Anthonia Hui, chairman and CEO of AL Wealth Partners

The impact of the financial crisis has been felt particularly hard in the wealth management industry, where client trust is low, the appetite for risk has disappeared, and customers are expecting frequent and time-consuming reassurances from their wealth managers. Writer Silvia Pavoni

As with the rest of the banking world, private banking has been sliced and diced in an effort to understand what model will work best in the future. The back-to-basic mantra has re-evaluated the simplicity of lending on the back of deposits for wholesale banks, and has opened up a debate on a traditional alternative to the business of investment banking, which would bring it back to advisory and brokerage activities.

So what about private banking? Some issues, such as reduced revenues and heavy cost bases, are shared across most of the banking spectrum. Others are more specific to private banks due to the emotional nature of this business. The trust in wealth managers' investment acumen has been broken and clients' appetite for more profitable but riskier assets is close to zero.

"The bread and butter of a lot of the private banks is under pressure," says one private banker. "Clients are more reluctant to let us manage their wealth on a discretionary basis, they [want] to be more involved." He adds: "Clients have moved into cash, which has a big impact on the bank revenues. We're in the business of managing people's wealth, not sitting on their cash."

In some cases, panic about the safety of investment portfolios has brought clients to seek compensation from banks. In others, this has pushed clients to look for alternative advisers. Assets have been moving from one manager to another. Their value has lowered across the board due to the heavy losses that the financial crisis inflicted on clients' portfolios. Pressure on relationship managers to dedicate more face-to-face time to clients and, at the same time, to provide the increasingly high quantity and quality of information they request is putting a strain on private banking businesses.

"Most [private] banks, be it small or big, are re-assessing their business models and the skill-set of their work force [following the] 2008 fourth-quarter financial tsunami," says Anthonia Hui, chairman and CEO of AL Wealth Partners. "The rapid expansion back in 2006-07 contributed to the high cost base of many market players, from large international to small boutique firms. The pressure to quickly return to profitability and the risks associated in managing private wealth have resulted in these banks re-thinking which segments of clients they should concentrate on retaining and servicing. The days when many of these banks thought they could service the broad spectrum of wealthy clientele are gone."

Grim reading

Beside anecdotal evidence, in-depth reports on the state of wealth management resulted in a series of figures, percentages and rankings representing the state of the market, and went far beyond the conclusion that clients' trust had been lost. The percentage of clients who withdrew assets from private banks has now been formalised and the lack of complete understanding between clients and wealth advisers has been exposed.

The World Wealth Report (WWR) by Merrill Lynch and Capgemini unveiled at the end of June that 46% of clients had lost trust and confidence in established wealth management firms, and 27% of clients withdrew assets or left their firms completely. Consultancy Scorpio Partnership's Global Private Banking KPI Benchmark, released last month, shows that industry assets under management have declined by 15.7% since 2008. Private banking profits fell by a higher margin of 32.9%.

"We certainly haven't seen as many clients closing accounts with us but we've seen clients moving some wealth away and into other banks," says Andre Cronje, head of UBS's wealth management business in the UK. "They are spreading their risk."

Such losses seem to be echoed in other geographies. "There has been a shrinkage in terms of assets under management across the board, given that clients exercised more caution with their portfolios," says Dr Mario Bassi, head of strategy and business development in Asia-Pacific for Deutsche Bank's wealth management division. "Most private banks, like us, have had their assets under management significantly reduced." However, Mr Bassi's group has experienced some growth since last year, with invested assets going from €18.4bn at the end of December to €19.1bn in the first quarter of 2009, largely because of the economic expansion among Asian countries.

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Jeremy Jensen, partner and Europe, Middle East and Africa team leader at PricewaterhouseCoopers Private Banking and Wealth Management

A lack of understanding

In addition to the reduction in assets under management, whether due to wealth being destroyed by the crisis or because it has gone to new firms, many private bankers do not clearly understand their clients' needs and requirements. This makes mending the client relationship that much harder. PricewaterhouseCoopers's Global Private Banking and Wealth Management Survey, published last month, highlighted that 20% of relationship managers admit to not fully understanding their clients. Furthermore, according to the WWR report, wealth advisers underestimate the importance of some highly influential retention drivers for clients, such as fee structures; risk management and due diligence; statement and reporting quality; and online access and capabilities. The perception gap between the percentage of clients that considered an issue crucial against the advisers' perception of such an issue ranges between 18 and 34 percentage points.

This matter is as old as private banking itself, but if in good times the relationship between wealth managers and clients may be relatively stable without perfect synchronicity, in bad times this situation would cause it to fall apart. While previously some felt confident enough to give free reign to their private bankers, now discretionary mandates have become an endangered species.

Neither of these facts is good news for private banking structures and clients' attitudes are not likely to change any time soon. In fact, clients' disillusion might have caused permanent damage to the industry. "Clients will remember this crisis," said Jeremy Jensen, partner and Europe, Middle East and Africa team leader at PricewaterhouseCoopers Private Banking and Wealth Management. "It's not like we're going to go back to a boom in so many years and clients will act in the same way as previously. I think that this has brought a mind-set change in them."

