to change, especially as far as the
emergence of private banking as a core cog of the financial
services system was concerned. The two big oil price hikes during
the 1970s precipitated a huge transfer of wealth from oil consuming
countries to oil producing countries. And institutions with big
private banking arms, especially the big Swiss triumvirate of
Credit Suisse and the then Swiss Bank Corporation (SBC) and Union
Bank of Switzerland, played a significant role in this
process.
Bull run
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By GlobalDataThe advent of more market-oriented economic policies, which
provided the catalyst for a wave of liberalisation and
deregulation, coupled with tough anti-inflationary macro-economic
policies, especially in the Anglo-Saxon economies, ushered in a
much more benign environment for economic growth generally, and
entrepreneurship in particular. In addition, during 1982 global
stock markets embarked on what would turn out to be one of the
longest bull runs ever recorded.
All this helped underpin a flowering in private banking, both in
Europe and in North America, during the 1980s. Demographic factors,
and in particular the realisation that a number of markets were set
to experience a huge inter-generational transfer of wealth,
provided further impetus.
Still, private banking, or the provision of investment and other
financial services for the rich, remained very peripheral to the
changes taking place elsewhere with the financial services sector.
At first glance the business of private banking appeared to be
relatively unaffected by the vortex of change then affecting
financial markets as the combination of deregulation and
liberalisation and increased competition ushered in a wave of
innovations. But change was afoot, as an increasing number of
financial services professionals started to become aware of the
possibilities of the wealth sector.
The launch of Private Banker International (PBI) in November 1987
reflected this changing environment. New launches, even in the
media section, are fraught with risk. But the decision was taken
that the private banking sector had developed to the point at which
it could be served by a specialist publication with the prospect of
a profit for the publisher.
Nonetheless, its appearance was hardly propitious, coming less than
a month after the great stock market crash of 1987. Cynics could
have pointed out at the time that the launch of PBI should have
signalled the end of the private banking boomlet of the 1980s. And
there certainly was a whiff of the onset of a financial Armageddon
in the days approaching its launch. But subsequent events have
proved the wisdom of the decision to launch a specialist
publication. Both private banking – and PBI – have grown and
prospered.
Private banking is now very much part of the financial mainstream.
Most aspirational banking groups around the world now have private
banking or wealth management divisions that compete with a growing
range of other institutions with backgrounds in stockbroking,
investment management, insurance and trust companies. In turn,
these are catered to by a plethora of service providers such as
accountants, tax planners, lawyers, global custodians and financial
IT providers.
According to some experts, the global private banking sector may
already dwarf institutional fund management in terms of assets
under management, revenues and profits.
The metrics have certainly grown very large. The Boston Consulting
Group (BCG), one of an increasing number of management
consultancies that cover the sector, calculates that personal
financial wealth amounted to just under $100 trillion at the end of
2006, of which affluent and rich investors accounted for around 86
percent of the total.
Apply an annual management fee of around 50 basis points and this
amounts to annual revenues – in theory at least – of around $500
billion. Moreover, potential nuclear wars, terrorist attacks and
the end of economic life as we know it notwithstanding, the sector
looks set for fast rates of growth in the future.
Despite this growth and development, there are a number of
parallels between November 1987 and November 2007. The most obvious
is the onset of another crisis within the global financial system,
caused by a bout of exuberant issuance of mortgage-backed
securities linked to the US subprime sector by big investment
banks. This will almost certainly have an impact on the future rate
and direction of the private banking sector.
Then there is the nature of the subject matter covered by PBI. Over
the years this has changed out of all recognition and now includes
topics and concepts that had never been heard of in 1987, such as
private equity and online account aggregation, or were known to
only the cognoscenti, such as hedge funds, which were undergoing
their own flowering.
Affluent clients
Some topics remain omnipresent. The first is the nature of private
banking. In other words, what is private banking? The second topic
– which PBI embodied in its masthead from its inception – is ‘how
to find and keep the affluent customer’.
The fact is that private banks are not very good at finding – or
keeping – clients. Marketing and client acquisition are still
Achilles heels at many firms and more work needs to be done in this
respect. But the market has grown to such an extent over the past
20 years that few firms have probably faced a new client
drought.
Definitional questions about the nature of private banking provided
a godsend to PBI editors in the early days, not least because of a
dearth of genuine news items to report. The problem was that far
too many institutions active in the sector took the view that
private banking really was private – and that prohibited any
conversation with the media about anything. Attempting to gather
sufficient news, comment or features about the private banking
sector, much less provide insights about ‘how to find and keep the
affluent customer’, to fill a 16-page newsletter was a very
frustrating experience.
