Rebuilding the wealth management business model

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Finance, business and politics boast few pivotal mea culpa moments, where leaders recognise failure of models or systems, so when they come, we should take notice of them.

Private banks watched Juerg Zeltner, the late boss of UBS Wealth Management, apologising at a PWM Geneva summit in 2008 for the industry’s “over-promising and under-delivering” through excessive structured product sales.

Similarly in a 2010 Zurich speech, Gerard Aquilina, then vice-chairman of Barclays Wealth, highlighted private bankers’ “insecurity complex”, facing disdain from investment bankers and “impossible demands” from wealthy clients.

The latest comments, from Credit Suisse chairman Axel Lehmann, at the FT Global Banking Summit in London, have even greater resonance. Those interested in investment banking, “have better bets in the US”, said Mr Lehmann. Clients and investors have been telling Credit Suisse to “get your act together and focus on where your core strengths are, but get out of that rather volatile business and business model that we have for many years”.

Death knell

These core strengths centre around wealth management, in a “truly Swiss company, somewhat stable, somewhat reliable”. For private banking observers, these no-nonsense pronouncements appear to sound the death knell for the ‘one bank’ model. Pioneered in Zurich, Credit Suisse and UBS popularised a mantra linking investment banking and wealth management for private and corporate clients.

Not only does Credit Suisse wish to avoid the volatility associated with investment banking, but the cultural change, suggested by Mr Lehmann, would shift the mindset away from aggressive, risk-taking investment bankers, to a milder, more measured approach typified by highly trained wealth managers.

What can such a strategic U-turn tell us about the industry’s future trajectory and shape of successful business models for the late 2020s?

The demise of the once all-pervasive ‘one bank’ strategy is hastened by regulatory change, believes Lucia Perchard, global head of product for family offices at Apex Group, provider of technology and custody to wealth managers.

“The regulatory and compliance landscape is only going to continue to get more onerous, so when you look at the ‘one bank’ giants, it is hard to imagine they can remain nimble in that environment,” she explains.

Expect more openings for multi-family offices and boutiques that can be nimble and take advantage of market changes

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Lucia Perchard, Apex Group

“Multiple layers” of increasingly complex regulations may further tighten constraints on cross-border banks, overwhelming single investment products with a combination of banking, fiduciary and investment rules. 

Rather than a market dominated by the largest players, Ms Perchard predicts “more openings for multi-family offices and boutiques that can be more nimble and take advantage of market changes”.

Strengthening the bench

Successful wealth managers will be specialised firms, pivoting from real estate to private equity investment, with environmental, social and governance (ESG) capacity “now an integral part of the wealth management stable”. Family office teams will be seeking to “strengthen their bench” in this area, “looking for wealth managers that provide this to them, whilst also keeping their values in mind”, predicts Ms Perchard.

This view of business models combining ESG and alternative investments is shared by Sahil Bhandari, former global head of alternatives for ultra-high net worth individuals at UBS, now running boutique firm Darsh Advisers, focused on technology investments. 

“At UBS, we had seen ESG emerging from our client base as an important consideration,” he volunteers. “The industry needs to evolve to a more transparent, more robust more quantitative methodology and I think that will happen over time. But it’s not an option for ESG not to become mainstream.”

While ESG strategies thrive within mainstream private banks, “talent-intensive” specialities including alternative investments may fit better elsewhere. 

“The financial incentives culture the alternatives industry has thrived on, based on performance fees, is something European banks and traditional asset managers find hard to absorb in its most pure form,” suggests Mr Bhandari. Alternative asset businesses are naturally better suited to an “independent partnerships boutique model”.

Talented alternative investment strategists, who value independence, will generally opt for a boutique culture. While banks and investment managers may try to replicate this, most fail to be flexible in approach to people, structure or compensation.

“These alternatives businesses and founders that want to run them are not necessarily looking for scale,” preferring to focus on performance and investment discipline, suggests Mr Bhandari. 

“They can be very profitable, steady-as-she-goes, cashflow generating businesses, but a lot of large banks, insurance companies and asset managers prefer a model where you apply scale and growth targets.”

