New relationships in private banking


Kurt Schenk - Dresdner Private Bank
Siegfried Peyer - Pictet & Cie
Pierre F. Baer - Credit Suisse Private Bank
Nick Lordá- FinanceAsia

Nick Lord: The topic today is new relationships in Private Banking. What challenges do you now face when building relationships with your clients?

Pierre Baer: I think that the challenges are increasing and they are different than they were a few years ago. First, there is increasing competition from both established as well as non-established players. I think we're seeing a change in the customer profiling as well. We are seeing people who are becoming wealthy who have no experience in private banking prior to becoming wealthy, typically the nouveau rich in the proper sense of the term. We are looking at IT savvy people, technology savvy people who have become wealthy through IPOs. These people are rather young and they look at the business quite differently than say their fathers did and their expectations are obviously very different.

Siegfried Peyer: I would fully endorse what has just been said. I see also that technology has obviously had an impact on our business as well, because technology has made our activities much more transparent vis-a-vis the clients and as has been mentioned many of the clients are now much more tech savvy and know how to take this information about different markets, about competitors and about fees. So I think the internet and technology in general has had and will continue to have a huge impact on our business.

Kurt Schenk: I agree with Pierre and Siegfried. Competition is much more fierce, clients' demand broadened and technology has made our activities much more transparent. Nevertheless, the key to a successful relationship remainsátrust. Clients want to trust the organization and the individual they are banking with and that will not change.

NL: Is it just a means of communication with your client, or is it access to information, or is it something more? Is it something deeper?

SP: Well for us, technology comes in stages. We find that in the first stage it's more of an informational tool, or a means of communication between the two parties. So the internet today is mainly used to obtain information about your account, about transactions, about sending e-mails back and forth, but probably further down the road this will change and as people get more knowledgeable and as the infrastructure gets even better and we'll see what happens then. But I think for the time being it is more of an informational tool and communications tool.

KS: Through these new tools, it allows us to communicate with the client with greater ease and makes us therefore moreáefficient.

NL: So it doesn't replace the essential nature of private banking, which is the personal service?

SP: That will always remain a cornerstone of our activities because we do not see people shifting totally to an anonymous platform, where they manage the portfolios themselves, they don't know who's behind at the other end and never have human contact to explain what's going on. So I think the advice, the handholding, the trust component of it will always be vested in a personal relationship with the client.

KS: With the slowdown of the US economy and the weakened stock markets, an increasing number of individuals are seeking the help of private bankers to restructure their current portfolio, to diversify their investments and protect their wealth. It seems that in today's market environment clients appreciate the professional advice much more than in a bull market.

NL: If technology is meant to replace personal service, why do Internet-based financial service providers start offering advisory services?

PB: Ultimately what the private banker does, or should do, is listen to the client, find out what the needs of the client are, then fulfill those needs with a whole array of product specialists. So with the internet it will allow you to do some transactional activity really cheap, typically with a brokerage, but that's only one portion of the whole wealth. So maybe another portion of the person's wealth is in a managed account for the longer term, maybe another portion is doing FX trading fairly aggressively. So the role of the private banker is to help also divide the assets into these different categories and let the client then speak to the specialists for these different products, rather than try and do everything him or herself.

KS: About a year ago a client shifted his whole portfolio to an internet financial service provider. Recently he came back to us, realizing that as a professional he does not find the time for his own investments.

SP: I think that's an excellent point. We're convinced that managing funds is a full-time job and the majority of our clients, and I'm sure your clients, are so busy with their everyday affairs, on businesses, whatever it is they do. They don't want to spend basically their waking hours monitoring their various investments and portfolios.

NL: Now this just leads into another area of change that has happened recently, where financial institutions are trying to shift the focus of the relationships between the client and the private banker to the client and the private bank. Is this a phenomenon that you are seeing and if so how is it happening and what are its effects?

SP: This is a very touchy subject, because as we all agree, a personal relationship between the individual and the private banker is the key to long-term success and a stable relationship. How the organization itself is ensuring that the relationship is more vested with the bank than with the individual itself is quite a difficult management challenge. One of the few ways you can do that is if you give the individual a long-term stake in the overall business, be it through some equity incentive or profit sharing because it is an absolute key that you maintain these individuals for the long-term and that you minimize your personnel turnover. But it is one of the key management challenges that every private bank faces. How do we retain the individuals we want to have? How can they establish long-term relationships with their clients and at the same time how can we make sure that the core relationship rests with the organization rather than with just the one individual.

