private-bankers-reveal-their-strategies

Private bankers reveal their strategies

Some of the world''s most senior private bankers talk about their strategy and their outlook.

Joachim Straehle

Member of the executive board of Credit Suisse, and head of private banking international division

What's the thinking behind relocating someone as senior as you to Asia?

The private banking area is the most important part of the Credit Suisse group in terms of net profits. Last year SwF2.48 billion of SwF5.2 billion came from private banking, so it is a substantial part of the business. We have split private banking into three areas. We have private banking in Switzerland, private banking Europe - which focuses on the onshore markets such as Italy and Germany - and then we have private banking International.

Switzerland is a very saturated market with lower growth rates, and the international part - which I run - is viewed as the growth engine for private banking within the group. And if you look at the world, the region which is growing at a double digit rate is Asia. So it was very clear to me that sitting in Europe and running the international part was a mistake. Looking at the populations and growth rates, and the fact that Credit Suisse is the second largest private bank in the world, I felt I should be here.

Last September, we had our group executive board meeting in Shanghai and we discussed my moving here. Both Credit Suisse's Chairman and CEO thought it was a good idea. Sitting in Zurich with two branch managers in Asia doesn't guarantee me the growth I am expecting.

Now I am here in Asia I have to build up the management capabilities and the platform. This is important because we have grown our staff in Asia by about 50% in the last two years. And due to the shortage of relationship managers in this market, I have brought with me the business school we have established in Switzerland. This is a private banking training school and opened in Singapore in May. We are looking for talent - students from university, and related areas. This allows us to give them the skills and faster integrate them into our organization.

From a growth perspective, I see organic growth through hiring people, as well as through making acquisitions. Likewise, getting our foot into China is the future of private banking. No one has achieved it yet. There are no private banking licenses and it is a moving target. But we have to think long and hard about getting China right.

So in any given month you could be in Hong Kong, Singapore, Russia or Latin America?

That's right. It is a punishing travel schedule, but I had that in Switzerland as well. The only difference is that I am sitting here in Asia and I have appointed a deputy in Switzerland who looks more at the US. My focus is mainly Asia and with a second eye, the Middle East.

Have you always been a private banker?

No, I started in 1978 with Credit Suisse, but on the commercial lending side. I began with letters of credit and so forth and then did my training in economics, and received a degree and then became an all-round banker. In fact, I have spent my entire career in banking.

In Switzerland, military service is an issue, and I became an officer in the army. Indeed, at that time in Switzerland if you were not a high ranking officer you could not achieve a good rank in the banks too. I spent three years as a captain.

Back at Credit Suisse Jo Ackermann started a multinational coverage model, for the 50 largest Swiss corporates, with three branches abroad and 25 people. I worked in this for four years between 1987 amd 1991. Then I was transferred to New York, representing this department in the US.

After that I joined Bank Julius Baer. I was running Julius Baer's credit department, which had 420 people in New York. I then moved into private banking, and by the time I left I was deputy branch manager. I left for personal reasons, because I wanted to go back to Switzerland.

In 1999 I started Credit Suisse's family office, and the next January I was appointed CEO of Credit Suisse Trust - which is one of the largest trust companies in the world. I opened up trust offices in Hong Kong and Singapore and we moved into all sorts of advisory products. I basically turned this round in two years from a loss-making company to one that made profit of SwF50 million ($41.6 million).

In mid-2002 I was appointed as the private banking head of Middle East & Asia. Then there was a total restructuring, and I was then made head of private banking International and made a member of the executive board of Credit Suisse.

Are you more of a business manager or do you deal with clients?

In order to rise through the private banking ranks, I had to produce and hit my targets. So I had to bring in new assets under management. Then I started moving more and more into management. But even today I am covering clients and specifically go and visit them.

Whenever I go on business trips my aim is always to see clients. I have to be close to the market - to understand their needs - and it is a very helpful tool. The best way to understand a country fast is through meeting the clients. It is also very helpful to our relationship managers when they can show up with top management. I am very pro-business and this is an important part of that.

