Participants:
Joe Ngai - CEO, Delirium
Kaven Leung - region head, Greater China, Citibank Private Bank
Urs Brutsch - regional head of private banking, ABN AMRO
John Holmes - managing director, Mirabaud
John Lui - group deputy director, Allen Perkins Group
Bernard Rennell - managing director, Bank of Bermuda
Kathryn Shih - managing director, UBS Private Bank
Kees Stoute - general manager, MeesPierson
Steven Irvine - FinanceAsia
Steven Irvine: What has been the strategy for private banks to win the business of the Joe Ngai's of this world?
Kathryn Shih: We have a strategy of tracking IPOs as they come on stream, although hopefully we get them before they IPO. We also see our private equity team's flow. We basically send someone over to see these entrepreneurs, and we approach it from a financial planning point of view.
Kaven Leung: We have a strong banking franchise and the different parts of the bank tap into this new creation of wealth. Obviously we have a corporate banking side, and business leads which will come our way as well as the private equity teams, as Kathryn has just mentioned. And in fact, we specifically target and support this new segment by having a very focused business programme called the 'Active Business Owner Programme', whereby we get in touch with this type of new wealth segment, and help them not only with planning the IPO before they get listed, but after they get listed we can finance them, and help them create liquidity out of their shares and help them to diversify. Often the only wealth they have is in the company and they haven't had time to diversify which may not be to their advantage.
Irvine: If guys like Joe are already Citibank current account customers, and have been an average bank customer using an ATM for the last five years, does this make them less likely to go to you as a private bank? Do they feel there's less cache, because they've always been a Citibank customer, and therefore want to go somewhere else?
Leung: I don't think so. In fact, we like to think the contrary because we look at our customer from a lifetime perspective. Someone like Joe, for example, might first get in touch with Citibank during his college days, when he got his first credit card. Then when he came out with a business proposition and started to acquire his first wealth, we would have a pre-IPO private equity channel that he can get in touch with. Every step of the way he sees incremental value being provided by this chain.
Irvine: John, you clearly don't have the tentacles of Citibank, you're a much smaller organization. Are you able to go for these types of customer?
John Holmes: No, I would say that it is not our forte. We're not involved in IPOs anyway, and I would say that we would tend to be an older, more traditional bank in that way. Really, I would say that the typical client who is introduced to us is usually post-45, and looking for a longer term relationship, with a concern for where their wealth will go in the event of their passing away. I think that's still a suitable niche for a bank like us. If Joe came to me, I would advise him frankly that he should go see one of these other banks if he was looking for a more aggressive, dynamic bank.
Irvine: Joe, what are you looking for from a private bank?
Joe Ngai: There has been tremendous wealth creation over the last few years, mostly in the technology field, and all of the people I've been involved with in Hong Kong have really made the new wealth. The profile of these individuals, as John pointed out, has been very aggressive, and has mainly been very much of a "well, since I'm very well educated, and since I've had lessons on finance, I am able to trade my own account" mentality. The shares they own are centred on technology issues. In these cases, asset allocation and things like that become very important concepts. Entrepreneurs over the last five to 10 years have never seen a real market downturn before. They have very little knowledge outside of their field. Certainly some handholding and education is needed when you see some rocky times such as recently.
They tend to be demanding people and they tend to think pretty highly of themselves too. I think wrongly so, in terms of their own sophistication in understanding the markets. So they tend to want to have a lot of involvement in the decision-making process.
Irvine: So, to summarize, would it be fair to say that you feel that you can handle the more risky stuff yourself, investing in equities, and what you would like the private bank to do is to bring a conservative approach to your wealth planning?
Ngai: Yes. While I know that Oracle is a better company than Ariba, if all my wealth is in three stocks, I wouldn't know what that would end up being worth if the market suddenly turned. That's where the education aspect becomes very important.
Irvine: Do you tend to trade equities most days?
Ngai: We don't have time to trade, but most of us have a pretty sizeable portion of our money in equities, yes.
Irvine: Up until the middle of this year would these equities have been predominantly dotcom/internet companies?
Ngai: They're mostly equities that we understand and we have a lot of personal friends in these companies so we all have a lot of information about them. We tend to be very sophisticated about which companies we know are better than others, and we know their sales and things like that because we do business with them. For example, since we've done business with IBM, we know a lot about how these people are doing. But aside from that, we know nothing about the rest of the investment world, which is the problem.
Irvine: Is it fair to say that having experienced the Nasdaq downturn, you want to diversify pretty aggressively?
Ngai: I think that that would be a need.
