Boutique private banks

Providers are attracted by 1,000-year nest egg


By Robert Cookson

Published: December 15 2009 02:37
Last updated: December 15 2009 02:37

In the wake of the financial crisis, private banks across the world are scrambling to regain the trust of the wealthy. In Asia-Pacific, the task is particularly urgent.

The region will overtake North America as the world’s largest pool of wealth by 2013, according to Merrill Lynch and Capgemini – making it a market no private bank can ignore.

However, winning clients in Asia is an expensive and risky business, especially for groups that are late to the game.

“I see a plethora of newcomers coming and setting up shop in Asia,” says a veteran private banking executive in Singapore. “I think half of them will have disappeared within five years.”

By his estimation, setting up a single office with 30 client advisers costs about $40m a year and it would only start to break even after five years – or $200m – if it was lucky.

“You need a strong commitment from senior management to spend money in the region,” he says.

Then there is the tricky business of hiring – and retaining – the right people. RBS Coutts, the private banking arm of Royal Bank of Scotland, is trying to rebuild its Asia operations after 70 employees – a third of its Singapore team – resigned en masse this year, partly because of worries over bonus levels. Two of its most senior executives went to BSI, a Swiss bank, and others are expected to follow.

While the scale of the Coutts exodus was highly unusual, senior private bankers expect the battle for talent to intensify over the coming years. Private bankers often take clients with them when they switch employers, making them attractive targets for ambitious banks with cash to spend.

Some groups are pursuing faster growth through acquisitions. Recently, both ANZ, the Australian bank, and OCBC, the Singapore bank, have acquired private banking assets in Asia Pacific from ING, the Dutch lender.

Behind the scenes, banks have been overhauling the products they offer and rethinking how they deal with clients. Asia’s wealthy, many of whom are entrepreneurs with sophisticated investment requirements, have become more exacting after their portfolios were hit by the financial crisis.

Adding insult to injury, many of these investors had fled to cash and government bonds by the start of the year and therefore missed out on the rally in equities and other risky assets.

“The crisis has certainly made clients a lot more demanding,” says Aamir Rahim, Asia private banking head at Citigroup. “They are looking for much more specialist advice.”

Other senior executives tell a similar story: where clients once made most investment decisions on their own, they are increasingly looking for advice. As a result, they have become far more discriminating between private banks.

Another consequence of the crisis has been a flight to investment products that are transparent and liquid, bankers say, not least because many clients were burned by complex structured products such as the Lehman “minibonds” that went spectacularly wrong in 2008.

Interestingly, however, appetite for risky complex products has not completely vanished. So-called “accumulators” – dubbed by some as “I’ll kill you later” contracts – are once again rising in popularity in Hong Kong, dealers say.

This time round, however, private banks are making sure they have rigorous procedures in place to ensure that clients buy only products that are suited to their requirements – with a paper trail to show that is the case.

But there are bigger strategic issues to deal with, when it comes to expansion in Asia-Pacific.

First and foremost is the question of exactly where and how to do business in a fragmented region that stretches from Japan – a vast pool of wealth in a stagnant economy – to Australia – still in the midst of a commodities boom. In between is a diverse array of countries with enticing growth prospects, including India, Indonesia, and China, but where access is by no means easy.

Take China. It is obvious why foreign banks would want to tap into the country’s wealth. It is now home to more millionaires than the UK, and the number is set to continue rising rapidly. The trouble is, accessing that wealth is tricky (to put it mildly) because capital controls restrict mainlanders from moving money offshore, while setting up private banking operations onshore is challenging.

As a result of these kinds of considerations, global private banks are pursuing a wide variety of strategies and the jury is still out on which will succeed.

JPMorgan’s private bank, for example, is not expanding beyond the regional hubs of Singapore and Hong Kong, as its executives reckon that Asia’s very richest people tend to keep their “juiciest” assets offshore.

The group occupies a niche in which it almost exclusively targets “ultra high net worth” clients – those with at least $30m in investable assets.

“I love it when my competitors spend their money opening up branches in places that oftentimes they don’t fully understand,” says Paul Scibetta, head of JPMorgan’s private bank in Asia. “We don’t see a need to move onshore, but we will consider that over time.”

Instead, JPMorgan is devoting its resources to technology and training. As well as financial education, JPMorgan is rolling out a programme throughout 2010 to teach its employees in Asia about art and fine wine.

“It’s meant to be fun and also to make them better at their jobs,” says Mr Scibetta.

Other banks believe that since the vast majority of wealth in Asia is held onshore, long-term growth will require setting up branches across the region.

“In our view, the only way to stay ahead is to be present in the domestic markets,” says Kathryn Shih, head of UBS Wealth Management, Asia-Pacific.

“It’s easier said than done. Investing in a domestic market is a serious investment; it takes years to build up a client base,” she explains.

As well as its Hong Kong and Singapore hubs, UBS has branches in Japan, Australia, China, and Taiwan and is just starting operations in India.

Domestic banks, many of which managed to grab market share from foreign rivals during the crisis, are expected to become an increasingly powerful force over the coming years, even if they lack the global reach of their larger rivals.

“We take local competitors very seriously,” says Didier von Daeniken, Asia private banking head of Barclays Capital. “We take that into consideration when we plan our expansion into a particular country.”

With large numbers of Asian entrepreneurs set to float shares in their companies overseas, private banks that are attached to investment banks will have an edge, says Marcel Kreis, Asia head of private banking at Credit Suisse.

“If we can help in listing a Chinese company in an overseas market, we’re in a good position to help manage some of these proceeds,” he says.

Of course, boutique private banks argue the opposite. They say clients have lost faith in large banking conglomerates and want the safety and personalised treatment of a smaller institution.

On one thing, however, everyone agrees: the number of Asian millionaires and billionaires is going to boom over the coming years. All that remains is for private banks to work out how best to