Berenberg’s recent re-structuring of their UK business just two years after it opened highlights the difficulties in opening a wealth management business in Britain. Mike Cobb explores just a few of the reasons why this may be.
With high regulatory costs, higher levels of competition and a weak economy breaking into the UK private banking sector may seem like a fools game.
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Since October 2011 however there have been no less than five businesses entering private banking or wealth management in the UK.
Some have been small, like Banque Havilland and Germany’s Berenberg, others have been global players trying to tap into the expanding high net worth (HNW) market in Britain.
Whatever their size what has attracted them is the appeal of the ever growing numbers of the country’s wealthy.
According to figures from sister company WealthInsight, the numbers of HNW are set to rise by 43% by 2017.
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By GlobalDataBerenberg’s recent decision to cut UK staff, and the departure of its highly rated co-head Ross Elder, is perhaps a sign that not everything is easy for the new entrants.
Competition between banks may be a factor but to cite it as a primary cause of the struggles of banks like Berenberg is too simple.
New entrants, local specialists and global banks may be chasing after the same clients in the UK, but the opportunities for everyone are huge.
The wrong offering
According to figures from consultancy firm Deloitte, wealth managers and private banks only have access to between 25 and 30% of their client’s money.
This leaves new entrants not only with a growing wealth base, but a possibility to access more than 70% of the existing client base’s wealth.
Which begs the question? Why are new entrants struggling to operate in the UK market?
One factor may lie in the fact that opening a new office in the UK is only the first step. The primary step is to attract high quality relationship managers.
As Private Banker International recently discovered, relationship managers are looking for a broad platform of products before they consider a move.
And banks, whatever their size are looking for the same small group of relationship managers, ones who can bring a large, ultra wealthy list of clients looking to use as many products as possible.
This competition for relationship managers plays into the hands of bigger banks and wealth managers. Banks like UBS, Morgan Stanley and increasingly Barclays are able to sell their proposition to relationship managers as a full service operation.
Smaller banks like NM Rothschild or Flemings maintain their attractiveness to some but for different reasons. One senior recruiter from a UK bank, who wanted to remain anonymous, says: "They offer something completely different. Its high end, its small boutique, and they’re not full service. But because it’s a small firm the kind of admin that you have to do in a big firm environment you just don’t have to do. So they’ve picked up more people from a lifestyle perspective."
Berenberg despite having a staff of only 150 in the UK, have a distinctly multi-platform approach to the business, but not the scale of a bank like UBS. For some relationship managers this may make them neither fish nor fowl.
Without the attractiveness of potential lifestyle benefits or the scale of a global bank for the up and coming, banks like Berenberg need to make a statement to attract the people who can help their business grow.
This is why the hire of co-heads Fred Hervey and Ross Elder from Barclays Wealth in 2011 was considered such a coup. Both men were rising stars, and would have had a book of business that got Berenberg off to a healthy start. What is more, their hire would have sent out a sign to their peers that they meant business.
Elders recent and sudden departure must have been a shock, and potentially deprived the bank of his clients in the long term.
Does a client pay?
The contradiction in the UK market remains that despite the size of its wealth base, making that wealth market pay is hard to do.
Regulation costs, through fees or through the costs inherent in staffing compliance departments are high in the UK.
And costs have been rising steadily since 2007. According to data from WealthInsight costs rose faster than revenues in the three years since 2008.
It is also predicted that the introduction of RDR will add to those costs.
This has led banks to seek ways to improve their infrastructure in an effort to beat this trend.
One way has been to optimise the technology offering.
The pursuit of client facing IT advantage is however an expensive investment that may not pay off.
While the approach taps into the growing market of younger entrepreneurs and future wealthy who use the internet to explore their options, Scorpio Consulting found in recent research that private banking lagged behind the rest of the luxury goods market in advertising its wares through a digital offering.
Just over 60% surveyed found enough information online to feel comfortable about a purchase from a private bank.
Indeed the report found much worse news for start ups.
Seven out of ten of all up and coming wealthy still found their private bank through recommendations. This clearly puts start-ups at a disadvantage in an already competitive market.
Consolidate or die
For many however a more popular solution to cost pressure has been to look at how the business is structured and what sort of clients they pursue.
Barclays for one has made clear their plans to do just this.
The bank has said it will be moving their businesses away from the mass affluent markets which are less profitable and into the ultra high net worth market and picking their markets with care.
Berenberg’s approach appears to be similar.
They have cut staffing numbers in the UK clients team and set out plans to hire more people for the international business, away from the regulatory costs associated with UK clients.
But such plans may only be a sticking plaster for smaller banks.
Costs continue to rise, and the full effect of RDR has not been felt by the wealth management industry.
The future for new entrants and smaller banks looks bleak in the UK.
Ray Soudah, an industry commentator and mergers specialist, has predicted that due to the high costs and regulatory pressures 50% of wealth managers in the UK will disappear by 2016.
This will mean that even household names in the industry may well be swallowed by global operations.
Only time will tell if Berenberg, one of the world’s oldest banks manages to pull through this period standing alone.
But with so many obstacles to growth in the UK market for new entrants, the odds don’t look good.
