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Private Banking Trends 2010
July 26, 2009 | 1 Comment
2009 is a year to remember for many private banking professionals. Hedge funds failed, Bernard Madoff convicted, clients withdrew assets from private banks. The global financial crisis has fundamentally changed how the HNWI clients invest and the wealth management business itself. As part of an orginal research, we study financial data and key events in 2009 to identify the emerging trends in private banking 2010. They include:
Trend 1: Growing Chinese market
Many “new money” acquire their wealth through IPO. According to Ernst & Young’s recently published Global IPO Update, Brazil and China accounted for two-thirds of global capital raised in Q2 2009. This not only means that the economy is growing rapidly in these countries, more importantly it shows that there is a growing demand for private banking and wealth management services in the region.
Warren Buffet, who has successfully navigated through many market cycles, predicted that China’s growth will outstrip US. While this may be good news for private banks who have a strong APAC presence, wealth management professionals should understand that the Chinese market is not easy to penetrate. First of all, client advisors need to be fluent in Mandarin and have local connections. Secondly, guanxi (relationships) still plays an extremely important role in the modern Chinese business community, private bankers without access to key relationship brokers as references will find it very difficult to convince Chinese HNWIs to open accounts. Private banks that hire locals will have a definite advantage over expats trying to cover Chinese clients.
Private bankers should also note that the growth of the Chinese market is not uniform across all Chinese cities. While Beijing, Shanghai and Shenzhen will spearhead growth, Hong Kong, on the other hand, will likely to have a tough 2010. Hong Kong actually suffered a huge reduction in HNWIs of 61% in 2009, because of the near 50% drop in market capitalization.
Trend 2: Rising compliance cost and lower profit margin
The Bernard Madoff $65 billion Ponzi scheme, among other scams exposed in 2009, alerted regulators in many countries. In order to crack down on false trading activities and tax evasions, governments worldwide demand more oversight of banking operations. This affects not only the investment banking business but also the private banking side. The account opening process, KYC and offshore banking activities are under tighter scrutiny than ever before. As a direct result, banks have to spend more money on compliance and risk management. With advocates such as Alan Greenspan proposing higher capital ratio for banks, the cost of doing business is bound to increase. With a stagnant market in most countries it is almost impossible to increase fees and banks are likely to have to absorb the rising cost. This means lower margin for private banks and flat compensation for bankers.
Trend 3: Diversifying clientele
As the society progresses and becomes more diversified, so is the wealth management market. Customers today are more fragmented than ever before, and banks which are quick to respond benefit from the changing demographic. Islamic private banking, for example, is gaining momentum. HSBC Amanah is promoting Shariah compliant portfolios. In June 09, Morgan Stanley Wealth Management hosted a wealth planning seminar for same sex couples in Beverly Hills. It is likely that other private banks will become more aggressive in targeting demographic segments that have previously been ignored.
Trend 4: Rebuilding client trust will remain a top priority for bankers
The 2009 Capgemini Wealth Report found that more than a quarter of HNWI clients withdrew assets from their firms due to a loss of trust and confidence. There are several high profile client-advisor fallouts in the past 6 months, such as Singaporean tycoon Oei Hong Leong suing Citigroup private bank for a $684 million loss, and US investor Andrea Barron suing UBP for negligence. In Hong Kong, entrepreneur Joyce Tsang (founder of listed beauty salon group Modern Beauty) sued Goldman Sachs advisor for her $2 million loss, which she claimed the investment was made without her consent. The Securities and Futures Commission in Hong Kong later barred the ex-Goldman advisor from the financial services industry for 2 years. All these lawsuits inevitably make people question the ethical standard of private banking professionals.
HNWI clients are likely to remain extremely skeptical of private bankers and advisors in the midst of financial turmoil. How to rebuild trust remains a top priority for private bankers. Proper disclosure of conflicts of interests can address some concerns. True private bankers are professionals who should act like doctors, who can be relied on to give impartial expert advice. Private bankers who can instill confidence are likely to remain top performers.
Trend 5: E-trading and online customer service will become key differentiators
While some of HNWIs prefer to deal with their advisors face to face and seldom use email, it is easy to see why the “new money” group, often in their mid thirties and forties, are increasingly turning to online self service. Many mid tier Swiss based private banking firms, especially boutiques, are not up to speed in this area. Their e-trading capabilities and the online statement functionalities can not be compared to more established private banks. It is logical to predict that private banks that provide comprehensive and user friendly online services will continue to stand out, while those that are ill-equipped will find themselves having difficulty to attract and retain clients.
Trend 6: Singapore will remain a key player in the private banking industry
Singapore is known as “Switzerland of the East”. There are many reasons why it will stay this way for at least another three years. On top of the excellent international reputation and the $300 billion private banking assets the region currently manages, the Singaporean government is aggressive in making the country more attractive to private banks and HNWIs worldwide. Singapore officials are planning to amend the Income Tax Act, which is likely to help the country to make Organisation for Economic Cooperation and Development‘s “white list”, further establishing itself as Asia’s private banking stronghold.
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I am very interested in discussing your views in more detail as it pertains to some research needs my company has. Can you please email me so we might connect offline.