In the pre-crisis world, serving Italian clients was a relatively simple and much-desired business. Italians are typically big savers; they are wealthy and their preferred products – such as government bonds, debt by solid issuers (such as banks) or other well-known asset classes – provided good returns. But things have changed.
The ongoing low-interest-rate environment has already turned government bonds into low-yielding instruments, troubles at local banks further dented risk perception about such assets, while increased volatility in global markets convinced Italian clients that they needed to demand more from their private banks, according to market participants.
Put to the test
Frederik Geertman, general manager of Cordusio SIM, the ultra-high-net-worth individuals business of UniCredit, Italy’s biggest bank, believes that as market uncertainty will continue, private bankers will all be put to the test.
“We’re coming from a few years in which advisers had been right in anticipating market movements and so clients felt reassured. But from around the second half of last year, this has changed,” he says. “Predicting markets has become more difficult, whether in equities, commodities or emerging market bonds. There’s much more volatility and uncertainty right now.”
Increased demand for investment advice is apparent when looking at the overall figures for assets under management in the country, which at the end of November reached a record total of €1,835bn. The figure reflects both private banks’ operations as well as independent asset managers. Overall, the private banking business has also grown. In total, assets that are either under administration or management by Italy’s private banks have expanded by almost 50% over the past seven years, from €363bn at the end of 2008 to €535bn registered at the end of September 2015, according to the Italian private banking association, AIPB. Italian private banks have much room to grow when it comes to managed assets, say professionals.
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A nation of savers
Even after the recession that has recently afflicted the country, Italians continue to be sought-after clients. Italy is a country with a historically high savings rate. Households were saving more than 20% of gross disposable income in the early 1990s, the highest level in Europe at the time, according to data from EU statistical office Eurostat. The level declined in the recession, but Italy’s saving rates remained in excess of 11% and above the EU average of 11.03% in 2013 and 10.45% in 2014.
This focus on savings has encouraged the accumulation of wealth. In relation to the total population, the proportion of individuals with wealth of more than $100,000 in Italy is four times the global average, according to estimates by Credit Suisse, while 3 million Italians are in the top 1% of global wealth distribution. The challenge is to put such wealth to work in order to generate good returns and supplement clients’ often low earning abilities – made worse by the economic troubles.
“Italians are very wealthy people but income is low. There’s a problem with cash flows,” says Paolo Molesini, director-general of Fideuram-Intesa Sanpaolo Private Banking, the specialist unit of Italy’s second largest financial group, Intesa Sanpaolo.
This focus on investment advice on how to supplement income is appropriate for very wealthy individuals, as well as for the merely affluent. Concerns have mounted not only about low returns on investments but also about the risk of people losing their principal. Late in 2015, four small banks – Banca Etruria, Banca Marche, CariFerrara and CariChieti – became insolvent. Holders of their debt, in particular of junior bonds that had ended up in pensioners’ portfolios, were badly burnt. The damage was so severe that the government decided to consider compensation for individuals who found themselves in extreme difficulty as a result of the loss.
Risk awareness
Gian Maria Mossa, general manager of Banca Generali, says that clients are becoming increasingly aware of the potential risks of investments that had traditionally been considered safe, including bank bonds. Advice on each individual product – rather than asset class – will become increasingly important, he says. Mr Geertman agrees: “I think we’re at the dawn of a period where clients will require insightful, sharp views from their advisers. We think this is a phase where wealth managers will need to pay particular attention not only to the asset mix but also to individual products included in portfolios.”
And so Italy’s top private banks are beefing up their advisory abilities. Wealth management had already started playing a more important role within banking groups as more onerous capital requirements made fee-generating businesses more appealing. Banking groups are revisiting their private banking structures, and the hunt for talented bankers has been launched.
Intesa Sanpaolo has merged its various wealth management operations under the Fideuram-Intesa Sanpaolo Private Banking name, which is based on an advisory model. The group is confident in its ability to steer bankers away from the competition. Carlo Messina, chief executive of Intesa Sanpaolo, intends to be “very aggressive” in his recruitment of new staff. “We want to be the Ferrari of [private banking],” he says. “[The group’s] good income and reputation gives us the ability to hire private bankers from other banks.” Fideuram manages a total of more than €184bn of clients’ assets.
Expansion plans
UniCredit restructured its operations targeting individuals with more than €5bn in disposable income and created Cordusio last June to focus its services advising such clients. And the part of its business aimed at the lower bracket of clients – those with at least €500,000 – has embarked on a hiring spree and intends to add 200 bankers to its ranks. Together, the divisions have a total of about €120bn in assets under management.
Fast-growing Banca Generali is keen to beef up its ranks too, but has a different approach, according to Mr Mossa. He believes that relying on an external network works best for clients as it supports independence of advice. This structure benefits the bank too, as it is more flexible, as well as bankers, since they would be offered a more independent relationship once the bank has hired them.
“We usually hire bankers and then we allow them to [set up] an independent structure, if they wish to do so. When it comes to making a decision on investments in art or other specific asset classes, we prefer to use [our growing network of] third-party advisers. This [structure] was created because of requests from clients,” says Mr Mossa. Generali’s assets under management have nearly doubled in five years, he adds – from about €23bn at the end of 2010 to more than €41bn in 2015.
Meeting demands
But to boost their advisory muscles, banks need not only new bankers, they must provide the advisory channels clients demand too. Increasingly, this means giving wealth managers a digital capability for serving all types of clients, irrespective of age and disposable income. UniCredit’s FinecoBank, which serves affluent rather than super-rich clients, has gained traction because of the combination of nimble digital channels, strong brokerage platform and its 'physical' relationship with clients, says chief executive Alessandro Foti.
Generali is also a strong believer in offering a digital service. Mr Mossa says that “80% of clients use digital services, across all ages. This is a cultural, social change for Italy and the fastest transformation I’ve ever seen in the industry.” He believes that providing clients with access to self-directed platforms will in the future be as key as allowing them to receive third-party advice about specific investment products.
Interest rates hovering close to zero, changed risk perceptions and market volatility are not necessarily ingredients for an easy investment recipe. But they are forcing a makeover on Italy’s private banks, which now need to think harder about what they offer.