KS: We at Dresdner tend to operate more and more on a team than on an individual approach. Trust leads to loyalty and that will strengthen the relationship among one another.

NL: Almost every bank in the world wants to have a high net worth individual private banking arm. Presumably the competition for talent for private bankers must be huge.

SP: The retention of the personnel that deal with clients is key. Some organizations are more successful in doing that for various reasons, and others less so. We see increasingly that a lot of clients are getting fed up with high personnel turnover because they are getting a call from organizationáX and six months later this person is at organization y and then twelve months later it's a new call and privacy goes out the window. There is a level of frustration that is rising in the market place precisely because of these high turnover rates.

PB: We see not so much as whether the relationship is with the private banker or with the bank, but rather we see a partnership. We see a partnership between the private banker and the client. And we see a partnership the private banker and the bank. If you can give the ability to the private banker to give unbiased advice, to choose any product in the market that is the best for the customer, then ultimately the customer will benefit and they will ultimately stay with us. Then the private bankers become more profitable and the more profitable they are, the more we can pay and obviously at the end of the day that is what attracts the private banker. So it's a partnership of being able to come to a platform that enables them to work the way they like to work, with all the products that they need. This enables the private banker to go to the customer much more confidently and more professionally and that makes them more successful. That's the model that we've taken both to retaining customers as well as keeping our clients happy.

KS: Total wealth management contains not only investment advice and portfolio management but also trust business, succession-, estate-, risk- and tax planning. It is a quite a complex field. The private banker is responsible for the overall relationship with the clients, identifies its needs and demands and provides through the "product" specialists the required solutions. As I mentioned before, it is a team approach.

SP: With products, one has to be careful to maintain objectivity vis-a-vis the client. All too often you might see a situation where products are sold to the client where it might not be in their best interest, but it might be in the best interest of the organization to sell that product for whatever reason. In private banking it is absolutely essential that any bank that wants to be a long-term player must maintain objectivity. Objectivity is increasingly the key because all too often we hear complaints from clients that have been burnt by various products, which were maybe not in the interest of what they were looking for, or didn't fit their profile, but were sold to them anyhow because it was in the interest of the organization.

PB: I agree. That is something you can see in the organizational structure, whether it is possible for the private banker to be independent, give independent advice that has to do with either being linked with an investment bank, being part of an investment bank, or being independent. If you look at the top 10 investments houses in the US, as of September, the top 10 were covering about 9000 shares, and how many sell recommendations did they have? 29. Are the clients of such organizations being misused for the distribution of investment banking products, or are they just the victims of the corporate world? Clients need someone to stand back and not have an invested interest and say "My invested interests are your interests. Let me give you the unbiased adviceá- this is good, or this is not good."

NL: Do the heads of the big banks understand this? They obviously must recognize this dichotomy that on the one hand having a private banking arm gives them a captive distribution channel for them to stuff all their bad IPOs into. On the other hand, that ruins their private banking business and the two seem to be mutually exclusive.

PB: We are two totally different banks. We are two Swiss banks, an investment banking side, as well as a private banking side. At the same time, we have the advantage of being able to use the products and know how of the investment bank and the global network, without being tied to the institution to make the recommendations that they make.

SP: The cornerstone of our business is clearly that we never want to have any sort of conflict of interest vis-a-vis the clients, so therefore we as an organization abstain fully from any type of activities such as investment banking or commercial lending and so forth. We believe that this is the proper way to do it, but obviously there are other business models as well.

KS: Dresdner Kleinwort Wasserstein and Dresdner Private Banking are two different business units with their own management. We are looking for long-term relationships with our clientele and are more advice driven than transaction driven. Therefore it would be short-sighted to misuse the private banking arm as a distribution channel.

NL: Do you develop close relationships with the investment banks to try and get into the good IPOs?

SP: Yes of course. We go out in the marketplace and buy from the providers that offer the best products, at the best price, that fits the needs of the client at that time.

KS: It is advisable to have close relationships with different investment banks.

NL: What scope do you have within your banks for going outside your organizations for advice, for brokerage, for ideas? Or is it very much a captive sell?

