The global economic crisis, the most significant downturn since the Great Depression, greatly affected the financial sector worldwide, both financially and reputably. Five years later, the United States looks to be recovering, but is it enough to ward off competing markets or to regain the high net worth population’s trust? Patrick Brusnahan and WealthInsight look at the current state of private banking in the US and the troubles that may lie ahead.
Despite the United States’ current stronghold as the world’s top spot in number of HNWIs, industry experts have predicted that emerging markets, particularly China, could soon overtake the US. Analysts have predicted that it could take place within the next fifteen years. Jack Garniewski, director of the Wilmington Trust family office, part of the larger Wilmington Trust private bank in America, believes that while ‘we still have our position’ there is a ‘lot more wealth being created globally’ and that America could well be overtaken in the next couple of decades.
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Once China gains more recognition, the US could face significant competition in high-wage sectors, especially as their products begin to gain brand recognition. Moreover, China has recently emerged as a major player in the worldwide economy, especially in regards to trading. It adds another area of the world that America must compete with. Shockingly, some reports have forecast that the Asia Pacific region’s wealth could surpass North America’s as early as next year.
Trouble from all angles
Recently, many difficulties have been coming from abroad and not just from China. European struggles have seriously hindered private banks in the US. Several American banks have significant exposure to the troubled EU market, which could be entering a double dip recession, according to industry experts. For example, a large proportion of the US equity market is derived from European investors, an investment which will continue to decrease if the economy continues to struggle.
More importantly, it is not only foreign markets which are causing problems, but also the economic situation in the US. The years ahead hold many potential pitfalls. The lack of economic stability in the United States has been prevalent for the last five years and it is expected to continue. The property market in particular is troublesome. The market has declined every year since 2006, before the global financial crisis, and shows no sign of slowing down or stabilising. The effect has been more widespread than simply hitting wealth. Consumer confidence in the sector has greatly fallen, which affects more than 50% of US individual wealth.
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By GlobalDataHowever, the situation is not all doom and gloom. The US has the highest number of high net worth individuals (HNWIs) in the world. In 2012, there were approximately 5.8 million HNWIs in the United States with a combined wealth of $21.7 trillion. In comparison with wealthy countries worldwide, the United States looks even more impressive. Japan, the second wealthiest country, only had 1.9 million HNWIs in 2012, compared to the US’ 5.8 million. Germany is even further behind with just over 1 million HNWIs. These three countries together account for 53% of the HNWIs in the world, but America clearly accounts for a large chunk of that group.
After years of stagnation, business investment rose by 8.4% this year, mainly resulting from the rise in income. Growth is moderate and the will to spend, in both the consumer and in business, has risen. The labour market is as flexible as ever, which keeps the US competitive. The ratings agency, Standard and Poor, has upgraded the country’s outlook from negative to stable. All of these improvements could benefit the private sector and, in turn, the private sector could be of great benefit. If the situation continues as predicted, it could strengthen the country’s GDP by 0.2% in the years 2013-2017.
According to sister company, WealthInsight, by 2017, there are expected to be nearly 10 million HNWIs in the country owning $39.5 trillion altogether. These estimates are not unlikely considering the local HNWI wealth has increased by 57% from $13.8 trillion in 2008. Of the 5.8 million HNWIs in the country, the prime target for many private banks is the 44,934 ultra high net worth individuals (UHNWIs) that reside in the US. On average, each of them is worth $138 million with 443 individuals reaching the billionaire category. However, while America currently leads in this department, Asia is expected to have a larger UHNW population by 2032 and to have a greater UHNW wealth by 2024.
With the sheer amount of wealth in the country, it is no surprise that private banking is a leading industry. In the top twenty largest global private banking branches in the world, eight of them are American; with three, Bank of America, Wells Fargo and Morgan Stanley, breaking into the top ten. 13.6% of the country’s HNWIs, and 15.4% of their UHNWIs, made their money through the financial services. This is the largest percentage of any industry. On top of this, the number of individuals acquiring their wealth through the financial sector increased by 63% between 2008 and 2012.
