The existential moment for private banking is finally with us. We have expected this day of reckoning for many years. We did not know whether it would come from a financial, political, climate or security crisis.
But it has arrived, combining a public health emergency, a social revolution on our streets and a major economic crisis. It has not necessarily come from the avenue we predicted. But private banks would be disingenuous to say it was unexpected. In fact most private banks and family office operations have been preparing for such an event for several years.
They have been investing heavily in digitalisation, data management, artificial intelligence, customer experience and environmental, social and governance facilities in order to adjust to a change of circumstances.
As a result, wealth managers are perhaps more ready for the challenges ahead than many other industries. Despite bragging about their flexibility to adapt, it has not proved difficult for them to move from meeting clients in boardrooms, dining rooms and sports venues to linking up on video screens. Cost savings have been significant.
Private banking investment teams have also been better prepared. They lost money for many clients at the time of the global financial crisis, due to allocations in inappropriate hedge funds, and widely-sold structured products, which benefited sales teams much more than investors.
This time round, we have seen more sensible changes to portfolios at the right moments, a bulk-buying of cheap assets after the initial crash and a move to more socially beneficial and new technology-led assets. There have been big losses too, but risk management and scenario modelling are improving.
In their move to curate data, structure philanthropic ventures and influence succession plans, private banks sometimes forget they need to be expert investment managers first. This is not lost on the likes of UBS, which apologised to clients after losing so much of their wealth after the last crisis. Bank bosses decided at the time that they must focus more on asset management.
The Zurich giant has just been confirmed as Best Global Private Bank for 2020 by our 15-strong judging panel. It has also won accolades for its Asian strategy and for its sustainable and impact investing offer. UBS credits much of this success to its catchy new ‘3L’ mantra of liquidity, longevity and legacy, used to frame client conversations.
The origin of such concepts is intriguing. This one initially sprung from the chief investment office’s work into how behavioural traits impacted the decisions clients were making about their portfolios.
This was eventually combined with another, separate piece of research from the client strategy office, looking at clients’ emotions and needs, into one of the bank’s top global strategic initiatives. UBS has long been fond of big ideas and grand gestures. But they knew this one was special, able to apply the glue of emotions to combine relationships and investment performance. It has already been rolled across different markets, countries and client segments.
The bank describes ‘3L’ as the pillar of its investment framework globally, crediting it for managing client expectations and adjusting portfolios during the Covid-19 pandemic.
While private banking leaders like UBS have done well to keep clients, they are aware the 2020s will be a transformative decade for the industry. The behaviour of clients will be key to how banks structure their offers to survive.
This will be driven by secular trends, including technology, demographics, the need for sustainable investments and perhaps most of all, the search for yield and return.
“Performance numbers will remain the guiding star,” says Amin Rajan, CEO of the Create-Research consultancy and a judge of our awards. “Covid-19 has shown that risks can emerge like a bolt from the blue. Clients want to be assured that scenario planning and liquidity management are now deeply embedded in the asset allocation process.”
Clients will tolerate short periods of poor performance. But they will not be impressed if their relationship manager does not contact them to explain it and make future arrangements for re-positioning or at least a discussion around risks. That’s why key criteria considered for our awards embrace both relationship management and investment performance, which are totally interlinked.
“Clients hate it when their private bankers change,” says Kim Cornwall, an awards judge who trains relationship managers in how to communicate the parameters of client portfolios. “Personal communication is key and mass e-mails and mailshots do not cut the mustard.”
This need amplified in times of challenging financial markets, when clients want to hear the difficult news from their relationship managers and not from watching Bloomberg or CNBC.
The reality, says Ray Soudah, who was a board member of several leading private banks before setting up his strategic advisory consultancy, MilleniumAssociates, is a stark one. This will remain a relationship business, but only for the wealthiest.
The high net worth population – even those with as much as $5m to invest – may increasingly be channelled into standardised processes and funds. Their offers and outcomes will be determined not by chats with sector experts and portfolio managers, but by algorithms and AI. Our candid interview with CaixaBank’s private banking boss, Victor Allende, shows this is likely to be the case.
What is clear from our awards, is that there are many successful private banks, with different priorities, business models and product offerings. Some emphasise only their portfolio management and asset allocation abilities. Others concentrate on empathy, understanding and communication with the ‘next generation’ of clients.
These factors will combine to create new opportunities for wealth managers. Trusted advice will become even more important, particularly when clients realise that in order to achieve their goals, they must embrace new assets such as private equity, until now well outside their comfort zone.
It is perhaps too early to tell whether wealth management can find the combination of content, scale and capabilities to succeed in the decade ahead. In the end, says Mr Soudah, “it will be the chemistry between the client and provider, coupled with at least a decent performance,” which will determine the success of the modern-day private bank.
