Ultra wealthy lose faith in advisers

One of the consequences of the downturn has been a major crisis of trust between wealthy individuals and their investment advisers, which manifested itself in a desire, especially amongst the ultra- wealthy, to take more control over their investments. The ultra-rich, those who have $30m (€22.5m) in investable assets, are looking for more communication, more transparency and more understanding of where their money is going and what they are getting in return, according to qualitative global research commissioned from the Economist Intelligence Unit and sponsored by Société Générale Private Banking. This increased vigilance extends to philanthropy and spending, but it is definitely more acute when it comes to investments. Clients’ preference has shifted from complex products such as hedge funds and derivatives to products that are simpler and more transparent and which offer more liquidity. A desire for better returns will gradually encourage the very wealthy to return to more complex investments, but they will be constantly looking over their advisers’ shoulders, according to the survey. What is most valued is a relationship with the adviser based on trust, as opposed to one where they feel they are constantly pitched new products. “High net worth individuals have a general mistrust in the banking system in general, but we have to make a distinction between the banks that are conservative and very long-term oriented and those that have a more short-term, brokerage like view, and a more product push mentality,” said Daniel Truchi, CEO of Société Générale Private Banking. “We have seen those banks suffer a lot during the crisis and some had to sell their private banks as they could not sustain their strategy,” he added, explaining that, in a way, the French bank has benefited from this turmoil. Improved offering The increasing dissatisfaction of ultra high net worth clients with large banks in general – due to their standardised, benchmark-based approach and general lack of flexibility in the discretionary managed portfolios – is increasingly driving banks to improve their offering of advisory services, in an desperate attempt to retain clients, who seek more tailored solutions, notices Carlo Michienzi, co-CEO at London-based boutique investment manager BCM & Partners, and former executive director within the Private Wealth Management Division of Morgan Stanley. “The trend towards advisory, which is less profitable for the banks, is the only way out for them, the alternative being that they lose their clients altogether,” said Mr Michienzi. However, sophisticated clients who cannot afford to spend time monitoring their investments, may prefer to go to boutiques, who typically serve a limited number of wealthy individuals and are able to offer a bespoke portfolio, he said. “If the large banks are able to create independent advisory teams within their organisation, then the game will be between the boutiques and those banks.” The major advantage of independent boutiques is the stability of their personnel, as trust is based on personal relationships. However, large banks can be “rich autarchic castles”, whereas boutiques generally need to open up to external partnerships, which can prove complex, said Mr Michienzi. “Clients seek more transparency, ask for more advisory services and want to be more involved,” notes Gianmaria Mossa, head of private banking at Banca Fideuram. Last year, the Italian bank launched an advanced advisory service, which adds an extra layer of fee-based advice on top of the basic level, which includes the construction of the portfolio, according to the philosophy of ‘value at risk’, in line with the investor risk profile. Clients who sign up will enjoy a more holistic package, claims the bank. This includes the monitoring of value and risk assessment of all the wealth they have with third-party providers and more detailed risk management. From its launch in June 2009 to the end of last year, €4bn of client assets moved to this remunerated advisory service. But Eric Barnett, CEO at SG Hambros Bank, the UK bank owned by Société Générale, said that it is hard to talk of a trend towards advisory. “Clients change their mind in the course of their relationships, switching from advisory to discretionary as they gain faith. For us, execution, advisory and discretionary represents a third each of our business, as this is how we structure it,” he said. Mr Truchi said the behaviour of ultra high net worth clients varies depending on the region, with Western Europeans generally tending to be more conservative and inclined towards discretionary portfolio management, while in Asia they are much more active in managing their assets.

Daniel Truchi, CEO of Société Générale Private Banking