Large banks, he believes, are currently struggling with business models, especially around the ‘one bank’ strategy, because this does not typically represent a cultural umbrella which can fit comfortably over a fragmented organisation.

“It’s hard to say whether it’s the end of this strategy and model,” says Mr Bhandari. “But some banks will find it hard to make the model work, driven by massive cultural differences that emanate in investment banking versus private banking.”

Geography is often a key differentiator, with private banking “hubbed” out of Zurich, operating in a Swiss European mindset, whereas investment banking is mainly London-New York oriented.

Stitch it up better

But even boutique founders are loath to write off big bank orthodoxy, believing co-existence is more likely, with smaller firms relying on large banks for custody, execution and research. Moreover, they expect a bifurcation, with services relying on personal relationships and intellectual capital, specialising in investment banking, M&A advisory and private wealth likely to become “boutiqueised”. 

It is much harder however to compete with large banks in balance sheet lending, capital intensive technology and trading activities. The banks who can integrate these services successfully with other activities will be the ones to thrive, he believes: “From a client perspective, the ‘one bank’ project works. Clients want it and one should not forget that. The question is, which institution is able to stitch it up better than others?”

One of the candidates for this crown is Citi, aiming to combine “wealth preservation at the core of traditional private banking” with expertise in family operating companies, direct investing in private market holdings and strategic stakes in public enterprises stewarded by an investment banking unit.

Such banks, believes James Holder, Citi’s head of private banking for Europe, will increasingly target a broader spectrum of clients to boost revenues, rather than focusing on a narrow segment of the wealthiest customers. 

Citi has leveraged its expertise for wider exposure by bringing all its wealth management businesses under the umbrella of Citi Global Wealth.

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ESG risks becoming a hollow catch phrase unless you can really deliver

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James Holder, Citi

“This allows us to make scaled investments in technology and our platforms to remain at the forefront of ever-changing client need and behaviours,” says Mr Holder. These behaviours have been underpinned by a major evolution in values. 

“Sustainability is more important and investors judge returns with a lens that goes beyond IRR [internal rate of return]. Those themes are well set and will shape the next decade.”

How investment specialists can translate these themes into investments will help define the future relationship between banks and clients, believes Mr Holder. 

“Echoing a family’s values across a portfolio is central. That means having the tools and talent to diagnose and prioritise, as well as design and implement solutions that fit. ESG risks becoming a hollow catch phrase unless you can really deliver. It matters to us as much as it matters to our clients.”

Lucrative fee pool

The Citi strategy is held up as an example of successful business models by Matthias Schulthess, former senior banker at UBS, now managing partner of financial services recruitment consultancy Schulthess Zimmerman & Jauch.

The ‘one bank’ structure still remains highly relevant when looking at the largest clients in wealth management, provided governance and risk management are given more attention by management, he says. This segment feeds a highly lucrative fee pool, “centered around complex transactions including financing and derivatives through structured solutions, as well as direct investment deals”. 

Winning formula

But firms with flexibility to also democratise their model for popular consumption will prove to be the ultimate winners. 

“In an ideal scenario, success in the UHNW segment and the related reputational leverage are translated into the broader high net worth and affluent market segments,” says Mr Schulthess. 

“As it is with private markets, it’s not unusual that institutional offerings over time find their way into portfolios of private clients.”

The success of such an operation, he adds, depends on recruiting leaders who are “solution architects”, able to co-ordinate distribution of investment products through an efficient, digital platform.

“The successful leaders in wealth management combine the desire for scale without jeopardising the promise and value of bespoke service,” he adds. “This is the winning formula for profitable global or regional wealth managers.”

Assembly line

The ideal model promoted by Mr Bhandari of Darsh Advisers is more of a self-assembly blueprint, especially when it comes to combining internal asset management expertise with a series of components sourced from the broader market.

“Think about the automotive industry and its big brands. Maybe 50 or 100 years ago, if you take a Ford, they would make the brakes and the gears in-house. They even went to the extent of actually buying plantations, to produce rubber for the tyres,” he says. “But today, they are no longer manufacturing the parts. They are in the assembly business.”  

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