Private banks opt for new models

Private banking business models are about change more than ever, according to the heads of some key wealth management franchises, including Deutsche Bank, UBS, Julius Baer and Lombard Odier. The wealth chiefs recently attended a behind-closed-doors round table here at Financial Times headquarters and the edited highlights are published on pages 38 to 42 of this month’s issue of PWM. As well as attacks on the offshore model by US, European and global authorities, obsessed with secrecy and tax evasion, the banking bosses pointed to a push among private clients for transparency, be it in structured products, hedge funds or mutual funds. One of the results of this will be the increased use of exchange traded funds (ETFs), which are particularly good for tactical moves. There is however some discrepancy between different institutions about how much they should be used. Some private banks such as Lombard Odier and Arbuthnot Latham find them particularly attractive and transparent, while others see the danger of ETFs just adding more risk, dampening performance and undermining truly active management, which many private clients prefer. There was also disagreement on the role of hedge funds. Julius Baer, for instance, reported that clients are leaving hedge funds and other complex strategies in droves, in favour of simple, predominantly cash-based products. But the view from UBS is that high allocations – 20 per cent plus – should be maintained in client portfolios, despite the background noise which is talking down alternative investments. Those still adhering to traditional portfolio theory believe the more asset classes you are invested in, the better. Front office the key Technology and outsourcing must also play a key part in private banks’ business models, but the front office, in terms of advice, is always the key differentiator in terms of acquiring new business and providing profits for partners and shareholders. Those areas which were previously seen as niches should not be ignored, however. PWM’s panel of key private bankers included representatives of two Islamic institutions who believe interest in Sharia investments is not just religiously led, but often performance oriented, and that non Muslims will increasingly become interested in the strategies being generated by Islamic banks. The original thinking was for 40 per cent of investments on some Sharia platforms to be in hedge funds, but this has been scaled back due to investor sentiment. The key to some of these niche strategies will be the effective use of a device recently much maligned in the private banking world – the structured product. Can banks match the deployment of such complex structures with clients’ desire for transparency? This may prove the most important challenge of all.