Wealthy are vulnerableto behavioural biasUBS chiefinvestmentofficerMarkHaefeleon how toreduceriskPage 4

Private BankingFT SPECIAL REPORT

www.ft.com/reports | @ftreportsMonday November 24 2014

Inside

Global crackdown ontax evasion hits homeBanks face rising costsas they struggle tocomply with new rulesPage 2

Tough decisions payoff for DeutscheRestructuring has beenbrutal but effectivePage 2

Family offices begin tocatch on in AsiaFinancial crisis erodedtrust in banksPage 3

Start-ups on the menufor private bank clientsTraditional portfolios areexpected to deliver onlysingle digit returnsPage 4

L ast month, Hong Kong’sfinancial secretary, JohnTsang, opened StandardChartered’s new wealth man-agement centre in the city –

an eye-catching off-kilter gem-shapedglasscube.

In a speech peppered with Chineseproverbs, Mr Tsang also talked up HongKong’s prospects for winning a biggershare of the booming global wealthmanagement industry.

As the world’s wealthy continues togrow richer at double-digit rates – andnowhere faster than in StanChart’sAsian heartland – it would seem thereshould be more than enough businessfor all those wishing to serve that grow-ingmarket.

At theverytopof thetree, thenumberof billionaires rose 7 per cent to 2,325 –a record, according to the annual

billionaire survey compiled byWealth-X and UBS, which covers the12monthsto Junethisyear.

Their combined wealth, meanwhile,grew even faster than their number – by12percent toatotalof$7.3tn.

Hong Kong’s billionaires would seema better bet than most too. They have amean net worth of $4.2bn comparedwith$2.5bnamongLondon’srichestand$3.4bninNewYork.

Hong Kong also stands out regionally,with Beijing’s wealthy holding an aver-age of $2.6bn apiece and Singapore’s,$2bn.

Yet private banking around the worldis facinghugechallenges.

For example, there are the invest-ment difficulties of successfully guidingsavvy and very demanding clientsthrough the end of quantitative easingin the US even as Europe and Japan are

expanding their own monetary easingprogrammes.

The industry also faces significanthurdles, from the tougher capital regu-lation the whole banking sector is facingto watchdogs’ push for greater scrutinyof global client flows amid an interna-tional focus on the risks of money laun-dering as well as a concerted interna-tionaleffort tocurtail taxevasion.

Following mis-selling scandals inother areas of banking, there is alsogreater oversight of how products arepackagedandsold.

On top of all of this, there is thesimple fact that fresh competitors arebeing attracted to this growing corner ofthebanking industry.

Private bankers admit that it has

never been harder to win a significant –and profitable – chunk of a client’s port-folio. It has never been harder either,following the financial crisis, to thenretain that client’s attention and theirtrust.

“Private banking is about long-term relationships and trust, so2008 was as disruptive for us, the indus-try, as it gets,” says Michael Benz, globalhead of Standard Chartered’s privatebank.

“It was a game changer in terms ofhow clients look at private banks andthe way they grade them and that hasnotreversed.”

It has not made building a stronginternational private banking businessanyeasier.

The difficulties of doing so profitablyhave been made clear in the number of

Continuedonpage3

Strong growthmoves Asia’sbillionaires totop of the treeSavvy and demanding clientsmean their advisersdo not have a smooth ride, writes Jennifer Hughes

‘Private banking isabout . . . trust, so 2008was as disruptive for theindustry as it gets’

Big is no longer always beautiful in pri-vate banking. After years of expansion,some of the larger global banks havescaled back their international opera-tions after succumbing to relentless costandmarginpressuresandstricterrules.

Rapidly rising expenditure to makesuretheydonotbreakanti-moneylaun-deringrules ismaking ituneconomicforall but the leading global wealth manag-ers to remain active in smaller markets.While the top five players manage tocling on and expand their internationaloperations, other big banks are beingforcedtoretrench.

Barclays is a prime example. The UKbank, ranked number 13 in ScorpioPartnership’s league table of privatebanks, pulled the plug on ambitiousexpansion plans in wealth managementlastyear.

It announced exits from more than100 markets and cut staff in its wealthmanagementbusiness.

By the end of 2016, the lender wantsto reduce the number of countries inwhich it provides wealth and invest-ment management services, from about200 to 70. In addition, it folded its pri-vate banking business into its retail unitthisyear.

Barclays’ retrenchment echoed thattwo years ago by Credit Suisse, its Swissrival, to pull out of private banking inabout 50 markets by this year to bolsterprofitability.

UK-based lender HSBC also wounddown its Irish private banking arm andsold $12.5bn of assets from its Swissprivate bank to Liechtenstein’s LGTGroup.