Meeting the clients is the part of the business I enjoy most and is the part where you can make a difference at the end of the day.

Did you find military service beneficial?

It's a unique experience. You are young but get lots of responsibility. What I liked about it was being put in a position where you need to make decisions quickly and also see the results immediately. In a way, it is good management training. Getting people to follow you is a challenge at the end of the day and learning about leadership is very helpful. Plus, getting to know the limitations of your mind as well as your body is something all of us should experience at one time or other.

Did you always want to be a banker?

No, actually I wanted to be a pilot. But when I did some training and actual flying, it was not what I imagined it would be. I also wanted to do sports, and considered becoming more professional. But I realized my limitations and knew I had to learn something serious. I always liked numbers, making contact with people, and leading people, and having responsibility. Going into banking offers you all these things.

What are your passions?

I have a passion for clients. I do not play golf due to the lack of time. I love art and the opera. One passion I also have is Formula One. We partially own the Sauber Petronas team. This is a passion that can be shared with your clients. I have also started collecting cars. I would like to get into this more at a later stage.

Why did you base yourself in Singapore?

My family are in Singapore and I divide my time between Hong Kong and Singapore. Hong Kong is our marketing platform for Greater China. Singapore is more of a processing platform and from a marketing perspective is used to cover Southeast Asia.

My family chose Singapore. Coming from the cold of Switzerland they wanted to live in a warm climate. Singapore is such a good environment, and when I compare Switzerland and Singapore, the nice thing is its stability and the government being so proactive in supporting business.

People often say Singapore is the Switzerland of Asia?

To a certain degree it is, but it still has a little way to go.

Is it true that China is where you are focusing a lot of attention?

Definitely. There are many issues with convertibility, licenses and so forth. With the WTO this might change, but we must get to know China, the mentality, the products and how we can go about doing business. We are also looking out for potential partners.

Would you consider JVs with local banks? For example, in Korea?

The concept I have developed is a global-local approach. Traditionally we have covered our clientele out of Switzerland. But now we need to identify key markets, and open a rep office - then you can be onshore and explore the potential, and know with whom we should talk. Then you acquire licenses and then you build as required, an asset management company, a private bank or whatever. That's our current approach.

So to return specifically to Korea. From a regulatory point of view it is a very difficult market. The only thing you can do at the end of the day is to go onshore and build. One way to do that is to partner with a local bank. But for a private bank the most valuable thing is the brand and reputation. So if you want to share your brand with somebody else, you better really understand who it is. It is very important to pick the right partner. We would normally like to have a majority stake so that we are in the driver's seat. And we would like to have a clear exit strategy from the very beginning.

What's your view on India?

In May we opened our branch in Dubai. We have 50 people there and will cover India from Dubai - since many Indians go to Dubai or live there and it's only a two hour flight. Our plan is to also go onshore in India, but it is a question of the license, and what exactly we can do locally. This has to be looked at very carefully. But it is a fantastic market.

Are you worried about the level of private banking competition in this region?

Obviously, you should never underestimate your competitors. But as I mentioned earlier, our profit contribution to the overall profit of Credit Suisse is very large. When you compare other banks and their private banking contribution, you clearly see that Credit Suisse is one of the most committed. Therefore from the very bottom to the very top of management, people are committed to this business.

Did you enjoy living in the US?

Very much so. It is very fast moving market and really expands your horizon. I lived there for eight years and I really enjoyed it.

I have a desire to be international, which is why my family and I moved to Asia. It's fantastic to pass on this cosmopolitan experience - living in Europe, the US and Asia - to your children. It makes you a much more tolerant person and gives you all the tools to be successful in your later life. You have the advantage of knowing the world. My children have a US and Swiss passport. People like myself realize that your children should speak English as their mother tongue. I have one daughter and two boys and they will learn Mandarin at school.

Where are you from?

Originally, I was born in Germany. We moved to Switzerland in 1966 and I applied for Swiss citizenship in 1978.

How long have you been living in Asia?

