In a climate where many banks are leaving the private banking industry altogether, Citi are differentiating themselves by focussing solely on UHNW clients and being as cautious and transparent as possible. John Schaffer hears from the Citi Private Bank team in London
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The hot topic of recent months for private banking clients and their advisors has clearly been the run up to the UK election, where questions over non-domicile status and uncertainty over UK property taxation had loomed.
The success of the Conservative party in the UK’s general election will certainly have been a favourable result for private banks and their clients.
Attention will now focus back onto the other issues that have been affecting private banks such as increasing scrutiny over the industry following tax evasion misdemeanours surrounding HSBC. Holding on to a profitable business model is proving difficult as more challenging regulatory requirements are put into force, resulting in a lower yield from wealth management services. The larger, more traditional institutions also face competition from start up entrants and digitisation.
Citi private bank are concentrating purely on the ultra high net worth individual (UHNWI) segment as they believe that having a more specific focus gives them a stronger business model.
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By GlobalDataCiti’s private banking division has $374bn in assets under management (AuM). The bank defines its target market as individuals with at least $10m in investible assets, thus excluding high net worth individuals (HNWIs) from its client base. Citi say that they are concentrating on "hundreds rather than thousands of clients".
The strategy is not ridiculous in the slightest. A recent report from Knight Frank, The Wealth Report 2015, indicates that there are approximately 10,500 families with a net worth of over $30m in London alone. Clearly there is a market for Citi’s ultra wealthy focus.
Luigi Pigorini, region head for EMEA at Citi private bank, explains why the bank decided to focus on the upper echelons of the wealth bands:
"Some of our clients display patterns that are more typical of institutions, so they’re more aligned with the institutional investors which are served by our markets division.
"A lot of our clients want the same content, the same ideas and solutions that we give to institutions. It was clear to put the private bank within the institutional clients group. It helped us a lot because the amount of cross referral that comes from a big part of this group is very large. Both ways, we originate a lot of opportunities for our investment bank and our markets division and they create a lot of opportunities for us."
As a result, the bank has been exiting some of its clients in an attempt to become more focused and to improve the client to banker ratio.
Pigorini says: "We’ve taken the deliberate decision of exiting a big number of clients over a number of years. Their needs and our needs changed over time and therefore we were no longer suited to serve them.
"One of the mistakes that we made at the very beginning was that we didn’t exit as many clients as we should have."
Staying out of trouble
Citi private bank is adamant to distance itself from controversy related to foul play and criminal activity.
Jeremy Knowland, managing director and global market manager at Citi’s UK private bank, says that the firm wants to be perceived as a "clean bank" and he feels that this strategy makes them a very attractive provider.
Knowland adds:"99% of the bank’s clients want to ensure that they are compliant with regulation"
Pigorini says that strict compliance with regulation gives the bank a "competitive advantage", however he reveals that it is time consuming to take on appropriate clients:
"It takes a lot of work to differentiate clients from the ones you want and the ones who are tax cheats. It’s important that when you do your KYC work, you know exactly where your clients stand."
UHNW clients clearly want to avoid any difficulties with criminal activity, so transparency becomes an important factor for wealth management offerings.
Regulation and legislation is a continuous concern for significantly wealthy individuals and some of the benefits of legitimate tax avoidance can be nullified if tax is applied retrospectively.
David Poole, managing director and head of strategic client segments for EMEA at Citi private bank, says that retrospective taxation has been an issue for the bank in the UK where legitimate tax avoidance procedure had been put into place:
"People were setting up structures that under the legislation were legitimate. Retrospectively, rules came in which changed that. So we saw that with offshore employee benefits trusts (EBTs), for example, the rules were changed retrospectively and everyone who had money in EBTs was suddenly subject to income tax.
"So there are huge issues around that which makes it challenging.
I think people want to be totally transparent, they don’t want to enter into any unnecessary tax arrangements that aren’t totally government endorsed."
Clued-up clients
Pigorini says that one significant advantage of working purely with the UHNW segment is that the clients already come to the bank having been very well informed on the issues surrounding their wealth, as they employ various lawyers and accountants that are external to their relationship with Citi. Pigorini says:
"It makes it much easier for us!
"It is in contrast to lower wealth target markets where clients may not know they are in breach of tax regulation."
However, if clients are to have multiple advisors, issues can arise if clients are given conflicting advice.
Poole says: "The challenge you have is when multiple advisors pull against each other. The ideal position is where all the advisors, including the lawyer and the accountant, are on the same team."
Although Citi are concentrating on a smaller client base, the remaining clients are proving to be profitable for the firm.
Pigorini says: "The amount of AuM and revenue has almost doubled in the last four years, whilst the number of clients has halved."
Knowland is sure that clients are investing more of their money with Citi as they gain greater confidence in the relationship:
"Each of these larger clients is, over time, giving a larger component of their wallet."
Citi say that the attractiveness of its private bank is due to consistency in its team where bankers stay with the firm for a greatly extended period, building familiarity with clients. Citi say that they do not burden bankers with overly large client bases. Knowland says that each banker at Citi looks after an average of 23 clients, with an aim to sustain client relationships for "multiple generations."
