The Israeli private banking market is dominated by a small number of domestic players. However, the mixture of old family wealth and assets generated by Israel’s fast-growing high-tech industry make it an attractive market, Robin Arnfield reports.
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The private banking in Israel is as interesting as it is fast-growing. According to GlobalData Financial Services, the estimated 29,670 high net worth (HNW) Israelis with assets of at least $1 million (including cash) in 2016 will grow to 36,170 by 2020. The mass-affluent segment, with $50,000 to $1 million in assets, is expected to rise from 1.1 million in 2016 to 1.33 million in 2020.
The HNW segment will see its assets grow from $105.82bn in 2016 to $129.56bn in 2020, GlobalData says, while the mass-affluent segment will grow from $181.98 billion to $212.42bn in the same period (GlobalData bases its estimates on liquid wealth – cash deposits, bonds, equities, any mutual funds – held onshore in Israel)
The total value of onshore liquid assets held by the entire Israeli population is expected to rise from $273.5bn in 2016 to $326.48bn in 2020.
The largest domestic private banks in the country are Bank Leumi, Israel Discount Bank, and Bank Hapaolim. While global players such as Credit Suisse, JP Morgan, Citibank and UBS are active in Israel, the market isn’t highly penetrated by international private banks yet.
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By GlobalData
Regulations deterring foreign players
A deterrent to international banks establishing operations is the cost of complying with Israel’s stringent banking regulations. According to the World Bank, Israel’s banking sector is one of the most regulated globally.
In 2005, a regulation (http://www.bis.org/publ/bppdf/bispap28p.pdf) was introduced that required Israeli provident and mutual funds to be separated from banks. As Israeli banks aren’t allowed to hold any interest in or to manage these types of funds, customers are free to opt for third-party products, increasing competition in the sector.
“Israel’s financial advisory regulations are strict and are intensely enforced,” says Shaul Shneider, Head of Leumi’s Private Banking Division. “Israeli banks aren’t allowed to manage assets or to own a mutual fund company.”
“Because of the US Foreign Account Tax Compliance Act (FATCA) law, most of the American Jewish money that was held in Israel has now left Israel,” Shneider adds. “Cross-border issues have created an arena where we aren’t allowed to advise American citizens. All Leumi’s clients are obliged to confirm that their funds are clean, clear, and declared to the relevant tax authorities. Leumi works closely to comply with cross-border regulations. If foreign clients want to work with us, we need to know the regulation in their country of citizenship/domicile.
“We’re investing a lot in our legal department to understand what we’re allowed to do and what we aren’t allowed to do.”
The wealth management services provided by Leumi are advisory – mainly investment consulting. “Our client fees consist of management and brokerage fees. We have an open architecture, so we can work with our clients’ third-party asset managers and we act as the custodian for our clients’ funds.
“Under Israeli law, we can distribute mutual funds to clients, but distribution is highly regulated, and fees are determined by the regulator. As we don’t own the products, we are 100% objective in our advice,” says Shneider.
Leumi currently doesn’t do discretionary management. “But we intend to establish a discretionary management company, mainly for the retail bank, which will be based on a digital platform,” informs Shneider. “The fact that we don’t have discretionary management could be seen as an advantage, as it means we aren’t biased. We put our professional investment advisory capabilities at the forefront of our services,” he adds.
“We offer retail banking services throughout our 200 branches across Israel. Our private banking service starts with the client segment which has Shekel 2m to Shekel 8m ($547,000 to $2.19m). Then we have the main private banking segment which has Shekel 8 million to Shekel 20m ($5.47m). Our top level of private banking customers has Shekel 20m and above,” he says.
Pictet Wealth Management Israel Ltd was created in 2012 with an Investment Marketing Licence, and a representative office of Pictet Wealth Management was launched in Tel Aviv to serve private clients locally. A Pictet spokesperson says:
“Our team in Tel Aviv is responsible for wealth management for private clients who also have access to Pictet’s expertise, including tax, legal and succession planning as well as family office services, provided by other divisions of the Group. From 2010 on, we have also been offering investment solutions to institutional investors, such as asset managers, insurance companies and pension funds.”
UBS caters for Israeli private clients directly out of Switzerland and has a substantial presence in Israel with a fully licensed entity in Herzliya that we established officially in 2012. “We have fully dedicated teams for Israel in London and New York and a small team focusing on Israeli clients in Singapore. Globally, we have approximately 100 people dedicated to servicing Israeli clients,” explains Edward Gordon, Head of UBS Wealth Management Israel.
“We operate in Israel through a Foreign Dealer Licence that lets us provide services via our local advisory office. As soon as the client has an advisory agreement with our Israeli office, clients have access to our global platform of products and services.
“Early on, we went the fully licensed route of having a presence on the ground in Israel, where we have a Portfolio Manager Licence. That allows us to provide a wide spectrum of advisory and management services for our clients in Israel. We can leverage our Foreign Dealer Licence for the distribution of global products through our local entity,“ says Gordon.