I moved here three months ago. I have been responsible for Asia for the last three years.

When you talk to your clients, are they a little concerned about the investment outlook?

I was expecting that we would see some correction after April and it seems to have happened. There is a lot of uncertainty. That's when clients come to us and it's why clients pay us. Our job is to inform them and help them find the right products for situations like we face now. It's why we have structured investment products, and these are doing quite nicely.

Do you worry about global imbalances leading to a crisis?

Today it is such a closely-linked market. Something happens in China and it immediately has an impact on the rest of the world. A terror attack in Indonesia will impact the whole world.

The nineties were a bullish time. Today there is less certainty. Is it more of a challenge today?

Yes, we now really have to work for our money. There is no free lunch anymore.

Swiss banks have always been known for capital preservation over the generations. If the markets are becoming more uncertain does that play to Swiss strength?

Historically, whenever there was uncertainty people would invest in Swiss francs and gold. And whenever there is uncertainty we see lots of improvement in our client base.

Can you talk a little about currency diversification.

We recommended three or four years ago - specifically to our Latin American clients - that they should move into euros. The ones who did made big money. As a Swiss bank, that's where we are strong - in international diversification.

Clive Bannister

CEO, Group Private Banking, HSBC Private Banking

Can you talk a little about the growth of HSBC's private banking business?

We've used as our moniker, "Assume nothing" and we use that because we don't want our private bankers to take our clients for granted, to take the markets for granted, and likewise to ask questions, and be intellectual.

This is a business that has been on a journey for the last 10 years. We had a small business in Asia, and smaller businesses in Europe and the Middle East. In the last 10 years we have taken the opportunity to meld them together through a series of acquisitions and in the last financial year we had earnings of around $693 million, and about 5,500 people working in 60 locations - that's versus $80 million six years ago. This is where I'd like to compliment the team in Asia. We've gone from being a small private bank, to the third largest in the world. Our goal is to work with complicated families. It's in Asia we see enormous opportunities. Asia has growing family wealth and this brings with it complications. Plus we are always intrigued by people who are still making their money. That's why our relationship with HSBC Group is so crucial. We have the opportunity to introduce clients of ours to the commercial bank, which can then arrange commercial loans for their businesses. That relationship between the group and the private bank has been one of the reasons for our success.

Then again, it's not how big you are, it's how good you are. There's a line I love: it's good to be big, it's better to be good, and it's best to be both.

Is your background in private banking?

I studied economics and worked in the US with Bank of Boston, and then I joined the management consultants, Booz Allen Hamilton, where I was a partner. I joined HSBC Group nearly 11 years ago, and joined the investment bank. I ran various businesses within the investment bank, working in America. My background is in corporate finance. In 1998 I was asked by John Bond to look after private banking as a global business.

It's ironic, but if somebody had said to me at the beginning of my career, do you think you will work in a private bank, I would have said not a chance.

So much has changed. We had a meeting with our staff yesterday, and there was a question about 'What sort of people do you need in private banking?'

There was a generation of private banker for whom playing golf and understanding wine was a more important skillset than actually having intellectual curiosity, energy and ability. One of our challenges is to become and remain the employer of choice for those people who want to become great private bankers. What I've noticed is that individuals who always thought they would become investment bankers or management consultants, are finding the mixture of dealing with complicated finance, and the human dimension of the families very interesting. So we now see a higher calibre of candidates.

What are your biggest markets?

Hong Kong is our biggest market, and the other markets are much smaller. The next biggest is Indonesia. Our Singapore office has 250 people and is our second biggest territory. We use Singapore to cover Southeast Asia.

Our ability to take Asian clients and work with them in Geneva, the Channel Islands - help them via Bank of Bermuda - or stay with them onshore is one of the compelling differences between our business and that of our competitors.

