| Ashley Crossley Head of Wealth Management practice, Baker & McKenzie |
| Seb Dovey Managing Partner, Scorpio Partnership |
| Remi Frank Head of Key Clients, BNP Paribas Wealth Management |
| Steven Kettle Executive Director, Stonehage Group |
| Ian Woodhouse Director of Private Banking and Wealth Management practice, PwC |
Nicholas Moody (NM), Editor, Private Banker International: What do you think is the best business model to serve the ultra high net worth (UHNW) segment?
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Remi Frank (RF), Head of Key Clients, BNP Paribas wealth management: "We have created a combination of the traditional offering from a bank while taking all the best of what the bank can bring. When you have a client either at $1 or $5 or $10 million, usually it’s the relationship manager who handles the full relation and brings all the products and services to the client. When you go to UHNW, I would say the relationship manager is the maestro of the relationship.
NM: Why did you decide to do approach it in that way?
RF: "Hedge funds are starting to be looked at by investment banks when they are at $20 million. Here you have clients who are above $50 million, say it could be a billion, why should they have a lower standard of services compared to institutions? They are as big and often as educated as institutions. Why should they end up with lower services compared to what investment banking is providing to institutions? This is the shift we have made. We have decided to treat them as institutions. We owe them the same quality of service that we deliver to institutions.
Steven Kettle (SK), Executive Director, Stonehage Group: I would argue, without fully understanding your model, that the more money involved, the more complicated the client, the greater the need for key advisors. Our model is one of having a key advisor, a trusted individual at the top, who will then outsource the service either internally or externally. And yes our client may have direct relationships with service providers such as myself as investment advisor. But I am always equally comfortable in communicating in most cases through a key advisor.
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By GlobalDataRF: We have the relationship manager; he is playing the role you described. We have 120 relationship managers in the world dedicated to key clients. The ratio of clients per RM is on average between 10 and 15 clients but can be as low as a single client. Those people know first of all what is going on, no one from another department will call a client without letting the relationship manager know about it. They have the holistic view of not only the client, but also the way you treat the client.
Seb Dovey (SD), CEO, Scorpio Partnership: This part of the industry is still finding its legs in terms of the viable business model.
Many operators in the family office sector are finding it economically quite difficult at present. The challenge is reconciling the aim
to serve eight and nine figure client accounts, but when the fees that can be charged are much more likely to be at the whole sale price level, which quite often leaves little room for margin. The basic data that often comes out from the banks, in terms of the fee they can extract from this group of clients versus a higher volume client, is typically in the fraction of half of the fee that can be charged to a mainstream HNW account. That differential is fine if you have a big number of clients; but it is a much harder and more expensive client base to go after. Many of the top 20 banks have key client groups, but they have to get scale to be able to support the model.
Employing 120 highly skilled people is expensive. As a result, I still worry about the key client space. The tipping point for economic scale is much higher than many of the smaller operators initially thought. Has it proved itself to be a profit centre? We have argued with some banks that it could be the research and development centre that leads to the development of products and services which can be sold to a larger, albeit slightly less wealthy, HNW client community, if it can just be neutral cost. Then the things that banks do, which are amazing at that client level, can be manufactured for a much wider audience. This isn’t very popular with the rest of the industry.
Ashley Crossley (AC), Head of wealth management practice, Baker & McKenzie: We concentrate on entrepreneurs and the reason is they do lots of things which produce lots of opportunities for us to assist them and help them grow their businesses. I think the concept of a "One Stop Shop" for these clients is very attractive, particularly in the international arena, where clients have to navigate a myriad of different tax systems and regulations.
SD: This year alone we surveyed nearly 1,200 ultra high net worth individuals on a number of different projects. Among many areas of research focus with this group, we asked them why they choose institutions and what they expect from a client journey. What’s becoming much clearer is when they select an advisor they will prefer to look to the business model where that advisor is more aligned to them. To most, the advisor needs to have the capacity to focus on their interests objectively and, crucially, that this objectivity is also supported by the institution. If one does not support the other most clients are less comfortable about choosing that firm. It is very difficult to pick out a single firm that has this balance totally right. It is a subjective matter to a considerable extent. What is also clear right now is that most UHNWs and families are on a quest to find the right solution – and this is often why they continue to have a larger number of financial provider relationships than HNWs have.
