Wealth management groups have their own product specialities for different segments and geographical regions of the market. But there are more similarities than differences between them, believes Emilio Saracho, the head of private banking for Europe, Middle East and Asia (EMEA) at JPMorgan.
“Investment banks have always been interested in wealth management,” says Mr Saracho, a Spanish national, whose career has included stints at the investment banking divisions of both Goldman Sachs and Santander. “But wealth management is clearly gaining in importance. We work in herds. And when something is hot, we all move in the same direction.”
A key factor currently driving this wealth management boom is the success of investment banks’ asset management units. Swiss giants Credit Suisse and UBS have both restructured to integrate fund management with private and investment banking. While some analysts have criticised such shake-ups, the opportunity to pump investment banking and big-brand fund products through private banking arms is clearly one that is appreciated by group strategists.
There is separation within JPMorgan, though co-operation among the various businesses is also strong. “In particular, we have leverage from our colleagues in the institutional asset management side of the business who create products for pension plans and distributors, and we regularly use their product,” says Mr Saracho, often in large quantities.
The big French banks have the same approach to private banking. While all claim to have an open-architecture approach of selecting the best products in all asset classes, there is no doubt that private banking units are seen as distribution arms.
There is a notion espoused by mergers and acquisitions (M&A) advisers, such as Ray Soudah at Millennium Associates, that investment banks should not bother with private banking unless they can deliver a significant portion of revenues – maybe 30% or 40% – from this activity. If they cannot compete with the big Swiss players, then other major international banks should quit, sell up and use the money from disposals for more lucrative operations. This is particularly the case today, when valuations are high (goes the theory), because it has been so easy to make money from wealthy clients in a rising market.
Happy to be tier two
But there is no shortage of institutions willing to be tier two private banking players, below the UBS/Credit Suisse/Julius Baer Swiss axis, but competing with other cross-border wealth managers, such as ABN AMRO, Société Générale and Deutsche Bank, for a share of the increasingly diversified portfolios of high net worth individuals.
“I don’t believe private banking is an entity for which value creation in the group can be limited to the profits it generates,” Alain Papiasse, who oversees 16,000 employees as head of all asset gathering activities at BNP Paribas, said recently. “You must remember that private banking is also a distribution channel, plus an adviser for other units of the bank, and it allows you to distribute capital market products, such as equity derivatives and bonds.
“When you sell a private banking operation, even if you get a good price for the business, if you sell it to a competitor, you will lose additional business related to other areas of the bank. And given the current rate of return, what else would you do with the money? There are no other alternatives at this time for investing cash that are as profitable as this one. We are not in the mind today to sell the private banking operation because there are growth prospects in front of us.”
The ‘bulge bracket’ Wall Street banks also clearly have ambitions in the Europeans’ back yard. But while leveraging group expertise, JPMorgan’s Mr Saracho is keen to stress that his expansion plans are not purely related to parcelling out products created in the New York factory. He also runs a strong fund selection department, which gets much input from the JPMorgan Fleming asset management franchise.
“We select funds from inside and outside the group,” he says. “Often JPMorgan Asset Management funds are the most suitable, but we are under no obligation at all to use them. As with any funds, if they are not performing, or they have changed managers, we put them in the fridge, observe what’s going on for a couple of weeks and if we don’t like it, we instruct our portfolio managers to sell.”
While there is no formal obligation within the JPMorgan group to sell internal products, it makes good business sense, says Mr Saracho, because concentrating business with a smaller number of high volume suppliers means lower prices and better service. The private bank is also given much better access to group-managed funds than it has to external managers.
Choosy clientele
When it comes to creating products, however, private clients are often much pickier than institutions, which are accustomed to a benchmark-led culture.
“Private clients want the best of both worlds,” says Graham Wainer, group head of clients and portfolio management at GAM. The boutique, created by Gilbert De Botton in 1983, is often credited as the founder of the open-architecture movement. Although it now runs nearly $70bn and is part of the Julius Baer group, GAM has been allowed significant autonomy from its Swiss masters. Its clients want participation when markets are doing well and not to lose too much when there is a crisis, says Mr Wainer.