We have very big growth plans in Asia. But our plan is now to grow organically rather than make acquisitions. In Asia we have two major challenges. One is to grow with an increasingly complicated group of families, and we are doing this through our family office division. The second major challenge is how we introduce our other wealthy clients around the world to opportunities in Asia. If you are a wealthy European or American, and you leave your money in the OECD, your money will grow at between 2-3%. If we can introduce Asian emerging market opportunities to our clients in a sensible way we not only help our clients in this part of the world, but elsewhere in the OECD. They are very interested and ask us about opportunities in China, India, Malaysia, Vietnam and so forth. So, for example, we recently set up a small $45 million fund that is looking for growth in China, and our clients were the majority investors in the fund. To take another example, we have a European client looking at real estate in Beijing. We know there is a growing appetite from our clients in the OECD to invest in the Asian success story. It is our job to help them do this via funds, private equity, equity portfolios or property.

So there are two ways that Asia is crucial to us. And I should add that our growth rate in Asia has been 20% per annum for the past five years.

Can you speak a little about the family office concept?

Yes, it is a very important part of our business. Three years ago we set up our first family forum. What becomes immediately apparent is there are shared issues, and they deal exactly with how you hand things over. Any family has three things to deal with. First is the philosophy of what to do with the next generation. Do you divide the business up; or do you monetize it by selling the company? So you have to have a philosophical approach about whether the family wants to work together. The second thing is you then need to put in administrative processes. Part of that is a communication exercise within the family, as the members of the family are often spread around the world. The final part is the investment approach. You can imagine a grandson will have a very different attitude to private equity investment versus the grandmother. That's why you need to have sense of shared investment philosophy.

At the heart of our approach is the ability to also do custody and legal structuring. Having bought the Bank of Bermuda we have the world's largest private client trust business. We can manufacture and operate legal structures in 23 locations. Plus we can do consolidated accounts, bringing together the clients various private banking relationships onto a single account. That is extremely complex, especially when you are dealing with a variety of asset classes. You have to do it in a consistent way so that a family can see the totality of its wealth and thus make informed choices. Families sometimes pursue a sort of random-walk investment approach; and we feel this is the lynchpin of pulling everything together for the good of the family. There are very few banks in the world that can do that.

At what level do you migrate your customers from the consumer bank to the private bank?

At around $2 million. But it is rather a crude question to ask somebody: are you rich enough to become a private banking client? The rather more intelligent thing to ask is whether the client is complex. Does the client have a business, and private money, children overseas, a liquidity event (such as an inheritance)? It is when clients have a complex personal situation that they need a level of interaction with a private banker, rather than the services that are given by HSBC Premier.

Is HSBC a major player in offering hedge funds to clients?

Overall we have $23 billion of our clients' money in hedge funds, and that is among the largest of any private bank. About 80% of that is advisory, fund-of-funds where we have done the surveillance - indeed we have 35 people around the world doing that. We then give advice on portfolio structures to minimize concentration risk. Hedge funds are a legitimate asset category, but you have to spread it out and diversify between strategies such as long/short, macro and so forth. We believe that every portfolio should contain some hedge fund exposure just as it also should have equity, bonds and cash. But it doesn't mean buying one, it means buying several and that's where we add value in an advisory capacity. What is exciting about Asia is our clients are now becoming increasingly aware of this asset class. We want, however, to peel away the mystique of hedge funds and let clients know exactly what they are getting involved in. We have a good track record of doing this in Europe and America.

Is there a hedge fund bubble underway?

As a percent of the total asset management industry, hedge funds are still 2-4%. The industry analysis is it will end up being closer to 8-10% of total assets. What does that mean? It means that if you are an institution or an individual, a portion of your portfolio will be actively managed against an absolute benchmark - as opposed to relative performance. That may involve leverage and various derivatives.

If 10% is the endgame, the question then arises about the trajectory. The trajectory thus far has been very fast, which is why people ask if there a bubble. I think that you have an industry that is attracting an enormous amount of human talent and funds - and is on course for assuming a larger role. It's still a very young and relatively less regulated business, so there are always those concerns about bubble situations. I wouldn't call it a bubble now.

How do you reconcile an open architecture approach versus using HSBC products?