The beauty of boutiques

As always, when there is a threat there also is opportunity, and some feel that this particular turn of the financial and wealth management worlds will benefit independent boutique firms. "Such client dissatisfaction comes at a critical time when market dislocation and volatility have disrupted many long-term investment plans," says Peter Sartogo, partner at wealth manager GWM. "This is benefiting boutique firms. We have seen a sharp increase in clients' interest."

And this seems to be true not only in expanding client numbers, but also in luring senior bankers away from large outfits, as many feel disillusioned with their employers. "Our research shows that while client satisfaction remains a top priority, many wealth management firms and advisers may not fully understand what drives clients to leave or stay," says Ed Merchant, head of financial services for UK and Ireland at Capgemini. "In addition, firms may be misjudging how satisfied their own [wealth managers] are with certain service and support areas."

Mr Sartogo has anecdotal evidence of this. His relatively small company has recently secured two particularly senior appointments: Samir Sayeed, former JPMorgan Private Banking head of international India business; and Shawn Mofidi, former head of Citi Private Bank's ultra-high net worth initiatives across the Middle East, who has brought his 27 years of experience and a team of five to GWM. "If you'd have asked me five years ago about these appointments I would have told you that you were dreaming," says Mr Sartogo.

Under pressure

The way clients go about their investments has changed dramatically of late, demanding transparency, more and better information, and the feeling that they need to be more watchful to ensure that their interests will come before the bank's profitability.

"Clients are now more open to look at which institutions to park their money with," says Ms Hui. "They are conscientiously demanding on transparency and investment solutions that will serve their financial planning better, and not mere product selling that claims to help them to make quick bucks. It's not a matter of the size of the financial institutions but the ability to appreciate their needs and guide them through this turbulent time."

Bankers' investment advice is questioned and some clients feel they need to carry out their own research and follow their own instincts. "Some clients are coming to meetings saying 'I read this research and I really believe it is correct. This is what I would like to do'," says Michael Lagopoulos, CEO of the international arm of RBC Wealth Management. "Those clients come with a very definite view that they want to buy gold, for example, and that's all they want to do. But most clients come to meetings confused and unsure about which investment strategies are going to work."

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Michael Lagopoulos, CEO of the international arm of RBC Wealth Management

Information frenzy

Confused or not, clients do request more information on their investments and at a higher frequency. Many wealth professionals say that the client whom you send a report to every three months and then have a discussion about how things are going is very difficult to find these days. "Clients want more frequent updates," says Mr Lagopoulos. "They're concerned about any losses they may have incurred during the credit crisis and want the reassurance of even more frequent contact to ensure this does not happen again. Some clients even want reporting to be more frequent than monthly."

For investments in cash, shares, bonds or daily traded funds, frequency of information is certainly not a problem, assuming that there is a reasonably good infrastructure in place. For other investments, such as alternatives - which are still present in some clients' portfolios - this can prove very difficult, if not impossible. Pricing a fund of hedge funds on a daily or even weekly basis would be impossible, argue experts. And even the monthly reports would not come right at the beginning of the next month; it would be more likely to happen towards the third week of the next month. But this, of course, is part of the deal when investing in alternatives. "If clients need updates more frequently for those assets, maybe they shouldn't have those assets in their portfolio," says Mr Lagopoulos. "These are the kinds of discussions we are having with clients we have brought in from competitors because their risk profiles are often not appropriate for the kind of investor that they really are."

Quality of information and depth of analysis is the real problem. Even when available, the information needs to be examined and reconstructed in the form of a client report and this requires extensive manpower, at a time when budgets are low and clients demand face-to-face time from their relationship manager.

"On average, if I look at what we had to do over the past six or seven months, we had at least a 50% increase in time spent with existing clients talking about investments," says Mr Cronje. "It is fair to say that they need reassurance."

Mr Lagopoulos adds: "It hasn't come to the point yet where we have to increase staff or reduce the client load per banker. This situation is more manifest in the fact that bankers have to work that much harder, travel that much more, be out of the office that much more. The issues are around the wear and tear on the banker because now is not the best time to change the key relationship person on the account."

The importance of information was made evident by the financial crisis. Clients that had a structure around them to examine it, such as family offices, had better outcomes. "Clients that have a family office-type structure - with a CIO or CFO, for example, someone who took it as their job to look at the report from the custodian - seem to have protected themselves better," says Aida Molineux, head of wealth management, EMEA for Northern Trust.

New brand value

Wealth management units of a universal bank still have an interesting proposition to offer, say many. Branding, economies of scale and custody services are all important aspects for a successful business that is trying to recalibrate its business model. The bigger the outfit, the longer it takes to implement change, but banks need to find a solution sooner rather than later, as such difficult times may have damaged trust and confidence but they certainly haven't subdued competition.

"Banks simply can't service the number of clients they had before because they have less staff," says Mr Sartogo. "The reason why there are boutiques is that big clients use banks for what banks can do. They use them for depositary roles, and use them based on what they are able to do - some banks are very good in some areas."

It would appear that in order to survive and prosper, private banks will be forced to be more selective with their clients, which might just mean that, as with investment banks that are going after big-fee-earning deals, there could be a fragmentation in the client segments for which private banks cater. This might be done according to the weight and flexibility of banking models. And it could create a great business opportunity for a new breed of specialised, nimble, independent wealth managers. As one private banker said: you can't be all things to all people.

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