NM: We’ve been talking about how people don’t k now how to engage t he UHNW segment really well. It appears to be the same with family offices. Are there any other views on family offices?
SD: The barrier to initial entry [in family offices] is very low and that helps to perpetuate the sense that this sector is still a cottage industry. The good news is there are a group of more independent offices that are running much more like commercial businesses than lifestyle choices and that have grown over time and become a credible core market. While the independent sector has taken its time to get going, this has given the opportunity for the bank-led key client models to re-establish their claim to market share.
SK: I think it’s confused for another reason. Every investment business starts calling themselves an investment office, and then they start calling themselves a family office. There is a big difference. I do feel sorry for families who are trying to choose advisors. From our studies, you need assets of something like $500 million to justify the costs of replicating the skills you get from the multifamily office. I think a single-family office is sometimes a risky proposition.
AC: We have set up quite a few family offices and it’s been a trend in the last few years for very wealthy clients to establish these, partly due to the financial crisis and their desire to not just rely on the financial institutions.
RF: You had a question between banks and family offices, whether they are competitors or co-operators. At wealth management, we have many types of this kind of clients, of course single-family offices, they have their own advisor, but they need operational assistance. They are in the key client group, being created as an individual. And for multi-family offices we have another department with a Chinese wall between the two. We know that our clients are multi-banked, so we don’t believe that every person who has been to a client is a competitor, we treat them more as co-operators.
AC: Often families are reluctant to keep providing so much due diligence and so much information about the family to each bank because they worry about confidentiality and exchange of information. So that can mean that family offices can be a useful filter in allowing the family to keep this information within a reasonably controlled environment, when dealing with issues of the bank or their investments.
SK: One of the single biggest risks is the unnecessary sharing of information. So we like to have counter-parties who rely on our systems. Within Stonehage’s 400 staff we’ve got 10 compliance officers, so we have an infrastructure to deal with this.
NM: As you said, one of the operational risks of having clients shared right through big organizations is there are numerous places confidential information could be leaked out. Is that an issue or an area you’re trying to address?
RF: Take Switzerland for example. There is not a single name that can be revealed to the head office in Paris even for credit purposes. We have very strict rules and it is not always easy. When it is a big issue, it is the top management of the head office who have to travel to Switzerland to give the approval. Although I am the global head of key clients, I cannot centralise any information in Paris. So no, for us this confidentiality exists but creates difficulties in managing it centrally, as a bank is used to doing so. Confidentiality requirements are higher than in other businesses.
Ian Woodhouse (IW), Director of private banking and wealth management, PwC: We work in partnership with a number of law firms, banks, family offices etc. What we see has shifted in the business model for clients, in addition to old money, there is a shift to more entrepreneurial and cross-border family office clients. Increasingly family office clients value data and knowledge in a few key areas. What we do to respond is to make sure our systems can interface with other providers so we can get high quality data, so whether that is a bank or law firm or whatever, we have invested in these systems because going forward we see models evolving around being much more data and data management intensive.
The data in systems becomes ever more critical in the business, and the ability to interface with providers also becomes critical as does how you manage data security aspects. If, for example, I am going to link into the BNP Paribas system for my clients, I need to know who has the regulatory reporting requirement. Is that you, is it me? So I can manage what I call the front-to-back operational risks. So at any one time I can assure a family the risks on our side are clear, and from any partner we work with, because whichever partners we work with de facto we are jointly liable, we have to be very specifically clear on what our liability is versus the liability of the bank in regard to the client.
AC: There is a generation change as well. The younger generations increasingly understand the requirements of tax exchange agreements and transparency and accept that the world has changed. There is far less resistance to accepting that client confidentiality has to be in the context of state oversight and control. There is a saying that "one man’s banking secrecy is another man’s data protection". There a re actually quite significant data protection laws that mean your information shouldn’t be a free for all, but what it does mean is you have to be quite precise in what you mean and what level of data protection you can have. I do think the wealth management industry is a lot better served by assisting clients to be compliant.
RF: We believe that with UHNW the issue of undeclared money is considerably less than with the mass affluent and that with large amounts they have been declared long ago in view of the risk of not doing so.