SP: In our organization we have a dedicated team that monitors a universe of third party funds. Basically it's a global database and then they filter this down to a monthly recommendation list of which funds at the time are of interest and we recommend that to clients if they are interested in this type of thing. All we do is analyze investments. We have in-house analysts and they buy these shares or bonds, or whatever the investment is, from third party providers. In our case, I dare say we are totally focused on independence and objectivity.

KS: Dresdner Private Banking has its own independent Investment & Advisory Teams. These teams are filtering information from different sources. To compare funds from different providers through the internet is very popular among private bankers. The ability to recommend third party funds gives the private bankers additional credibility.

NL: So now there is far much more objectivity within the private banking environment?

PB: I think we were the first private bank to go onto the internet, and one of the first things we did, is launch the Fundlab, which now covers over a thousand fundsá- our own funds as well as other people's, because ours are not always the best. But it doesn't matter, because as a private banker, our interest is to sell the best fund to the customer.

We've gone a step further recently, which is not available on the internet, but only for our customers, where we have found the best hedge fund managers in the world and put them together to offer that to the customers. By taking the best of the best, bundling it, offering to the customer in sizes that are agreeable, that's the kind of approach that we are taking in the future.

NL: Having spoken about some of the conflicts of having investment banking tied into private banking, there must be some positive aspects.

PB: Most definitely. It gives you access to a research capability second to none and these are global resources. So regardless of where you want to look in the world we have research on the companies and understanding of them. It also gives you trading capability in shares or bonds that may be not very liquid.

SP: I would agree that there are certain advantages at times. If a large private banking client needs to raise money through IPOs, disposing of businesses, this is where an investment bank's expertise is required. With all due respect, I tend to disagree on the analyst side, because investment banking is as you mentioned, a sell side activity and out of 9000 stocks in the US, only 29 are on sell recommendation, so I don't know whether that's objectivity or not. I wouldn't go as far as to totally discredit it, but again I would leave it up to the readers of FinanceAsia to decide, in the current climate, whether these kinds of ratios are an objective view as to what's going on in the market or not.

KS: Without defending the analyst we should bear in mind that their research is mainly meant for the institutional clients and not for private clients.

NL: You mentioned earlier that some investors have been 'hands on' in terms of buying their own stocks and making their own decisions and so forth. Are you noticing a bit more of a change now that we are in a bear market? Are there any changes to their investment habits?

SP: I would say that it's stating the obvious that the typical Asian private banking client is more hands on than in Europe or other parts of the world. They tend to be more performance-sensitive than other clients and I wouldn't go so far as saying that just because we are in a market downturn, that clients have become more comfortable in letting go and letting the private banker take all the decisions in terms of a fully discretionary portfolio. I think it's safe to say that in a period like this, as Pierre mentioned earlier, that is, when private banking can show a lot of value added in terms of guiding the client through difficult times. I think the intensity of the contact has been increased and must be increased in a period of relative turmoil.

PB: If the analysis of the client's need is done properly at the beginning of the relationship, you tend to find there is not a change of product or investment involvement in times of market volatility. The part that clients invest themselves will still remain in bad times. What changes though is the understanding of the value of advice again in bad times, which is maybe larger than in the good times. In good times you feel comfortable and can take care of things yourself, but when it is more difficult, then you want to have more advice again. It is the advice that comes out more in bad times rather than a shift in the product, say from a managed to an advisory.

SP: I also think that we were in a period in the past few years where we had the rising tide that lifted all the boats. Everybody made money left and right and quite a lot of people thought it was quite easy and that stock markets only go up. This recent correction has also highlighted the benefits of diversification, having different asset classes and not putting all your eggs in one basket. In that sense it has actually been a good development.

KS: I fully agree. Nevertheless, it is very difficult to convince clients to remain in their discretionary portfolio. In a bear market it's all about absolute performance and not relative performance.

NL: Are you seeing clients bringing money back to Asia and out of the US markets?

SP: I find it very difficult to make these global statements because in the end it's extremely difficult to measure these flows. You only see these flows with a time lag, so all we have to go by is anecdotal evidence on clients telling us that yes we have done this, or no we haven't done this. As far as our activities are concerned I wouldn't say that we have seen an extreme shift of repatriating money home.

