Private banks finally ask: why are we here?

Battle lines are being drawn in the colourful world of private banking and the latest showdown is one that goes to the very philosophy behind the management of family wealth. Banks are at last asking the fundamental, uncomfortable question in their internal soul-searching forums: is our main purpose to make money for our clients, or are we here to maximise the quality of the customer experience?

This question becomes apparent when reading between the lines of 120 entries to PWM’s Global Private Banking Awards for 2016. Despite entreaties from private banks such as UBS over the last 10 years, stating that investment management is now the key raison d’être of these institutions, the reality is not so cut and dried.

Of course, there are those who value investment credentials above all else. In Liechtenstein, the LGT private banking franchise shouts from the mountains about alternative investments. At Coutts in London, newly-installed chief executive Peter Flavel is stressing the importance of investment performance to a clientele previously wowed by the attractions of a luxury private wealth brand. Banque Syz in Switzerland, having made its name in hedge funds, is adding private equity to the menu and plans to popularise these strategies beyond Swiss borders.

Indeed, banks such as ABN Amro, big fans of the new reality of the onshore model of local relationship managers for local clients, have long talked about improving investment processes. Their chief investment officer Didier Duret is taken seriously by the bank’s management in Amsterdam when he asks them to recognise challenges created by unspectacular growth and hyperactive monetary policy. He urges his investment staff to roll up their sleeves and search for returns when asset yields are melting away and diversification has become a much more arduous pursuit. They are finding this through careful scrutiny of emerging markets, Asian equities, commodities and listed real estate.

But at the same time, he asks the private banking fraternity why they cannot embrace the same techniques which asset managers use. Talk of minimum variance, factor investing and smart beta strike fear into the hearts of private bankers, yet they should not.

So why are so many big name banking brands reluctant to seize the nettle? Several years ago, Amin Rajan, a leading consultant in asset management, was sensing optimistic signs in the wealth world, with innovative strategies and devices, mostly from the US, seeping into best practices in the white-gloved worlds of Geneva, Zurich and other private banking powerbases. But today, he no longer sees the bright lights of innovation.

What has led to this change in mentality? According to Christian Edelmann, head of private banking at the Oliver Wyman consultancy, one of the main problems has been the lacklustre market and difficulty in mining for alpha. Investment performance has slowed considerably across the industry. The difficulties in generating returns have led banks to downgrade the importance of investment and focus instead on the “broader relationship”.

But could this new focus on softer factors in fact be what most clients are looking for? According to wealth think-tank Scorpio, the private banks are finally getting the formula right, after many years of missing the target. Service factors such as access to a broader range of team specialists are more important to today’s client than promoting investment strategies and performance, according to the research Scorpio conducts in the high net worth client community. The customer experience in terms of easily negotiable technological portals also helps spread the feelgood factor.

The key qualities of the ultimate private banking business model emanate from the clients themselves and the specialists who interact with them, believes Scorpio’s founder Seb Dovey. The biggest challenge is in optimising the performance of these customer-facing staff, requiring a radical overhaul of the way banks reward staff in relation to revenues received from clients.

So should the investment geeks, fuelled by return statistics, standard deviations and Sortino ratios cede ground to the softer sell of the service culture in order to win the hearts and minds of clients? To start answering this question, banks must keep the dialogue going and ask the customers exactly what they think before constructing solutions. Bearing in mind the emphasis on dialogue within communities, networks and families in the awards submissions of most private banks, this appears to be at least one part of the equation they are definitely getting right.