We seek best of breed and we have to be able to go to our clients and say we did so. To take one example, if a client says will you invest us in India, we have an India fund and that happens to be world class. We have to be able to do that. Clients expect us to have a set of investment competences, so we have to have our own funds. For instance, in the hedge fund area we have our own capital and funds in Hermitage, which is one of the largest Russian-only funds. If we are recommending investment in Russia, we would naturally recommend Hermitage because we have our own money in that fund.

Then again, the world is such a complicated place and it's inconceivable that we'll have the best of everything. So well over two thirds of the funds that we put clients into come from outside HSBC.

There has been massive growth in Middle Eastern private wealth due to the rising oil price. Is much of that money going to flow to Asia?

I was in Kuwait, Dubai and Abu Dhabi recently and many people I met had just come back from a research mission to China. The conversations we had were all about the fact that they had all this extra money and in the past they would have invested it in OECD stocks and now they wanted to put some of it into Asia - and they ask us, as HSBC, to tell them about opportunities in Asia.

Then there is the religious connotation. We have a big business called Amanah Finance, and that is a dedicated shariah compliant business. So we have people in the private bank whose job it is to do shariah financing. We see Malaysia and Indonesia, for example, producing products that can be given to our shariah-compliant private client business in the Middle East.

When you talk to your clients, are they a little bit jittery about the markets now, especially with the twin deficits in the US and Greenspan stepping down at the end of January?

Ir's intriguing that the world always has something to worry about. Several years ago you could have talked about the emerging markets and Asian meltdown; then you had a lot of instability in Argentina; the second Iraq war and all the difficulties that created. There are always issues that can make the glass half-empty for any investor. The size of the US deficit is a concern for many people and it is obviously being tackled. But you can also say the glass is very much half-full if you look at foreign exchange reserves, low levels of inflation, the transition from socialistic to open market economies. Capital is being created, and saved in a way like never before. Plus the amount of personal net worth is greater - more personal wealth has been created in the last 20 years than in the previous 150 years. So there is good reason to be confident. But being confident is not the same as being naive about all the risks.

Surely the difference with previous crises is that they were fundamentally quite peripheral. A US crisis would impact the whole world?

The US is 3% of the world's population, but 19% of the world's GDP, and when America sneezes everyone else catches a cold. No one is blind to the consequences. But do our clients feel impending doom? No, I think they feel this is something that can be managed, and will be worked through.

A year ago I was told that China was overheating and there was going to be a hard landing. What we've actually had is stable progress. So I am not depressed about the world's ability to manage these situations.

Historically, private banks were primarily concerned with wealth preservation in the face of calamities. Are we entering a phase where this type of philosophy should return to the fore?

I hope that view is wrong and we are not entering a phase of calamities. But I agree that all private banks have a primary obligation to preserve wealth - as well as provide sensible capital appreciation. Capital preservation is the order of the day irrespective of if there is any form of meltdown or not. Many clients take confidence in working with HSBC because it is one of the world's best capitalized banks.

How much do your clients have in private equity?

Under $500 million.

So relatively-speaking you are underweight private equity versus other private banks?

If you look at how our business has grown and the institutions we have acquired, there was a high component of cash and deposits; so it is unrealistic to take that sort of client and put them straight into private equity. One has to work with people in an advisory way, and get them into discretionary asset management before such a step can be taken. But the fact that we are in our third round of investments with HSBC's own private equity fund means that the returns have been sufficiently satisfactory to encourage our clients to come back.

Are the returns sustainable in private equity? A lot of people have been talking about there being too much money in private equity?

If you go back to the dotcom bubble of 2000, and look at how private equity funds got burned then, people commented that private equity funds had overextended themselves. What is intriguing is that today the big private equity firms are seeing more opportunities outside America than inside America. The other trend is that instead of working against each other you see private equity funds joining together and buying the sorts of businesses that would never have previously been contemplated - ie whole chunks of industry - and manage them for long periods. So I think private equity is evolving. And as you get bigger, your returns have to normalize.