PB: I think what happens typically for the portion that is managed in portfolio management, discretionary mandates, that will not change because you have your global asset allocation. The portion that could change is the investment advisory portion, where the client could decide him or herself.

KS: From a total wealth management point of view there is not much of a change in terms of regional allocation and currency allocation. Within the portfolios we have seen a shift towards lower risk investments.

PB: A lot of the self-directed investments that took place in the US were based on recommendations of the US investment banks. Now we know that most of these recommendations have lost money, so the customers are either sitting on their losses, or they took their loss early. If they took their loss early, then they can have money to invest again. But as we saw of the 9000 shares, only 29 were on sell, so no one told them to sell, which indicates most likely that they're still sitting on their losses. Therefore there is not that much money to repatriate elsewhere. They've been burnt, they've got less wealth now because of the situation, and it's a lot more difficult to invest again.

SP: I thinks it's also important to remember that in a long term asset allocation there's overwhelming statistical evidence and we can go back many years, 10, twenty years, that the bulk of your performance does not come from stock selection, but from asset allocation and different asset classes, between geographical markets, currencies and alike. If I remember correctly, roughly about 80% of performance is made that way and 20% by picking stocks or sectors. A crucial component that was just mentioned is that you stick with long-term asset allocation.

One additional area of interest we've seen recently, with markets being relatively volatile, but more or less moving sideways, is that many of our clients have expressed an interest in hedge funds. These are tools that hopefully will allow our clients to make money in up and down markets, or even if markets move sideways. Obviously clients have to be fully aware that this is a different kettle of fish in terms of risk. There's no free lunch and for a high return you have to be willing to assume a higher level of risk.

NL: Yes, you can still lose a lot of money playing relative performance. You beat the index by 20% but still lose.

SP: I think increasingly we hear clients say "I'm more interested in absolute performance, rather than relative performance because I'm not happy at losing 20%, even though the index may have gone down 50%. My aim is to preserve my capital and at the same time I want to make money."

KS: It's a bit contradictory. We know that a professional asset allocation process is the single most important factor in determining superior long-term performance. Security selection has hardly any influence and market timing is basically irrelevant for the long-term performance. But in a bear market, timing seems extremely relevant and absolute performance is a must. Under this condition it is very difficult for a private banker to advise a client to invest in a managed portfolio.

NL: It's very hard for fund managers whose job is to beat the indexá- which they doá- and they still lose 20%.

SP: I think it's also a bit of an educational process in terms of talking to the client that you have to point out the different risk profiles. How long is your investment horizon? It might be quite okay to have a negative performance and relatively positive vis-a-vis the index, if your investment horizon is three years or five years out. But again some clients have different views and different attitudes and the private banker needs to be flexible and be able to address those while pointing out the risks that are associated with it.

NL: Okay, let's just wrap it up and draw some of these themes together. The message that I am getting from this is that the relationship between private bankers, private banks and their clients has become deeper in the past few months. Clients demand more advice on products. They want more flexibility. Is this something you would agree with?

PB: Yes, I would agree, and that's partly due to the competition. Partly due to the visibility of the information and partly due to new entrants, who are also coming to the market.

SP: If I may, I would beg to put a relative aspect on deepening the relationship with the client. I dare say yes, hopefully the relationship has deepened, because in a time of turmoil the private banker needs to be as close as possible to the clients. I can't say whether all of our competitors have done that, but I'm sure that my colleagues around the table certainly indicate that they have and I for one can say we have done that as well.

NL: Do you think some of the recent turmoil might shake out some of the less professional private banks, or private bankers out there, because obviously there are quite a lot of them.

SP: Well it's always difficult to make statements about our competitors and other organizations, and I for one wouldn't wants to make a comment like that. But I dare say that maybe with the growth of our business, the quality of the people in our businessá- or the quality control standardsá- might not be as tight as it was in the past. That is certainly an issue that will need to be addressed over time by various participants in the market, because the quality of the people in the end makes or breaks a private banking operation.

PB: I agree. I think training is a constant necessity and we welcome the MAS's [Monetary Authority of Singapore's] efforts to put a certain level of know-how to private bankers and make it compulsory. That obviously reflects what you mentioned, which is that it is felt that there is a necessity to protect clients and to give them good advice.

KS: I doubt that due to the recent turmoil the number of competitors will be reduced. But in the long run, quality will succeed!

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