Sometimes servicing the very wealthy simply isn’t enough.
On Wednesday news broke that JP Morgan, which boasts that it serves wealthy clients possessing $1.05 trillion in assets, had cut 30 people from its Asian private banking operations. Most were front office staff and they included Edwin Lim, market manager for high net worth clients in North Asia.
The bankers were all focused on high net worth, as opposed to ultra-high net worth, individuals. The move was made in an effort to slim the bank’s cost base and return to its old strategy of banking the richest of the rich.
A JP Morgan spokeswoman confirmed that Lim had left the bank but otherwise declined to comment on the cuts.
In making these cuts, the bank has tacitly admitted that it got it wrong in trying to extend its reach. Back in the 2000s, JP Morgan’s private banking arm prided itself on only banking the wealthiest clients. Individuals whose riches stood merely in the low millions of US dollars were overlooked in favour of those with $10 million or more.
But this strategy changed around 2010 when JP Morgan decided to reach out to the world’s merely rich in Europe and Asia in addition to the US (where it already did so). It began reaching out to individuals with $1 million in investable assets or over.
In Asia, Peter Flavel, the global head of Standard Chartered’s private bank, was brought on board in January 2011 to help spearhead this new effort, which was called Private Wealth Management. Meanwhile the bank’s traditional ultra-wealthy clients continued to be serviced by JP Morgan Private Bank.
However, in recent years JP Morgan’s criterion for what constitutes ‘high net worth’ has gradually been ratcheted back upwards. Insiders say the bank raised it from $3 million to $5 million about 18 months ago.
The latest announcement officially marks an end to JP Morgan’s attempt at mass HNW appeal. The Wall Street Journal reported in March that the bank had decided to focus once more upon individuals with over $10 million in assets.
The global shift has led to 100 staff being laid off in the US and London, in addition to the 30 just announced in Asia. The cuts are part of a broader set of job losses totaling 5,000 that were announced in May 2015.
Evolution vs. inflation
JP Morgan’s decision to recalibrate its sights on a superior breed of millionaire is understandable.
Private banks have struggled to keep their cost bases down globally in recent years, amid mounting demands for regulatory compliance. The implementation of Know Your Customer, Fatca, and the incoming demands of the OECD’s Common Reporting Standards are all designed to make banks supply more information about their clients to other countries or tax jurisdictions. It’s time consuming and costly.
The latest Panama Paper revelations are only likely to raise these compliance requirements further, while further eroding the secrecy that traditionally attracts wealthy people to private banking services.
Added to this, the institutions are now suffering for their earlier impatience. Back in the 2000s, global private banks raced to expand into Asia as the number of wealthy Asians soared in keeping with the region's sizzling economic growth. Most banks abandoned notions of fiscal prudence in doing so.
Costs soared as private banks grabbed relationship managers on increasingly appealing compensation packages in order to draw some of the billions of dollars being earned by the region’s multiplying ranks of entrepreneurs and tycoons.
The trouble is, Asia’s largely first-generation wealthy don’t have the same affinity as their European or US peers to paying others to manage their millions. A report entitled Re-thinking Private Banking in Asia-Pacific by EY in 2014 estimated that only 10% to 20% of Asia’s HNW clients use private banking services, versus 70% to 80% in Europe and the US.
The combination of mounting compliance requirements and ill-advised expansion efforts towards an indifferent client base has left the banks with big costs and not enough revenues. A report by Accenture estimated that cost-to-income ratios at private banks in Asia vary between 80% and 95%.
Inflation vs. expectation
In addition to all this, the concept of $1 million being the entrance point for a person to become a private bank client has become increasingly outmoded.
After all, $1 million in 2016 buys a great deal less than it would have done in 2000. Yet many banks still use it as the base level to start rolling out more expensive investment services for their clients.
Citi Private Bank’s Asia head Bassam Salem noted in 2013 that “the challenge many newcomers are facing in Asia in terms of profitability is that they’re trying to offer high-end banking services to clients whose net worths are $1 million to $5 million.”
That neatly encapsulates JP Morgan’s problem. “Unlike some private banks we use a genuine team approach to covering clients,” a bank insider told FinanceAsia. “While other banks just have one relationship manager covering the relationship, credit, lending and investment, we have a relationship manager plus a dedicated investment adviser and a credit adviser.”
That higher-touch approach might well make the client feel more special but it’s also more expensive. It can quickly become too much so for the bank when clients simply have fewer assets to invest.
And costs are an issue, given JP Morgan’s languishing wealth management revenues. In its latest set of first quarter results released on Wednesday, JP Morgan announced that global wealth management revenues were virtually flat year-on-year and up 2.9% versus the last quarter of 2015.
Stripped down services
Citi dealt with its HNW client conundrum in 2010 by dividing its services into Citigold Private Client, which offered lower touch services for clients with wealth in the sub-double-digit millions, and Citi Private Bank, for genuinely UHNW individuals.
JP Morgan is now following in its footsteps.
The bank insider told FinanceAsia that the US institution would not arbitrarily abandon HNW individuals that no longer meet its loftier $10 million wealth minimum. Instead, “we will create a group that is dedicated to servicing these clients but going forward they might not get the full service [enjoyed by the bank’s UHNW clients].”
This stripped-down version of private banking has yet to receive an official internal name, at least in Asia, although it could become known as, say, the ‘private client group’ or ‘private client direct’.
As JP Morgan executes its strategic pivot, other private banks will have to undergo similar existential debates, working out where the base point is at which to offer more expensive personal service coverage.
Add to this the likely rise of automated investing services from robo advisers and this point might become even higher. Don’t be surprised if the minimum point for genuinely personalised high net worth services becomes $10 million or even $20 million in the years to come.
Private banking was always traditionally meant to service the financially elite. Now, thanks to soaring costs and increasing automation, it’s being forced to reacquire that status.