By delisting big companies - in syndicate with other private equity funds - does that not seem to be an indicator that there is too much money in private equity? Surely, the public market should be pricing these companies properly already?

Private equity people I meet say when you put a company back into the private domain you can be more vigorous in taking action. You do that for three years and then you can list it again in the public domain. But your hypothesis that asks what can you do in the private markets that you wouldn't do in the public markets is a question well said.

Todd S. Thomson

Chairman and Chief Executive Officer, Citigroup Global WealthManagement

What is your wealth management strategy in Asia?

Citigroup has more than 100 years of history on the ground in Asia. And with the Citigroup Private Bank and Citigroup Wealth Advisors, we have the leading wealth management company in the region. Our strategy is to build upon this leading position by executing three priorities. The first is to provide to our clients the best global investment platform, so that they can access the most sophisticated thinking on asset allocation and the best investment choices whether created by Citigroup or outside specialists across the spectrum of equities, fixed income, private equity, real estate and hedge funds. The second is to continue to attract the best-trained, most expert advisors in the industry. The third is to expand our operations, as regulations allow, to capture the emerging wealth in India, China and Korea.

Is your background in private banking?

My appointment in November 2004 as Chairman and Chief Executive Officer of Global Wealth Management marks a return to familiar territory. Before being appointed Citigroup's Chief Financial Officer and Head of Strategy in 2000, I had previously served as Chief Executive Officer of the Citigroup Private Bank. However, my background has been in a number of business leadership roles in strategy consulting, merchant banking, and finance, all leading up to my current appointment.

What are your biggest markets in Asia?

Hong Kong, Taiwan, Indonesia, the Philippines and Singapore each are currently major markets for us. Looking ahead in the next 3-5 year period, we expect China, India, and Korea to create substantial new wealth and provide significant opportunities for wealth management. They will demand access to top-quality local and global wealth management solutions and we are prepared to meet this demand.

At what level do you migrate your customers from the consumer bank to the private bank?

At Citigroup, we serve our clients with the wealth management model that best suits them, and it could be from any of the three businesses - Citibank Consumer Bank, Citigroup Wealth Advisors and the Citigroup Private Bank. Each business has its own business model, product platform and a distinct target client segment.

In the Asia-Pacific region, Citigroup Private Bank caters to high net worth individuals and families with $10 million in assets or more, while Citigroup Wealth Advisors provides investment opportunities to the affluent with assets under $10 million. The Citibank Consumer Bank offers retail banking services including CitiGold, a wealth management proposition to the affluent with at least $100,000 in assets.

We actively promote referrals and cross-sell between the businesses so that our clients receive the wealth management services they truly need - however, the final decision is that of the client to choose which model best suits them.

How do you reconcile an open architecture approach versus using Citi products?

Our clients demand objective advice matched with superior products, irrespective of their origins. Open architecture couples our proprietary product platform with "best-of-breed" products from third parties, identified through a rigorous, institutionalised manager-selection process. We demand that our clients needs come first - and we continuously demonstrate our objective and comprehensive approach to wealth management.

There has been massive growth in Middle Eastern private wealth due to the rising oil price. Is much of that money going to flow to Asia?

Funds flow to where the best investment opportunities lie. Asia certainly offers a strong growth story and we can expect some Middle East investor interest in the region in the future.

When you talk to your clients, are they a little bit jittery about the markets now, given all the global imbalances?

Yes, clients, in general, have a lot of liquidity, a glut of money on the sidelines. It is difficult to find investments that look "cheap". My investment team is telling clients that based on our economic outlook, market projections and analytical models, our base case for the global economy calls for a relatively benign growth environment. We expect global expansion on the whole to proceed at a steady rate. While we are projecting a slowdown this year from 2004's brisk pace, we also see the possibility of a re-acceleration toward the end of this year or in early 2006. Global inflation should be moderate and largely contained.

Among the G4 central banks, the Fed is expected to continue tightening and the Bank of England could raise rates by another 25 basis points, depending on economic data. The rest should stand pat.

