The myths and the reality of private banking

There are some stubborn myths about private banking that still persist, such as the end of offshore banking, profitability having seen its last days, costs going through the roof, and even the absolute necessity of adopting a segmentation strategy. The reality, however, can be more subtle than that.

 

Offshoring is dead! Long live internationalization!

In light of the current economic and political situation, it must be said that the credibility enjoyed by so-called offshore financial centres has not been diminished. Quite the opposite in fact, with the attractiveness of these traditional centers, such as Switzerland, persisting, thanks to the level of service they offer and the degree of professionalism and experience of their teams. Indeed, the total amount of assets managed in Switzerland, Luxembourg and Monaco has stayed constant, and the number of clients investing more than EUR 10 million in a European private bank has seen a healthy rise. Consequently, despite western Europe having slipped into third place in terms of wealth generation, and whilst we witness other agonies in the private banking industry, European financial centres have been able to hold on to their place amongst the world leaders in wealth management.

 

Big is beautiful

A real and tangible trend has been appearing since the crisis broke: “big is beautiful”. This is both in terms of profitability and the ability to grow business.

 

Whilst the costs relating to the volume of assets under management rocketed after the 2008 crisis (particularly in view of increased regulation), a KPMG study published in August 2015, “Performance of Swiss Private Banks”, showed that costs have generally fallen since 2011. It seems that when it comes to costs, not all banks are created equal: size does indeed matter and is increasingly important. Operational costs of small businesses are almost 40% higher than those of their larger counterparts, which are in a position to generate economies of scale.

 

In parallel to this, revenues have tumbled to around 85% of their 2007 levels. This fall is associated with increased competition, absolute market level (with interest rates historically low) and regulatory developments. Revenues have reached their lowest levels since 2011, but have been rising since then. Once again, there is a difference between small and large set-ups, with average revenues generated per private banker being higher in bigger businesses, due, amongst other things, to being able to offer a wider range of products and services.

 

The growth of the cost base and revenues is therefore forcing banks to reinvent themselves and to trim their range of services in order to improve the added value they can offer clients. As part of this, high-added-value services are becoming more important, to the detriment of standard, customised services, such as custody and brokerage. Consequently, advisory, personalized portfolio management and niche services, such as direct investment or premium credit services, have a bright future ahead of them.

 

Geographical concentration: choice and need  

The tightening of regulations and each country having introduced its own suitability rules have forced several private banks to adopt a more extensive geographical segmentation strategy, especially so they can be closer to clients and get to know their tax situations in detail, without having to invest in several booking centres. However, the myth of the need for geographic segmentation does not correspond to the reality for everyone. Whilst smaller operations are tending to gamble on refocusing on specific countries in an effort to become quasi-onshore, other banks are preferring to opt for a multi-site, multi-booking strategy, and to concentrate on international wealth.

 

The result is that a growing number of banks – generally speaking, the international or smaller ones – are throwing in the towel or are returning to a more limited number of sites and markets, with whole swathes of their businesses or specific sites being put up for sale. The wave of consolidation is therefore likely to continue: and even more so as the break-even point for a pure-play private bank nears EUR 10 billion – a clear rise over the last ten years.  

 

“Everything for everyone” becoming less attractive

 

Open architecture was born out of the desire to offer a very wide range of solutions to a maximum number of clients, with the aim of responding to all of their needs. In Asia in particular, there is still a duty to offer everything to everyone, but, in reality, this is no panacea, and the model could evolve over the coming years.

 

By its very nature, open architecture has always been a complex process, which in turn makes it costly. With the disappearance of retrocessions and the tightening of regulations, sources of revenue associated with this offering have fallen, whilst, in parallel, its complexity has increased. The “supermarket” banking model has been undermined by tougher regulations and by the development of particularly efficient platforms which make a range of highly sophisticated tools available to clients at low cost. This raises the question of the durability of this model: would it not be better in future for banks to invest in their own management and advisory capabilities, which, in the end, will remain their only differentiating factor?

 

Today, it is clear that no bank can allow itself to rest on its laurels, and the time of mimicking strategies is well and truly behind us. With the great myths of private banking being questioned, one truth remains: do not believe in the false truths that have been built up around the industry; rather, focus on adding value for clients.

 

About Michel Longhini

Michel Longhini joined Union Bancaire Privée (UBP) in September 2010 as chief executive officer (CEO) of the private banking division and member of the bank’s executive committee.

 

He is leading private banking operations worldwide, with a view to reinforcing UBP’s activities in emerging markets and Asia, while continuing to grow the bank’s overall private banking business.

 

Michel has over 20 years’ experience in private banking. Before joining UBP, he was managing director of BNP Paribas International Wealth Management in Paris. Member of the executive committee of BNP’s Wealth Management division since 1999, he first was global head of investment services, and then was CEO of wealth management in the Asia Pacific region.

 

Michel holds an MBA from the Ecole Superieure de Commerce in Lyon.

 

 

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