Of course, there were exceptions. A number of individuals and
institutions were extremely generous to PBI in providing
information as well as editorial in the form of articles. Russell
Taylor, a former private banker who did much to sow the seeds of
the ‘private banking renaissance’ (even to the point of publishing
a very highly regarded management report that carried this very
title in 1991), George Alford, a chief executive of Kleinwort
Benson Private Bank and Michael Maslinski, a former Coutts banker,
were all very helpful in the early days.
More often than not, however, journalists had to put up with a
stream of refusals for information and comment. “We don’t comment
on client-sensitive issues” almost became the standard industry
response, irrespective of whether or not the query really did
relate to client-sensitive issues.
In this environment, definitional issues, together with coverage of
related but sometimes peripheral topics such as investment
management, provided a pragmatic solution to the conundrum. But it
also did its bit to muddy the definitional issues. Banks that
focused on the mass affluent market or US mutual fund companies
started to feature increasingly in the pages of PBI. But was this
really private banking?
The fact is that the term ‘private banking’ can be used in a purely
functional context, the provision of banking and other financial
services to rich private clients. This can give rise its own set of
definitional problems, and continues to do so today. Can an
institution that restricts itself to private client investment
management or the management of hedge funds legitimately call
itself a private bank, for example?
Definitional pedants, especially in Switzerland, could go further
and argue that the term ‘private bank’ refers to a specific capital
or organisational structure. In this instance, a private bank is
structured as a private partnership on an unlimited liability
basis. Yet conventional shareholder-owned institutions, such as
Credit Suisse, Julius Baer or UBS, which have big private banking
franchises, are routinely bracketed together with firms such as
Lombard Odier Darier Hentsch and Pictet, which are private
partnership banks.
Wealth threshold
Then there is the nature of the clientele. For historic, as much as
any other reason, 1 million dollars, pounds or Swiss francs always
seemed to be a natural threshold for ‘real’ private banks. But this
was quickly observed more in the breach. And indeed, given the huge
surge in wealth experienced over the past 20 years, an increasing
number of commentators would contend that 1 million of assets is an
insufficient minimum demarcation of wealth.
Nonetheless, this has arguably given rise to yet another
definitional problem. What is an asset? The term is typically used
in relation to financial, as opposed to physical and non-tangible,
assets. But this has become an increasingly unsatisfactory
definition for a variety of reasons, not least the fact that
increasingly liquid and sophisticated financial markets have made
it much easier to monetise just about any asset, physical or
otherwise.
Rich Lists
These types of questions began to gain increase coverage with the
advent of the publication of Rich Lists, which attempted to
identify and quantify the wealth owned by rich individuals. These
also provided an invaluable source of copy for PBI, especially from
the ‘how to find and keep the affluent customer’ perspective. They
also provided further evidence of a growing infatuation of a wider
public with the rich and lifestyles. The wealthy as a topic had
started to become popular.
The dotcom boom of the late 1990s was particularly noteworthy in
this regard. Getting rich suddenly appeared to become the epitome
of fashion and spawned an entire new media. It also spawned an
explosion of interest in private banking and wealth management from
a variety of institutions keen to exploit the returns
available.
This coincided with a wave of merger and acquisition activity,
which gave rise to the private banking behemoths of today, although
these were not always driven by private banking concerns. Swiss
Bank Corporation and Union Bank of Switzerland merged to form UBS,
which then went on to acquire PaineWebber in the US. HSBC’s
acquisition of Republic New York and Safra Republic was arguably of
seminal influence as far as establishing its credentials as a
global private banking force, while Deutsche acquired Alex Brown
and Bankers Trust.
As the interested parties quickly realised, private banking
typically generates high margins and profits on a consistent basis.
The downside is, however, that these ‘annuity-like’ returns can
sometimes have a long gestation period. In the short term, as all
too many institutions found when the dotcom bubble burst in 2000,
it turned out to be nothing more than a big expense.
This gave rise to a wave of restructuring, the effect of which is
still being felt, although financial markets happily resumed their
upward path from 2003 onwards, as have the fortunes of private
banking and wealth management firms.
And the really good news for PBI’s editor and staff is that private
banks often go out of their way to speak to journalists. So fulsome
amounts of copy should no longer be a concern over the next 20
years!
*Ian Orton edited PBI from 1995 to 1999 and was a business research
manager at Lafferty Publications, the original publisher of PBI
from 1988 to 1999.