Leung: We believe we have a lot of value to add, in terms of being your trusted adviser. Right now information is exploding, and you can easily get a lot of information. The question is how you use that information to your advantage. I think that we can, as the private bank, add a lot of value, in terms of guiding you into the right kind of wealth planning model, so that you won't be drastically affected by any short-term market fluctuations.
Kees Stoute: We do not have a specific strategy to bring to young clients and dotcom specialists. What we do is try to make our organization as entrepreneurial as possible, because if you want to deal properly with entrepreneurs you have to be an entrepreneur yourself as well. Also, you want to act fast, and you don't want to deal with a bureaucratic organization, having to go through all kinds of forms until you get everything done. We think that entrepreneurs are used to working in a fast world and that means that we as an organization have to adapt to that.
Irvine: Is Joe a client that ABN AMRO wants?
Urs Brutsch: Oh, absolutely! I'll give you my business card! We also would work with our merchant bank to get hold of these people before their IPO. But, as Joe said, what is really key for these people is education. Of course, they have first class internet and high-tech stocks, but obviously that's not the best way to invest all the money they have made at an early age. You need to diversify reasonably and you need a trusted advisor to hold your hand with products that you're not familiar with and to convince you that it makes sense to plan for the long term.
Bernard Rennell: What you were saying, Joe, is our perception of the newer wealthy too. They have a higher sensitivity to fees and returns and they expect a high level of service. They seem to want to play a more active part in the decision-making process. From our perspective, in terms of servicing those clients, traditionally our strengths have been in trust and structuring. We have done trust structures for people pre and post-IPO, but the other thing that we really believe is that no one house can actually provide the best returns and the best level of service in every sector and every type of market. We concentrate on trying to make life simpler. These clients want access to the best of the best. We've recently had authorized a 'Multi-Manager' product which we believe is the only one of its kind in Hong Kong, where we select and monitor the best managers in a range of different markets and sub-markets. We use our relationships to provide access across the range. We're not saying we can do everything ourselves.
Shih: I have a question for Joe. UBS has an internet banking presence already in Switzerland, and in Asia we shall be rolling it out in about two months' time. As someone from the technology side, what would you require from a private bank in terms of technology?
Ngai: All my friends have huge accounts at E*trade and some of them are furious tradersá- it just happens to be the nature of the business. The things that we know are tech stocks and these new companies, such as biotechs. We will know about obscure biotech companies in the Valley. Absolutely, we would want to have trading capabilities ourselves.
Shih: Do you want advice online?
Ngai: These guys are also very busy people, and they have very strong opinions on what they do, so it is important that this advice gets 'given' to them in simple termsá- well, these are bonds, what do they do? This is cash, what does cash do? What does the cash earn? These are things that are not well known or not well appreciated.
Shih: We fully agree that there has to be some value added. We have come up with a web-based 'wealth optimizer' where clients can go in and look at their own risk profile and look at what we would recommend in terms of asset allocation on the web. The other thing that we want to make available is online research for different bonds and equities, so that people can look at it in their own time.
Ngai: These are useful. I would only caution that these are widely available, so I don't have to go to UBS to get it. I can get it from wherever I want. I have plenty of people pitching all kinds of financial sites and all kinds of financial information.
Stoute: This is exactly what gives private banks a big opportunity. The world is now an information jungleá- there's just so much. If you want to read an extremely negative story about Oracle, for example, you go to the internet but if you want to read an extremely positive story you also go to the internet. We are happy with that, because that means you still need a trusted advisor to talk to and to lead you through the information jungle.
Rennell: Is it useful to have access to your own account on the internet? Not only in terms of your portfolio or asset allocation, but your entire balance sheetá- your trading, the value of your portfolio at any given time - so that you can click in and see that 'the market went down this morning and how has it affected me?'
Ngai: The appetite for being able to see things and accessing things whenever you want is something that I think is nice.
Private bankers coming to me have a big advantage. They know a little bit about me, who owns what and where, and that is important.
Leung: Joe, do we need to push ourselves to the leading edge of technology in terms of providing statements online, and all the research online so that you can have access to it? We look at it as essential in terms of facilitating your relationship with the bank. What we're saying, and the message I'm hearing clearly from you, is that private banks have to go beyond the generic stuff. A content provider is not going to be enough because everyone else can do the same thing. What we have to do is sort through all this information and distribute all the research, and then come up with something that is tailored, and hand it over to Joe and work together with him, walk him through it allá- the entire investment process. He will probably look a lot to the private banker to help him, because he makes money in one particular area and now is the time to broaden out, to plan out. The other thing we believe is important is that the strength of the institution is the key.