IW: Then if you then move that forward, what do you mean by changes in business? Well that will create great change in the business model, going forward what we see is the future around data and understanding those clients. Family offices themselves have
to think about it as do providers. At the end of the day what you’re moving towards are more standards. If you have standards and it’s transparent, you start to create more value from data. One of the things that is interesting is promoting data around custody/ security services. That in our experience is a big draw for clients. It could be that’s your way in, then what you do is use the power of data aggregating to move them to the different services. Also what we find is we have different relationships with different people in the family offices, as do the banks.
RF: Of course our role is to talk to the owner of the family office and we find one of the best ways to do this is to deal with "passion investments" such as yachts, jet financing, philanthropy, vineyards and art… Frankly, they can deal in billions of forex, bonds, equities and you may never meet them, but when you are talking about financing their next yacht, you speak directly to the owner.
IW: The problem I perceive is that most beneficial owners don’t necessarily want to talk to banks. There is something about the fact that they are more comfortable dealing with other wealthy individuals and families and with what they would call trusted advisors.
RF: Maybe for some you’re right. There is one area where no one can replace banks and that is financing. All UHNWIs want to get leverage. And when they want leverage they have to go to banks. Banks will not lend you money if they don’t know you. When we lend 50 million, 100 million, we don’t want to see a default. We need to know the person. I was talking about passion investment, which is a way of talking to a client, but frankly on the financing side, there you have a real relationship.
IW: I agree with you to a point, but we see a sea change. For example, what we have is consortium of families, and what’s interesting about consortium of families is they can raise $1.5 billion in 24 hours. They also deal amongst themselves so what we see is more and more of the family offices are building networks where they have aligned interests. We’re also seeing more polarisation between old and new money, polarisations between what the ultra high net worth and family office want versus mass affluent. You can see significant changes. One consortium has all come from commodities background so they have commonalities of interest and knowledge that no bank has. What we’ve seen now is very powerful between these families.
They know instantly what is going on in the commodity world before anyone else does, even banks. It comes back to information insight; it becomes more of a knowledge transfer as a key for families. So they can start buying and selling between themselves, and they don’t need the banks for that. Banks could build similar networks of expertise but this may be challenging.
RF: In commodities, BNP Paribas is one of the biggest financing banks in the world. As such, we know all these clients for 20 years as corporations. So, this is one way for us to bring them to wealth management. They are aware that we know their industry, because we are financing every energy commodity provider in the world.
SD: We have to be a bit careful about these anecdotes that come out. That isn’t the whole ultra market, there are 110,000 ultra high net worths. Actually that’s a very small client community when you consider it, and it becomes even smaller when you take into account there are as many as 1,000 decently sized entities targeting this audience to consume their financial service business offerings. Whenever UHNWs go to any financial institution the things they value are consistency, credibility and the bank’s ability to interpret content, i.e. what banks know, how banks analyse it, what the market is doing, what’s the recommendation based on that information. And then they want community.
The thing that Remi is talking about is very interesting, this passion space. In my mind, that’s the strategy side of the business. Where you are an educator, a guide, you look at the things clients want to be involved with. We’ve said recently to a few banks think about education, think about how you can work with your clients. They are curious about what they should be doing, whether one family is doing the right thing or the wrong thing. The problem I have with that is many banks don’t go in to provide those services with a commercial mind. They think education is just a little freebie you do on the side, maybe with a tie up with some academic entity such as INSEAD to give it a veneer of deeper suitability.
Sadly, most of these offerings are really lip-service to the education concept and mostly are not integrated into the core proposition of the financial services solution. In our view, it must be more integrated. There are incredible things that can be achieved through this education. For one institution, our concept for them results in nearly half a billion dollars in new assets in six months.
RF: Just two examples: next week we have the "Next Gen" offsite in Paris with 40 people attending. We are doing it today in Hong Kong for some 40 people. The second is what you said: philanthropy. I’d just like to say a few words. We started six years ago with François Debiesse, the former head of wealth management, who became senior advisor for Philanthropy and Microfinance. We approached it seriously and now we are recognised for it by our clients, who are happy to have a specialist like François. We never recommend any charity they could invest in, it is totally independent.
SD: You asked about business models at the beginning, is this a good industry to be in? What’s the value of this model? Is it worth spending the money? I understand the philanthropy and education piece. The R&D element, you have to look at as a commercial element. At the end of the day you’re spending money, and is that going to give you a return? If it isn’t, should you do it? Maybe not.
