Targeting domestic markets

As traditional offshore private banking business models come under attack from tax-hungry governments looking to play the populist card, wealth managers are increasingly favouring a move into domestic markets.

The business model they are choosing to activate involves hiring or acquiring legions of customer relationship managers (CRMs) servicing high net worth clients from regional hubs. “In the next 18 to 24 months, the focus will be predominantly onshore,” says Brandon Sharrett, head of global wealth services for SEI, the US solutions provider which installs multi-manager investment strategies and administration platforms for advisers and private banks.

In a domestic market such as the UK, SEI has narrowed its focus to 40 wealth management firms, most of which will want to “enhance the capital value of their business” in the belief they will eventually be swallowed up by larger banks. “These are firms that are evolving their proposition for recurring fee income versus transactional revenue,” says Mr Sharrett, talking about groups giving advice, rather than pushing products.

“They are looking for more defined business processes in areas of advice and a more institutionalised investment process,” adds Mr Sharrett, who believes wealth managers must decide exactly what they are offering and to which kind of clients. “Just because a client has money to invest does not mean it is the right client for a particular firm,” he believes. “They need a solid proposition for a client, whether they are a global wealth player like UBS, an asset manager like Investec or an IFA.”

Sourcing profits

According to SEI, it is relatively straightforward for a private client advisory group to source the magic 100 basis points revenue figure they need for profitability from private clients, with the customer actually charged 200 basis points, distributed between bank, underlying asset managers, custodians and other third party service providers.

“Our goal is to encourage efficiency and we are able to help firms support more clients per adviser based on scalability of business, with technology underpinning that,” believes Mr Sharrett. Currently an average domestic CRM might look after 100 to 150 clients, although this varies depending on the firm’s proposition, he adds.

The most dramatic increase of efficiency can be achieved in the middle and back office, where firms like SEI claim they can vastly improve profitability by introducing straight through processing.

But some are rather cynical about claims of tinkering with business models, in the belief that private banking is purely profitable when the volume of assets is large and clients are fully invested in fee paying instruments. At Swiss consultancy Millennium Associates, CEO Ray Soudah says domestic markets around the globe should be viewed over two time periods – the last 12 months and the next 12 months. “We are currently at a fundamental, pivotal point in the wealth management cycle,” reckons Mr Soudah, a specialist in M&A transactions in the financial services sector.

The paralysis in acquisition deals over the last 12 months has been due to major institutions looking internally at capital adequacy regulations and external regulatory pressure. “Smaller firms, on the other hand, have been concerned with placating customers and dealing with complaints from clients about poor performance,” he adds.

But now that the large banks such as UBS, Citigroup and Commerzbank have addressed their balance sheet issues, the outlook has changed. “Many of them are now obliged to shrink, event though they might use the word ‘refocus’,” smiles Mr Soudah, who is expecting to see his business boosted by branches, divisions and whole subsidiaries being offloaded, spun-off or sold to competitors.

He cites the impending disposal of UK wealth manager Kleinwort Benson by Dresdner Bank, the rumoured sale of Coutts by RBS and the acquisition of Fortis by BNP Paribas among examples of this phenomenon. “Now that the market has picked up by 20 to 30 per cent, profitability has partially recovered,” spurring further interest in the sector, believes Mr Soudah, who expects a raft of deals to be signed in the coming months.

“At the end of the day, people need investment advice. This will not disappear and once confidence comes back, clients will return to the market. There are a lot of ‘strategic reviews’ going on. But this is nonsense. There is no need to adapt the business model. The biggest factor influencing the profitability of a business is purely the assets under management. They might hire or fire a few people and find a more efficient outsourcing platform, but these are marginal factors in comparison.”

Renewed interest in acquisitions will no doubt spark further competition in domestic wealth management businesses. Most groups have made decisions in their head office in Zurich, Frankfurt or Paris to make smaller acquisitions and then use them as hubs for regional expansion.

Regional focus

Deutsche Bank’s acquisition of Tilney in 2006 introduced the lion’s share of the German operation’s £6bn (E6.8bn) UK private client asset base, as well as establishing regional offices outside London in Liverpool, Shrewsbury, Birmingham, Glasgow and Edinburgh. The group intends to follow the type of business structure required by private clients, and may feel it is too early to call the end of offshore, secrecy and tax-led business. But it is clear that Deutsche sees its key priority in domestic markets. It has also made big investments in Spain, Belgium and Poland.

The model here is to deliver global investment solutions on a regional basis, through a brand which remains relatively untarnished by the global financial crisis and has helped attract CRMs from rival institutions, although recruiters say it is no easy task to find somebody who can bring in the average annual £100m asset haul necessary to create a profitable business unit.