Holmes: How would you like to communicate ideally with your private banker? My guess is, without jumping to any conclusions, that you don't want to spend three or four hours on the net every day to research information, what you probably want is to have extra information whenever you want but to have someone to talk to, to bounce your ideas off.
Ngai: That's right, absolutely. It's going to be very much about the personal relationship. Because, as I said, people like me will probably know where to find information on the web better than anyone else. People either find it in their own time, or definitely know someone who will know how to find it. I would say that it is really the personal call that makes the difference, saying 'hey what do I do here?' We do business in Taiwan. There is this tremendous wealth in Taiwan right now, that is completely uncaptured in the whole chip impression industry. These guys have been rolling in cash for the last three years, and none of them really understands the opportunities to diversify or understands anything about what happens after companies go public or get bought. A lot of Taiwanese companies get snapped up for $25 million by huge guys like Cisco. That doesn't even cross their radar screen because it's too small. It wouldn't even warrant a press release. These guys have suddenly got this stock in Cisco and large companies. They still understand a lot about tech, but what they like is a little bit of advice here and there, whenever they need it.
Irvine: Kaven Leung from Citibank made a very interesting point too, which needs to be discussed. You said, you think it's the institution, but Joe seems to be suggesting in fact, that it is less the institution and more the individual relationship.
Ngai: Looking at my colleagues in the industry, we see this as a new relationship, but something we don't really understand. Establishing trust in this relationship is very important. It's not really understood what private wealth management is. A lot of people believe that it is broking, and that is not really what it's about, right? I would say the pure broking industry is not what these people are looking for, because they like to trade. Asia's always been the same. Just say, well, instead of trading 90% of your assets, trade 20%á- and here's what you do with the rest of it. That's where I think the knowledge is most important.
Irvine: How important to you is the issue of tax in all this?
Ngai: It's very important! Having not planned before, and especially when a lot of existing scenarios are sales into US companies, there's quite a few issues in there. With careful planning you can really optimize on different scenarios. This requires a little bit of investment as well because you can never be sure that this is going to be one as well, right? If you can actually provide advice at that point then you'll definitely be there when it happens. People are very ignorant about these issues.
Irvine: What percentage return would you expect on your portfolio?
Ngai: Asians always trade and people always expect what, 20% a year? Come on. Its very much a trade mentality, so unrealistic expectations are always going to be there, I don't think that will ever change. Now, they may be happy with 20%, but before it was definitely in the 25% range, which was something that is unsustainable and is certainly unrealistic.
Irvine: Do people around the table feel that expectations have changed now, or do people still have expectations of high return?
Leung: I think we've only just covered one side of the equation, which is the return. It is also key for us to focus on what kind of combination of investments that person is looking at.
Holmes: I think that 1997 was a very good thing for the private banks in Asia. It was a very sobering experience. I think expectations are much more realistic now than before.
John Lui: From our experience, investors' expectation on return is coming downá- I would say back to earth. Compared to say six to nine months ago when we spoke to investors with something like Joe's profile, they were asking for return in the high double digits, which we frankly say is not reasonable. If we are telling you thatá"Yes we can do it" , then we are probably lying to you. So how can we keep track of these IPO guys who've become millionaires, we can't, and we probably wouldn't be in the best position to do it. I think that the crash in the past few months has brought along a realization that yes you can continue to have your trading accounts, yes you can continue to trade day and night, but it makes sense to segregate your assets into several categories, and it doesn't really hurt. You have a portion of your portfolio put into something offering a more steady return.
Irvine: Would people around the table be focusing on Joe's structuring needs?
Holmes: Clearly I'm not going to try to outsmart him on the equities side. I'm going to look at asset allocation.
Rennell: We would look to leave clients like Joe to do their trading but perhaps talk to them more about asset allocation, structuring, tax, issues like that. Again with our 'Multi-Manager' product, we can say that of the six equities portfolios, five of the mangers are in the top quartile, and over time, you will be better off. But there will be fluctuations along the way, and the best we can promise you is that you will be ahead of the field, but if the market tanks, you're still in the market.
Leung: In the case of Citibank, in the first or second meeting the relationship manager will be talking to you, trying to understand a bit more about what you need, what you know, what you have gone through in terms of investment. We need to be able to bring about a whole host of different alternatives that, in our experience, may be suitable for you. And we probably wouldn't be selling it to you in the first couple of meetings because that would be too risky. We've got to understand a bit more before we feel comfortable that it's something that should be part of your portfolio. But also in the first meetings we want to understand your needs beyond equity investment and try and see where you are in your stage of life, and what other kinds of things we can help you with. For example, we talk about trust, we talk about wealth planning and tax planning. Those are the kind of things that belong to wealth management, not just trading equity.