SK: You provide services such as art management and philanthropy because it helps you stay close to your clients. It’s a cost centre; it’s a way of staying close to things that are a passion to your clients. From my experience most of our clients don’t want to deal with banks and they employ us as gatekeepers. So in the example of a client who wants to borrow money, our job is to have an approved list of financing banks who are specialists in those areas.
SD: There are lots of clients, lots of markets that do consider banks to be an important central point of resource. In Scandinavian markets and Asian markets the bank is a critical part of the relationship.
NM: What are the geographical differences in UHNW demands in Asia versus Europe versus the US?
SK: Old money and new money is all so geographically linked. So the idea of a gatekeeper, a really independent lead advisor is still quite foreign in some of the developing countries. Where families who have made new money want the kudos of having relations with certain banks … It often doesn’t work so well in more developing economies because immediately the client involves himself directly with the bank. We know there is a certain maturity of wealth that is suited to our model.
RF: Maybe what you describe is true for pure private banking players … it is not the case for us. Most of those clients, the young generation, are entrepreneurs. We know them from the corporate side. They have relationships with banks like us because they were our clients when they started to grow their corporations and they have developed a relationship with the top management of the region. Like in Asia, for instance, where we had Mignonne Cheng running the corporate investment bank for 20 years who is now CEO for wealth management. She knows all those clients very well from this relationship. The same is true in Europe, Russia or the Middle-East where we know the people from their corporate background.
IW: You do sense differences in the models. In the UK for us it’s pretty clear all our wealth management models are changing, the affluent model is changing, the banking model is changing, and the family office model is changing. A lot is driven by regulation, so its involuntary change. The industry is at some kind of inflection point, no one quite knows yet what future models will look like, but the UK has some interesting models. Players will modify as they go, we don’t yet know how things will pan out, and we keep an eye on the different models.
AC: The Asian market i s more products focused at present and so there needs to be an evolution in how the wealth management industry responds to these clients’ needs. It requires a different approach to the European or US model.
SD: Not all the statistics are clear in terms of all the money managed by the wealth management industry, 80% of those assets are held by the top 20 institutions. Half is held by the top 10 institutions. That doesn’t mean that the balance is a small amount, 20% is still a huge number, it is about $3-4 trillion. There is a lot more money to play for that isn’t in the financial institutions right now.
Our estimate for this is around $11 trillion. Smaller brands could attract that share, but they have to be much more connected to the customer base.
IW: It is not that there isn’t a role for banks, absolutely not. I think with the inflection point, the role of the bank and what they provide is going to be different in the future. There weren’t many multi-family offices around, they’re not big, they are new, and increasingly we are being asked to make lists, for our fiduciary responsibilities, for nonbanking institutions. It suggests the industry could be fragmenting. In the past you went to BNP Paribas, Barclays etc for those services because you knew the bank could provide them in the round. What’s happening now is it seems to be the clients are more willing to go with different providers for different areas of expertise. For example, if I want top-notch investment I could go to an independent UHNW investment office. If I want more fiduciary service, I go to a multi-family office. If I want more tax advice I would probably go to an accountant, if I want legal structure I go to a legal firm. And because that’s been more technology enabled, it’s now actually easier because there is more transparency. What you know from other industries.
If you take as an example the IT industry, where IBM changed from selling PCs to selling consultants, putting technology together to get a solution. So I wonder whether something similar is happening in private banking/wealth management. It’s very difficult to know, you never know. One of the things IBM never knew was neither when it was in the inflection point nor how long the inflection point would last. What they did know is that when you came out of the inflection point, if you haven’t taken action you would’ve gone down. So I think there is something here. I think the warnings are written large of staying in old models too long.
RF: I think you have to make a clear distinction between the general private banking and the UHNW segment in particular, it’s very different. When we were talking about new money and old money. How can a bank deliver services? I have two examples. I was in Shanghai two weeks ago to meet many clients. Typical clients have stocks in their own company, and at the same time, they are all traders in currencies and equities. When you are in Russia it is more commodities. The typical model for them is to give us their shares as collateral, and then to trade, based on this collateral all the capital markets instruments – both in China and Russia but less in the Middle-East. Yes, it’s a change in behaviour, but we have a global business model.