Due to the large amount of HNWIs in the United States, the competition to secure their business is extremely high. The strong competition between the three main sectors, private banks, wealth managers and family offices, has forced many to extend their offerings to gain a larger market share among the country’s huge wealthy population. One of the particular ways that American private banks differentiate themselves to others worldwide is their client criteria. They accept clientele with at least $1 million in assets when the general worldwide model is to only accept those with over $5 million.
Competition begins to rise
In the aftermath of the global financial crisis in 2008, many of the larger private banks suffered significant damage to their reputation. This led to much trepidation when investing with private banks. Many chose to seek the advisory expertise of wealth managers and family offices instead, which were more tailored wealth management services with much deeper engagement.
Garniewski said the ‘security clients once felt’ had been damaged and has to lead into ‘recalibrated thinking’ when it came to the private banks. Another problem was the feeling that the goals of private banks, particularly investment bankers or proprietary trading arms, did not match with the interests of their clients. In addition, more UHNWIs were looking towards family offices and wealth managers rather than the traditional private bank, having a severe impact on the big players.
Single family offices were created by wealthy families to manage their investments and finances, especially after the demise of Lehmann Brothers. BNY Mellon’s head of international wealth management and client segments, Don Heberle, says: "private investors today are seeking a higher degree of personalised advice delivered by a trusted advisor who can simplify the increased complexities of today’s markets. Trusted relationships and honest, straightforward communication and transparency are valued significantly more than transactional investment models."
Due to the cost of this malleable form of wealth management, it is limited to those with more than $100 million. Those wanting to explore that option, but are only valued between $30 and $100 million can join a multi-family office, which lets families co-invest and share costs between them. These two different versions also compete for clients, but less so, due to the difference in wealth level that they work with.
Wealthier families swung heavily in favour of family offices after the 2008 financial crisis. For example, now 30% of family offices are located in New York, the largest area of wealth in the US. A key factor was that family offices can provide more customisability than other options. Strategic outsourcing has enabled family offices to be capable of providing a wide variety of services. These include managing household staff, property management, philanthropy coordination, managing family education, intergenerational transfer, and legal and tax services, as well as the usual investment services.
Philanthropy is of particular interest to many HNWIs, as they donated $229 billion in 2012, an estimated rise of 3.9% compared to the previous year. They also offer an exclusivity factor as they only tend to deal with family members and their related trusts, foundations, charities, non-profit organisations and family-related investment vehicles.
Stephen Campbell, head of the North America family office group of Citi Private Bank said: "We have seen an increase in the formation of family offices driven in part by the formation and transfer of wealth along with the desire to control and personalise services offered to family members. Firms who wish to serve this market must offer flexible, cost-effective, high quality services, not unlike those traditionally available to institutional clients."
However, not all private banks conflict with family offices. Many strike up mutually beneficial partnerships. Jack Ginter, senior managing director of Abbot Downing, a family office branch of Wells Fargo, feels that their two companies hold an ‘active relationship,’ a ‘strategic advantage’ which allows both to benefit. This allows many private banks to keep clientele while still offering the ’boutique experience’ that family offices are known for. Heberle took a similar view and considered BNY’s relationship to family offices as an ‘extension of the family office, rather than simply an advisor or service provider to it.’
Regulation rears its head
One of the increasingly common demands in private banking, not just in America, but worldwide, was for greater transparency and reporting that was easier to understand. Consequently, more legislation, such as Basel III and the Foreign Account Tax Compliance Act (FATCA), was approved to monitor banks and to increase their transparency.
Stephen Campbell commented on this saying that legislation such as ‘FATCA and recent family office regulations certainly raise the bar’ and forced the wealth sector to ‘adapt to regulatory scrutiny that was generally not present even five years ago.’ He also said that ‘transparent solutions’ were a key draw for clients when it came to Citi Private Bank. Garniewski agreed, stating that clients were more ‘aware’ of all regulatory and compliance components and they had to become ever more active to maintain their clients’ confidence in them.
Overall, the private banking situation in the Unites States is secure for the moment, but it possibly will not be for long. With the competition sprouting from emerging markets and the problems encountered, at home and abroad, the sector is on thin ice. While the sheer wealth within the country will help it stay strong, whether it will keep its coveted top spot remains to be seen.