“We are increasingly seeing defections of CRMs from a small number of big banks,” says the CEO of a major wealth management group. “Places such as UBS are perceived to have troubles. But a CRM working for a stable bank will not be willing to dislocate himself in the current market. Except for those banks where there are problems, it is very difficult to dislodge people.”

Credit Suisse is also an ambitious player in both international and domestic markets, although it has a different approach to Deutsche, preferring organic growth and finding it easier and more economical to recruit teams of CRMs rather than acquiring entire businesses. However, CEO Ian Marsh plays down the hype surrounding increased levels of activity at the Swiss bank.

“We are not striving to be the biggest player in the UK,” claims Mr Marsh. “Rather, Credit Suisse’s private banking business aims to be best in the areas where we excel and have competitive advantage; for example, delivering the integrated bank to our clients.”

Unlike deadly Swiss rival UBS, which is now looking to separate investment banking and asset management from its wealth management division, whose brand has been badly damaged through the association, Credit Suisse sees its newly integrated status as a big plus-point when marketing solutions to private clients.

“Ultra high net worth individuals and entrepreneurs are the natural beneficiaries of the combination of private banking and investment services and these are important target client groups for Credit Suisse,” says Mr Marsh. During recent months, clients have apparently been requesting Credit Suisse investment products, even though these are not the best performing or most competitive, because they see products associated with this bank, which has not had to surrender itself to government ownership, as something of a ‘safe haven’.

SG Hambros is another UK arm of a continental European operation, in this case the French banking giant Société Générale, which has made inroads into the UK domestic market, having raised £8.5bn through a combination of regional expansion and bookings through offshore offices in Jersey, Guernsey and Gibraltar.

The French house entered the UK market in 1998, by buying the British bank Hambros. The group recently acquired the ABN Amro wealth management franchises in the UK and Gibraltar.

One year ago, SG Hambros had just three regional offices outside London, in Cambridge, Southampton and Milton Keynes. It has since opened outlets in Yorkshire, Edinburgh and Manchester. “It is vital to have a regional presence. That is the feedback we get from our clients,” says Phil McIlwraith, group commercial director at SG Hambros. “Clients don’t like a London centric approach. It can be quite an arrogant one where bankers just sit in their leather chairs and expect business to flow in.”

He too believes the potential for growth is currently greatest in domestic rather than offshore private banking markets. This marks a sea change to ten years ago, when money from international clients coming into the Channel islands dominated the bank’s business flows. SocGen has a similar commitment to domestic expansion in the French market, which mirrors its UK plan, with regional offices set up in Bordeaux, Lyon, Marseilles, Rennes and Lille.

Taking a new path

SocGen’s key rival in private banking, BNP Paribas, is also prodding its tentacles into new waters, through the acquisition of Belgo-Dutch bank Fortis, which runs £2bn for private clients in the UK.

BNP Paribas tends to operate a very centralised operation in private banking, with investment products selected in Paris by its FundQuest subsidiary. Bosses of the bank’s Asset Management and Services (AMS) unit – until recently run by Alain Papiasse, who has swapped roles with former investment banking chief Jacques D’Estais – are known to see their private banking units as distribution outlets for proprietary fund management products.

This may put pressure on the Fortis business model, which relies on investment managers to give clients a personalised money management service, as opposed to the CRM model, where large numbers of bankers sell a centrally manufactured product range through more of an industrialised process.

Although profit margins may be higher through using a more centralised model, assets are not always so sticky.

Bankers say that using a more personalised model, they may have to work much harder to get assets in, but once they are in, they command much greater loyalty.

There are generally five players, managing assets of more than E20bn, in each country who dominate the onshore wealth management market, says Sebastian Dovey, managing partner at wealth management strategy thinktank Scorpio Partnership.

“In France, a private client might go to BNP Paribas, as they are a visible, solid, big bank. By doing this, they are unlikely to make a mistake or look foolish,” believes Mr Dovey.

The next league down is composed of 20 or so players running assets of E5bn to E20bn. These groups are more typically from an asset management background, such as Schroders. Lower down the scale, there are large numbers of predominantly regional advisory firms who pick up clients in specific segments.

It is just as easy for the larger players to buy whole businesses, like Deutsche did with Tilney, rather than acquiring regional sales teams, says Mr Dovey, although he believes private banking operations in Europe have typically been bad integrators of acquired businesses.

“A lot of CEOs and management teams look at the time requirements of making an acquisition and see it as a long and slow process. They need much more patience,” he explains. After all, when the “feelgood factor” of hiring a new team wears off following an initial 24-month honeymoon, the bank is not necessarily left with any central ownership of assets.

“You do need to acquire in wealth management and focus on an integration process in order to succeed,” says Mr Dovey. “UBS did it in France and the UK, their chosen markets for an onshore strategy. People might not like how they are doing it, but there is a strong argument from the business model perspective.”

Ray Soudah, Millennium Associates