“It is a tough environment, where one has to be clever and adaptable with regards to manager selection, asset allocation and management of portfolios,” he says.
Although wealthy clients clearly appreciate well-constructed portfolios, they are more interested in such a proven, safe multi-manager system that is efficient and prevents catastrophic losses than they are in squeezing every basis point from a rising market, according to GAM.“Our experience is that private clients are not greedy. If the market is up 10 and you are only up 9, they are not disappointed,” says Mr Wainer. “They don’t feel they need every last cent from the market performance, and are prepared to give up a little bit of upside if their capital is protected.”
That’s why GAM’s multi-manager programme is designed to reflect the wealth preservation needs of its client base. “For the vast majority of our clients, their fortunes are already made,” says Mr Wainer.
A typical absolute return portfolio would have as much as 35% in alternatives, followed by 30% in long-only equities, 25% in equity long-short and just 10% in bonds. European equities are seen as the ‘sweet spot’ in portfolios, powered by a combination of deregulation, European enlargement and strong M&A activity, with cross-border transactions particularly prominent.
“There is the sceptics’ view that Europe is beset with structural problems – needing labour market reforms – which will be obstacles to development. We don’t fit into that camp,” says Mr Wainer. “We feel that European politicians get it, often in contrast to what they say in public.” At the same time, GAM is scaling back on allocations to Asia, which has already “come a long way”, he says.
Lazard Frères Gestion, the Paris-based institutional and private client arm of Lazard, also works as a niche operation, running E10bn – although it is officially part of Lazard’s $130bn asset management group. “We are more or less a boutique,” says François de Saint-Pierre, head of equity investment and research at Lazard Frères, which employs 100 staff in its Paris office. “This allows us to be more up to date in terms of client servicing, as Lazard is working with pension funds, which we don’t have in France. We can exchange ideas and products with them.”
Mr de Saint-Pierre says Lazard Frères is more relationship-based than the large French banks. “We want to advise clients. Our sales people are not product specialists; they are specialists in dealing with clients. They are able to recommend the product they think is good for them at that time, not the product which is hot.”
He even gives an example of a fund launched for Lazard Frères clients last year, and managed internally by Lazard Asset Management, which he would not sell to clients. “Our emerging markets equity team, based in New York, had a strong track record for the investments,” says Mr de Saint-Pierre. “But the fund manager said this was not the right time, so we did not push this product.”
Lure of central Europe
Wealth management groups are also increasingly moving into central Europe, which is enjoying accelerated levels of wealth creation due to fast-growing economies and top-performing stock markets.
Deutsche Bank is particularly keen on establishing its wealth management franchise in Poland, where it has already enjoyed some success with mass affluent clients. The move upscale is based on the premise that existing clients are moving from the affluent to the high net worth bracket and need new sets of products to service their wealth and earnings.
“It’s a dynamic situation,” says Leszek Niemycki, vice-president of the management board of Deutsche Bank in Warsaw. “A client today might have €25,000 in total assets and savings. But in five years, that person might be a successful manager or employee in Ernst & Young or PricewaterhouseCoopers. Their assets can jump in a relatively short time to more than €100,000 or €1m, because the whole economic cycle is very accelerated.
“There are a lot of job opportunities here for young people, plus more jobs abroad. Real estate prices are going up and shares are going up,” he says.
Top clients can get a combination of individually tailored portfolios of funds and keenly priced derivatives sourced from Deutsche’s capital markets team in London. “London really is the centre of the world for asset management,” says the head of private banking at a major global institution. “The only problem we have is the airport at Heathrow. You can get in, but you can’t necessarily get out again.”
Yuri Bender is editor-in-chief of Professional Wealth Management (www.pwmnet.com)
