Surgery required for return to health
Deep-seated reforms to banks’ fee models are needed if they are to make money in the long-term, and these must benefit the client
While inflows are slowly returning to many private banks – now that the carnage of 2008 and early 2009 has been largely dealt with – a new problem is emerging for the wealth managers. With clients choosing to invest in deposits, money market products and government bonds, it is becoming much harder to generate the fees once available from high margin hedge funds and structured products. Hedge fund providers – including funds of funds and platforms such as SocGen subsidiary Lyxor in Paris – have confirmed that encouraging the once enamoured high net worth community back to the glitz and unpredictability of the alternatives world has been a tough nut to crack. Most are now concentrating on institutions, although certain players, such as Man Group in Switzerland, are so plugged in to the local private banking community that they continue to attract assets. Others have struggled. Even the widespread release of Ucits III compliant vehicles may not do the trick. Bankers at Kleinwort Benson, for instance, are on a crusade to spread the once all-pervasive equity culture among newly cautious private clients. Kleinwort has done well in keeping most client assets at home, despite enduring two changes of ownership in 2009. It is investing in more analysts, so that clients in the UK, Middle East and Asia can buy any European or US stock and receive advice and reports from the bank’s relationship managers. Yet the active discretionary portfolios, which the bank believes will create value in a world currently obsessed with simple, cheap, exchange traded fund-type solutions, are taking up a smaller share of the cake than previously, with cash probably the most popular asset class. So how will the banks make money in the future? The answer, according to the financial services arm of consultancy Oliver Wyman, which has issued a discussion document, ‘Trust me, I’m your Private Banker’, is to change the fee model. Private banks have lost the trust of their clients, believes the report’s author Ole Heggtveit, due to the “unsound incentive structures” which their banks promoted during bull markets. While cost-cutting initiatives and a recovery in equity prices are helping return private banking to healthy profits in the short-term, a fundamental change to the model is required to ensure long-term growth. Mr Heggtveit proposes that clients pay a single fee to cover all activities made on their behalf. Not only should the new system prevent bankers stuffing client portfolios full of unnecessary structured products and proprietary mutual funds, but there should be restrictions on selling those third party products which offer the best kick-backs to the bank. But changes will need to go even deeper than this if the client is really to benefit. Private banks must be given the confidence and resources to operate independently, rather than just being treated as a distribution channel for the latest fad.
