Private banking and asset management business models roundtable, 8 November 2010
- Louay Al Doory, Head of Global Business Development, Reyl & Cie
- Peter Astleford, Partner, Dechert LLP
- Joe Bannister, Chairman, Malta Financial Services Authority
- Toby Pittaway, Partner, Oliver Wyman
- Guy McGlashan, Head of Products and Services, Kleinwort Benson
- Todd Ruppert, Chief Executive of Global Investment Services, T Rowe Price
- Jervis Smith, Global Head of Clients, Global Transaction Services, Citi
- Yuri Bender, Editor in Chief, Professional Wealth Management
Yuri Bender: Welcome to the discussion about private banking and asset management business models and how they are evolving following the financial crisis. Is it true to say that a lot of the issues to do with the way the business is managed relate to poorly constructed and thought out attempts at mergers and acquisitions?
Todd Ruppert: What many obsess about is growth as an outright objective as opposed to viewing it strategically, and M&A is a quick way to propel growth. However, what this does not address is the potential negative impact on culture, which can be destructive. In our case, with $439bn (€321bn) under management, our mantra must be ‘thou shalt not forget the first $439bn of valuable client assets’ and if the incremental dollar is going to cause disruption to the existing client base and culture through M&A activity, then it makes absolutely no sense to do it.
Looking at banks and insurance companies that either have asset management subsidiaries or are seeking to acquire asset management entities, there is a dichotomy. On one hand, the asset management organisation has a more predictable and desired cash flow profile and utilises less capital so from that standpoint, you have a higher multiple entity buried within a lower multiple entity. However, on the flipside, because of Basel III and Solvency II, the surplus capital might not be there to acquire someone.
So on the one hand, there is a desire to sell, meeting Tier 1 Capital or Solvency II, and on the other hand there is a desire to acquire for the attractiveness of the business. I do not know which way the industry is going to go; I would imagine there will continue to be both buyers and sellers.
Jervis Smith: For both asset managers and private banks, if you are looking at M&A, either to be divested from a large organisation or to acquire somebody, you really have to think about what the objective is and the reasons why you are you doing it. If you have a very strong, open architecture, asset allocation manager sitting within a private bank, I do not see anything wrong with that model. It is a very good model to have in a private bank
because it means having some people who are very close to the client base so they know what the clients need and what their objectives are and they can pick products from the various asset managers on their platform.
There are only two reasons why an asset management firm would want to buy another asset management firm. The first is distribution, so in other words, buying somebody that does not necessarily have that many products that you need, but who have a parent that has a good platform and a good understanding of what products might sell into their channel. We saw an example of this when Aberdeen bought Credit Suisse.
Alternatively, you buy for product which is what BlackRock did with BGI, which is they saw a macro movement going on towards cheap and cheerful index products and thought that they might as well cover a business threat, by making sure that they had that in their wardrobe as well as their active management. The management of these M&A activities is what is important and it is the execution of them that is really critical. We have seen BlackRock do it well once and there is no reason to suppose that they cannot do it well again.
Louay Al Doory: M&A is all about execution and managing culture. There are only three things that really differentiate one company over another, basically people, process and culture; that is what you have to manage.
In my previous role at UBS Wealth Management, I used to be responsible for all third party and UBS funds used within the bank, so I had a relationship with nearly every fund provider. Each provider showed me their product range and we would then decide which one would go onto our platform. We had about SFr250bn (€185bn) of product assets under management.
The real difference between manufacturers is their ability to serve the client and making an effort to understand their business model. Out of the 500-600 wholesalers that continually knocked at our door, only 10 per cent knew what they were doing. The quality of personnel in the asset management sales industry is very poor. What will be even more interesting will be when all of the hedge fund providers that develop Newcits realise that they now have to sell in the retail world.