Irvine: Would you be interested, Joe, in being given advice by a private banker on alternative investments, maybe art or property?
Ngai: Once you sell a business you acquire a taste for things that you've never thought about before. You have people buying all sorts of junk really. We talk about art and we talk about real estate and more recently talk about buying watches. There is a variety of things people get interested in. People think that's an attractive market because honestly they have no concept of what these things cost and they're out there looking for things to buy. You should look at the Silicon Valley real estate market, it's really been outrageous recently.
Shih: At UBS we offer art advisory and real estate advisory as part of our financial planning service. For Asians especially, real estate is an important component of their total wealth, so we have a real estate advisory team that have mandates from clients in Asia, to say that I want to invest in a portfolio in the USá- these are my preferences, this is the type of risk I want, this is the kind of yield I want, structure me a portfolio, find me a manager. We do the same for Europe. For art we do advisory for clients because as you said, when people start getting more assets they start to accumulate toys, and we want to ensure that they buy good toys and not just toys that are not worth their while.
Irvine: John, obviously UBS had these advisory departments. Do you think they're an important part of private banking?
Holmes: Mirabaud has its own private art gallery in Geneva and I'd be very happy to take the job on. Actually, after listening to Joe more this afternoon, I would advise him to go work for Goldman Sachs.
He seems to know more about private banking than most individuals I've met. If you're coming to a small private bank like Mirabaud, of course the family has a long history, and I'm sure they have exquisite taste. To be a friend of the family will be to know them in many different locales in the world and be advised by them, I'm sure, on a number of different matters. I still think there is a place for responding to the individual.
We have no internet capabilities. We have many clients at Mirabaud who are very happy that we do not allow clients access to their accounts via the internet. We have an information site where we give information about the bank and about our funds worldwide, but we don't put any clients on internal systems of technology, and they are kept completely separate from external points of access.
Irvine: Joe, would you be interested in a family- style bank like that?
Ngai: There needs to be some education on what this whole 'family' aspect is all about. The one thing that could be an angle is that a lot of these people, especially people who are listing companies in the US, have zero privacy on what their wealth is. The problem with the internet millionaires is that their information is so 'out there' that people actually know what stock you own, and what's changed today. The whole security aspect could be something that is quite interesting. Investors know exactly what is going on, they own your company. For the rest of your assets the whole concept isá"let's get some security here, let's get some privacy here". It would be something that could be very interesting for these people.
Irvine: These guys who are buying rare bottles of wine and antique watches are into cache, aren't they? So they might want to go for a slightly smaller bank?
Ngai: Yes, I guess they might develop a taste for it.
Irvine: We've obviously been speaking a lot about the profile and personality of someone like Joe. Let's turn this discussion towards investments. Are people at your institutions advising clients now to be much more cautious on the US market?
Lui: We are. It seems that we are at a turn in the liquidity cycle. In the past seven to eight years there has been a tremendous liquidity boom in the US, and that has essentially financed the entire global capital markets. You are seeing signs that little by little liquidity is being reigned in. The venture capitalists are not as aggressive as they were, and banks are tightening their lending requirements, while capital markets are not as buoyant as they were just a year ago. You see the spread in high-yield bonds or corporate bonds compared to treasuries widening, and you conclude that the cycle is turning from an expansion phase to a contraction phase, so we are becoming more cautious on the US market.
Irvine: John, given that Mirabaud is quite a traditional bank, what sort of advice would you be giving in this uncertain climate?
Holmes: Our philosophy is that we don't completely focus on macro ideas all the time, or macro sentiments. We look at companies from the bottom-up, and if we like a company and we think that the value is right, then we invest in that company. Our approach is global on that.
Leung: We believe there are still opportunities in the US market, but obviously we will stay away from the crazy pursuit of those mega-high-tech companies. We believe there will still be some downside on those. However, we think that there is a lot of value in the mid-cap market. There are a lot of companies out there, maybe a lot of small-size companies, $10 billion and up, and they have been growing the business very well with 10-15% growth every year, setting a very reasonable multiple.
Rennell: We're not bottom-up, we're top-down. But through the process we use, picking and monitoring top managers in each market, they do the bottom-up stuff. You need to diversify and the US is a big part of the overall market and you can't afford to be out of it entirely, but in terms of the bottom-up stuff, we leave it to those people who are closest to it.