UBS target market in Israel is private individuals, but the bank deals with the family offices that represent some individual clients and selectively with corporate clients seeking wealth management services.
“We start with affluent clients with an account minimum of above CHF500,000 ($496,000) to CHF2 million ($1.98 million) and serve HNW clients with assets from CHF2 million to CHF50 million and the UHNW segment beyond CHF 50 million.
“For very sophisticated clients who require direct access to our investment banking unit, our specialist Global Family Office unit provides direct access to our investment banking services.”
High-tech boom
The Israeli private banking market comprises family money made decades ago by established businesses and also, as Israel is a start-up nation, millionaires and billionaires who are generating large amounts of money from new ventures.
“The Israeli ultra-rich keep their wealth in Israel and also outside, for example in Switzerland and the US. A characteristic of Israeli HNWIs is that they are more willing to pay offshore wealth management firms and banks higher fees than they are to pay onshore Israeli private banks – they realise that outside Israel they have to pay higher fees,” says Shneider.
Will Trout, Head of Wealth Management Research at US consultancy Celent says: “Many of the entrants to the Israeli private banking market such as Pictet and UBS only really started building up a presence early this decade, once the tech boom hit full stride.”
From the private banking standpoint, the decade-long Israeli tech boom, headlined by firms like crowd-finance platform Our Crowd and cybersecurity firm Adallom, which Microsoft bought in 2015, has generated tremendous wealth.
Says Trout: “The infusion of new wealth has helped reshape a wealth market coloured by the country’s unique cultural and political situation. The democratic, egalitarian (“each according to his abilities”) ethos symbolised by the Israeli Defence Forces (in which all young Israelis must serve) has become increasingly pronounced in the country’s private banking sector, with tech exits by 20- and 30-something entrepreneurs driving a need for new servicing and delivery models.”
An already sophisticated market – HNW Israelis have high expectations from their advisors in terms of knowledge, especially around tax and wealth-structuring issues – has become increasingly tech-oriented and focused on the needs of entrepreneurs, which include the management of concentrated wealth positions, for instance in the form of company shares.
“Generally, Israeli HNWIs and UHNWIs understand how to take risks and are knowledgeable, smart customers,” says Shneider.
UBS provide the full spectrum of affluent-plus client services in Israel, says Gordon.
“Compared to other banks, our main difference is the amount of resources we provide for wealth management. We don’t do retail banking outside Switzerland, and have a core focus on wealth management. We offer proximity to our clients in Israel, which is more and more needed in the wealth management industry, along with technology paired with our expertise to reach clients through different channels.”
“We protect our clients’ wealth by providing diversification in the current uncertain global economic and political climate. Diversification is key from a geographic and from an asset point of view – we combine this in one package.”
Digital games
Leumi offers an Internet-based platform that provides customers with comprehensive reports on their portfolio and a dynamic user experience. The platform provides reports on asset allocation, cash flows, yields, risk profiles, and more.
Leumi is also investing in algorithm-based robo-advice technology. “But what differentiates our private banking business is the high level of service our clients can’t get from other banks. We work hard to understand our clients’ needs in terms of helping them increase their earnings and give them exactly what they want.
“We will use tools such as robo-advice to give higher-quality advice. But the most important aspect is ‘emotional intelligence,’ with our advisors understanding our clients’ needs, even when clients themselves don’t know what exactly they need,” says Shneider.
Incumbent providers, whether domestic champions like Leumi or foreign players such as UBS, Rothschild and Pictet, are having to up their digital games quotient in an increasingly crowded and fragmented wealth market, which includes law firms such as Norton Rose and Big Four firms such as EY and smaller accountancies, according to Trout.
“Much of the services provided will centre on managing the significant tax burden imposed by the Israeli state, both on income and capital gains, despite more wealth-friendly policies intended to drive investment and immigration of tech-savvy talent from Europe and North America.
“These policies include liberal inheritance laws and favourable tax treatment of trust assets held outside the country, although requirements were tightened recently. Although geopolitical issues and Israel’s small size and relatively remote location mean that the country is unlikely to emerge as a major private banking hub, the inflow of valuable human capital, with associated wealth generation effects, represents a major tailwind for both legacy and emerging private banking providers in Israel,” he says.
Retrenching underway
In recent years, Israeli banks have been selling their international private banking operations.
In March 2015, Leumi completed the sale of its Swiss and Luxembourg private banking business to Julius Baer.
In November 2015, Israel Discount Bank sold IDB Swiss Bank, to Hyposwiss Private Bank Geneva for CHF10.9m ($10.81m).
In December 2016, First International Bank of Israel agreed to sell FIBI Switzerland’s customer portfolio to Swiss bank CBH. Hapaolim agreed to sell its Miami branch’s international private banking portfolio to Safra National Bank of New York in December 2016, and announced the closure of its Uruguayan subsidiary Hapaolim Latin America.
As cost-income ratios rise, more focus around core markets and operations can be expected from Israeli private banking players.