There we have a real competitive advantage because we can leverage their shares. We can custody them and at the same time provide them with top quality capital market products. So I agree that some clients want to split everything, but when, on some occasions, you can have everything in the same place they appreciate it, it’s easier.
On real estate, what we do now is to do club deals between our clients, and they like going alongside two to three families for one building and we can manage everything. So I don’t agree with you when you say all the clients want to break down their portfolios; they want the best of everything when possible. But when you have the opportunity to do everything in the same place it is easier, they like it. Only banks can deliver the product, the leverage, and the management of the position.
SK: Clients want an investment solution that includes solving the tax issues that arise from making that investment, overcoming structuring problems and handling soft family governance issues in the context of the wider family situation. Those are real solutions.
SD: Solutions present a client with a sense that they have control. Control is a big feature in the mind of a wealth holder. There is a fear of loss of control when it comes to your wealth and the degree of how you delegate depends on your confidence over the ability to regain ultimate control if necessary. At a bank, whether you sense that you’ve won or lost control, or whether it is with an advisor, it is a big thing in the behaviour pattern of a consumer, whether they are a billionaire or millionaire. I think in the industry, as it goes through its inflection of understanding about what is the most optimal business model in the future, a key question is what parts of its business give the customer control? The rigidity of the traditional private banking model has been its downfall. The flexibility of the key client group model is huge. We all just need to figure out what is the most efficient organisation of that to make money.
NM: If you’re running a business how do you charge for a solution? Solutions are a lot tougher across an enterprise as big as any of the global banks to charge for.
RF: We don’t charge for services, like wealth planning for instance. We have a team which is a cost centre for wealth management and we consider is as part of our service offering. When it concerns insurance of course there are fees by insurance companies. Philanthropy is not charged, it is a cost centre, same with art advisory.
AC: One of the issues when it comes to bringing in lawyers and accountants into the wealth management part of a bank is being able to explain to clients that you want to help them navigate complex problems and charge for that help, but you are not providing legal or tax advice and so not taking on the risk of the advice, which is better outsourced.
Often it’s the fiduciary structure and professional side where a bank is reluctant to take on risk without much reward, so that is the area I think we will see most change in bank services over the next five years.
SK: I’m always very cautious when someone gives me advice if I’m not being charged for it. If we ran an advisory model on the same basis as the banks, we’d be bankrupt. We have 12 advisory businesses and every one has to stand on its own feet.
SD: I can’t speak for BNP, but there are other banks that are getting to separate the intellectual skills and present that as an independent set of fees. What is interesting is we have the customer research on the other side from families and ultras that shows they are much more respectful of the fact that they are paying for that advice. They see the commercial transaction. It is essentially a "contract for value" principle and this is a critical issue. It is key and we are introducing that idea to the wealth industry. I think the biggest gift that the key client sector can give to the entire industry is to demonstrate contract for value. The rest of the high net worth
space will follow. We have that going on with RDR at the other end of the scale and that will work its course.
In addition, you talked about emerging markets, particularly in Asia. The impression is that the Asian client is a trader-based client. Actually, all of the research, which is representative and statistical, shows that there is a huge demand for guided advice and financial planning, but it is not being offered. A lot of the industry is still plotting its future growth on outdated and often unsubstantiated ad hoc hearsay. Our evidence based approach shows a clear direction of travel for consumption patterns.
RF: So clients are ready to pay for it?
SD: We’ve asked this and the bankers will argue they are not prepared to pay for it. We are now trying to understand how it is been offered to them. When you ask across the board, ‘What is advice to you and will you pay for it?’. It is not that everyone will pay for it, but there is a significant community of clients that are saying ‘Yes I would’.
NM: What are your final conclusions to today’s discussion?
RF: I think we are each representing one part of the private banking world. I’m fully convinced there is room for all of us.
AC: I do think that the industry is changing. You will find financial institutions reducing the level of structuring/wealth management/tax planning side they do internally and outsourcing these services more to other providers.
SD: I’m really pleased that we’re still debating the definition of family offices. We haven’t even begun to clarify the term. We’re miles behind where the US is at an industry level for the family office business. So I’m glad we’re debating it. I suppose at some point we need to have a conclusion to that.
SK: The value of a truly independent trusted advisor continues to be underestimated. I think that is somewhat linked to people not always understanding the difference between a multi-family office and a private bank or investment office.
