A revelation from Morgan's Warner

In Hong Kong JP Morgan''s boss Douglas Warner outlined a new vision for the bank in the e-future.
ôYou could severely disrupt Hong Kong if a terrorist got in here,ö was one passing observation. Such was the calibre of the audience. As even master of ceremonies and Hang Lung billionaire Ronnie Chan pointed out, there were people sitting at the tables that didnÆt normally turn out for Asia Society events.

What provoked this turnout? As it happened, a speech by JP Morgan boss, Douglas Warner, who was in Hong Kong for a brief visit.

I did not go there expecting a revelation. However, I was remarkably surprised.

The early part of the speech dealt with the present technology debate û dinosaurs versus dotcoms, etc. It was not boring, but nor was it original. However, in probably the most opaque sentence of the speech he opened up a very interesting avenue for the Q&A that followed.

The sentence referred to the financial services industry and went: ôClient versus product business models increasingly represent real tradeoffs. With the power of technology to disaggregate, it will probably be necessary to choose one or the other, client or product, not straddle as has been possible up to now.ö

In the Q&A he went into more detail about what those two sentences mean. He said his firm was following the client not the product route.

ôItÆs about client relationships, not products,ö he said. ôThat means we create solutions for our clients. We re-aggregate to form these solutions.ö

Then he cut to the chase: ôBy aggregating and forming the best solutions, we will offer some products that are ours, but if ours are not the best we will offer some of Sandy WeillÆs [of Citigroup] or Phil PurcellÆs [of Morgan Stanley] or HSBCÆs.ö

This is what he means by taking the client route, and not the product route and itÆs quite radical.

ItÆs a view that came out of a recommendation made by 70 of JP MorganÆs brightest stars, all of whom were stuck in a room for six weeks in December and January. This was one of their core recommendations.

What is amazing is that by becoming client-focused, JP is returning to a classic advisory model invented by the old British merchant banks. The approach involves giving trusted advice û and creating a relationship with the corporate much like that enjoyed by a private banker with his rich client. You build this trust by doing whatÆs best for the client, as opposed to selling the client the product from which the firm will make the best commission.

This approach recognizes that one firm cannot be the best at every product, and when your firm is not, you recommend the client use someone else. It recognizes that your firm does not have to be in every product. To add value, you simply help the client make the right choices. That is not to say your firm is not excellent in some products. You might be very good in, for example, mergers and acquisitions.

He then began to question the idea of the ôbroad-spannedö financial institution.

This broad-spanned financial institution is, in fact, the very thing that the world has been creating over the last few years. It is the financial supermarket: the structure that can offer all products to all clients under one roof. It is the commercial bank that merges with the investment bank that merges with the private bank and so forth.

WarnerÆs point is that technology will tend to ôdisaggregateö all these products anyway, so the logic of providing them all is not a compelling proposition. Clients will want the best of every product and almost certainly these will not reside under one roof.

The premium going forward will be earned by the institutions giving the advice, the ones adding the real intellectual property.á

That is what JP Morgan wants to be the market leader in.

Certainly it is an institution that is well placed to face change. Once a pure commercial bank, with 70% of its balance sheet made up of loans, today that figure is 5%. It has made a successful transition from a wholesale bank to an investment bank.

Now it plans to make a further transition. Certainly JP Morgan is looking at the future intelligently, although one cannot imagine this transition being a simple one.

All that said, the award for the wittiest remark of the day must go to MC Ronnie Chan. Warner spoke about turning JP Morgan on its head and a question came from the floor asking what would have happened if he had not done this. Chan couldnÆt resist saying ôYou would have been on your feet and not on your head.ö