Looking at the regional economies, growth in the US should outpace the Eurozone and Japan, although the latter two economies should see some acceleration, albeit from a low base. The reason: economic reforms in these two regions, such as balance sheet repair in the case of Japan and labour reform in the case of Germany, should support a long-term positive up-tick in domestic demand. Finally, the emerging economies as a whole continue to restructure, address imbalances and create a basis for sustained growth.

We think that the global supply of liquidity that fed the bull run on credit may be receding. Some of the direct byproducts of that liquidity, such as tight credit spreads, now look increasingly vulnerable.

Given that outlook, fixed income remains our least favoured asset class strategically. Global equity returns have been positive and have performed better than fixed income instruments. We believe that equities will continue to outperform bonds, albeit with subdued returns. Most importantly, we believe at this time it is critical to secure those fund managers that can best provide "Alpha" in a choppy environment.

Historically, private banks were primarily concerned with wealth preservation in the face of financial calamities (e.g. the 1929 crash, wars, oil shocks/ inflation). Are we entering a phase where this type of philosophy should return to the fore?

Clients are concerned about protecting their wealth for future generations. They are interested in portfolios that are structured according to their risk-return profile, and savvy financial solutions, which ensure unencumbered transfer of wealth to their families. These require a combination of both wealth-preservation and wealth enhancement strategies.

Also, many families, including in Asia, have the bulk of their wealth tied to the family business, and are looking for ways to mitigate this concentration risk.

So, our job is to be the global trusted advisor to help manage all their personal wealth management needs. We focus on providing the best thinking for our clients' future generations. Our business model provides top-tier advisory, structuring and manufacturing capabilities within an open architecture platform; and top-tier capabilities including investment management, capital markets solutions and structured lending. For those who can take advantage of the opportunities on offer, we believe it is the best wealth management model in the industry.

Is Citi a major player in offering hedge funds to clients?

We believe the most important service we can provide is advice to clients, not distribution of product. The growing importance of hedge funds and other "alternatives" to high net worth clients makes understanding the risks and performance of these investments paramount. We've spent great amounts of capital and time developing a proprietary asset allocation model called Whole Net Worth Asset Allocation which we believe helps to best employ hedge funds and alternatives within a balanced investment portfolio. For most of our ultra high net worth clients, carefully selected hedge funds form an important part of their portfolio.

Is there a hedge fund bubble underway?

That is what some market watchers think. What's for sure is that there are more and more managers starting funds right now, and more and more investment dollars flowing into them. And because these are relatively new investments, their risks are not widely understood. So we have a lot of new investors in an investment with poorly understood risks - that's a potentially volatile mixture. The key is understanding the risks attendant in these investment vehicles and mitigating them by careful manager selection and portfolio allocation. We believe hedge funds can be an excellent investment opportunity for high-net-worth investors - provided they're chosen carefully.

How much do your clients have in private equity?

Private equity can provide an important source of return in a diversified portfolio. However, the amount we recommend in private equity varies depending on the particular portfolio risks and investment objectives of each client, so the amount may range from zero to 20% of the portfolio. Some of our top clients co-invest with Citigroup in private equity offerings, which can be extremely compelling investments. It's worth noting that many of our clients are entrepreneurs with privately-held businesses, so private equity is often already a large component of their portfolios.

Are the returns sustainable in private equity? A lot of people have been talking about there being too much money in private equity.

Once again, the important factor is manager selection. The top private equity funds outperform the median funds by 1,000 basis points per year, so that's were we focus our attention when advising our clients on this type of investment.

Jos ter Avest

Global Head, ABN AMRO Private Clients

Is Asia the highest growth region for ABN AMRO's private client business?

Absolutely, if you look at the growth rates worldwide, Asia is growing at between 5-10% versus 1-2% for Europe. So the number of people who are becoming wealthy in Asia is growing rapidly - especially since most new wealth is created by business owners. The growth rate in Asia of wealthy people is enormous. That, of course, makes it very attractive and has led us to put more of a focus on the Asian private banking market.

In the segment just below private banking, we have also grown enormously fast. The preferred banking segment is the wealth management part and we call it Van Gogh. That is now staffed with 1600 people. It is an important feeder line for the private banking business. The clients initially have $200,000 but over a period of time they sometimes grow into private banking clients. On the other side we have the corporate bank that can also generate business from the entrepreneurs. So these are two important feeder lines for our private bank. It is far easier to get clients from your internal feeder lines than by acquiring them.

Is it not ironic that Van Gogh lived in poverty most of his life and that is the name of your wealth management business?

Yes, but after his death his paintings sold for millions and today only the private banking clients can afford them!

How do you plan to grow your private banking business in the region?

Worldwide we have a top 10 business, with roughly $150 billion in assets under management. In Asia, we are also top 10. We have a 150 history in this region, and a 30 year history of private banking in Asia. We need to transfer all the knowledge in our network, and run Asia as part of a global business.

Our goal is to become a top five private bank in Asia. We believe we can do this in four years. And part of this growth will come from new staff. We are going to hire staff in the market but also convert staff from our corporate and investment bank into private bankers - as well as taking people from the preferred banking side. This obviously requires training and coaching, but we need to do it. In Europe, we have already done this, with 95% of the people joining private banking coming from within the ABN network.

This is clearly one of the fastest growing businesses in Asia and we want to tap that growth.

We currently have 250 people in the region, with the biggest offices being Hong Kong and Singapore. We will grow that to between 400 to 450.

Is your background in private banking?

I have worked for the bank for 20 years. I started on the corporate side in relationship management, and then worked in treasury and risk management. I started working in private banking five years ago. I was brought in to build the onshore private banking business in the Netherlands - which now constitutes one third of ABN's total private banking business.

I was asked to join the private bank by the main board because they thought I had the right skillset. On the one hand I had very good relationship management experience - which is vital in private banking - and on the other hand I had experience with products from my time in treasury. The third element is building and leading.

Do you spend much time with clients?

In the phase we are in it is more about leadership and having time for my team. For example, this is the third time I have come to Asia in four months to see our people. Of course, I do want to know from the clients how they connect with our bank and what they really want. Tomorrow I will visit clients and will hear their feedback.

Is ABN AMRO a major player in terms of delivering hedge funds to clients?

No, but we can advise clients to have a small part of their portfolio in hedge funds. But most of the time we advise clients to go into a fund of hedge funds.

We were talking about hedge funds this morning. It has become such a wide category. It seems that everything outside of direct equity, and bonds seems to now be called a hedge fund.

All our funds are managed by the asset management side of the bank. And if we are looking at hedge funds, we use a very limited number of providers.

How do you reconcile using your own asset management arm versus an open architecture approach?

We use many product providers, and have relationships with most of the big houses, such as Merrill and Fidelity. We are really looking for the best solution for our clients, depending on their risk profile. We even have an overlay product called Triple A Advisors, which constantly switches between the best performing funds. That is truly an open architecture approach.

What is your attitude to private equity? Is that an area where you have advised your clients to invest heavily?

No, not heavily. Private equity should also be a small part of your portfolio. We normally advise clients to approach private equity via a fund-of-funds structure. With those clients with $25 million or above we bring them into contact with those people who are searching for private equity investors.

How do you differentiate your private banking approach?

Our private bank is very well connected to the network of our retail and corporate bank. So it is a different approach. The advantage we have is that our client feeder lines are in place, as are feeder lines for recruiting staff. On the investment banking side we can provide many products. Plus when it comes to Asia we can point to our history and commitment to the region.

By managing the private bank separately, we have the advantage of creating a boutique-feel in the client interface.

Do you sense from clients that they are a little worried about global economic imbalances?

There are clients who are more on the defensive side, the neutral side and the offensive side. With those who are more on the defensive side, we have seen the percentage of liquid assets go up. They are really waiting to see what happens. On the other hand, the more aggressive investors are looking at opportunities.