The move to shed assets from clientsin countries across Europe, Africa andLatin America was widely interpretedas one to reduce risk in the business at atimewhenthere isan increasedfocusonanti-moneylaunderingrules.

Astringofother largebanks includingBank of America Merrill Lynch andMorgan Stanley have sold their overseasoperations in recent years. This againwouldappeartosuggestaneffort tocon-centrate on core regions where thosebanksareamongthemarket leaders.

“We have seen a lot of rivals exiting

the field,” says Luigi Pigorini, chief exec-utive of Citi Private Bank in Emea,which itself stoppeddoingbusinesswitha number of smaller and unprofitableclients in recent years to concentrate onverywealthy individuals.

“We now see a lot of clients calling usup saying one or two of their banks nolonger offer the products they tradition-allywanted.Theyask: ‘Canyouhelp?’”

But what are the drivers behindthis widespread retrenchment, and willit continue? Private banking experts saythe sector is seeing a reversal of atrend that started just after thebeginning of the financial crisis – backthen many large banks viewed privatebankingasaprofitablegrowthmarket.

At that time, there was a dash to openup booking centres across the globe. Butbanks came to realise that these opera-tions were not profitable amid a lack ofscale, costly new regulations and a lowinterest rate environment that dentedclients’ investmentactivity.

Banks are not only leaving smallermarkets because they have failed toachieve sufficient scale or become prof-itable enough – in some instances, theyhave been forced to exit because oftighterregulation.

Those stricter rules have madethe capital they can use for overseas

operations much scarcer and it has alsoprompted expensive fines for anybreaches of increasingly strict compli-ancestandards.

The retrenchment comes despite arise inassetsmanagedinthesectorby17per cent last year, according to researchby Scorpio Partnership. This was drivenby growth in global wealth and a rise instockmarkets.

Bankers say the consolidation drivewill continue. The biggest wealth man-agers look likelybothtospinoff regionalentities and act as buyers of privatebanking operations. Royal Bank of Scot-landis themostrecentexample.TheUKlender recently hired Goldman Sachs toseek buyers for Coutts International,the Switzerland-based internationalarm of the private bank whose custom-ers includeQueenElizabethII.

RBS plans to keep the UK business ofCoutts, one of the world’s oldest privatebanks, dating back to 1692. The sale ofthe international arm is part of thebank’s drive to refocus on its domesticmarket by reducing its internationalandinvestmentbankingactivities.

The consolidation trend not onlyplays into the hands of the very top pri-vate banks, but some medium-sizedplayers can also benefit – if they are bigenough to afford the regulatory costsandif theyfocusontheircorestrengths.

Frédéric Rochat, managing partner atLombard Odier, the oldest private bankin Geneva, which has recently beenexpanding internationally, comments:“Consolidation is a good thing for us,because it always means more dissatis-fied clients who are willing to look else-whereandchangerelationships.”

Larger groups are cutting backon international operationsRetrenchment

Banks are succumbing tocost and margin pressures,as well as stricter rules,writes Daniel Schäfer

‘Consolidation is a goodthing for us, because italwaysmeansmoredissatisfied clients’

Source: Scorpio Partnership Global Private Banking Benchmark 2014

-30

-20

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0

10

20

30

0

100

200

300

400

500

600

Average AUM growth rate (%)Average AUM ($bn)

Global top 20 private banksAssets under management

2007 2008 2009 2010 2011 2012 2013

2 FINANCIAL TIMES Monday 24 November 2014

Private Banking

The quiet conversations that take placein the tastefully furnished offices of pri-vatebankshaveanextraedgeof late.

The industry is feeling the chill windof tougher regulation and transparencyrules, with the long arm of the US lawmaking itself feltacutely.

The spectre of the massive fines beinglevied on banks that fall foul of USregulation is forcing managements to

sharpen up compliance with anti-money laundering rules and sanctionsregimes, and to scrutinise their clientbasesclosely.

The example of BNP Paribas, whichwas hit by a near-$9bn fine because ofsanctions violations, hangs heavily overthe industry, as do several large settle-ments over anti-money laundering vio-lations,accordingto insiders.

Banks are trying to assess where therisks of operating are too high and arebecoming more cautious about individ-uals with political connections in cer-tain countries. Operating costs areheadingnorthasaresult.

“It is making private banks incrediblyrisk-averse – just as the big global banksare,” says Geoff Cook, chief executiveof Jersey Finance, which represents the

island’s financial sector. “They areexiting some countries completely andexitingelementsof theirclientbase.”

This comes as private banks alsograpple with the repercussions of thecrackdown on global tax evasion. TheUS has been particularly assiduous,with UBS having to pay $780m for itsrole in abetting tax evasion in 2009,while in 2014 Credit Suisse pleadedguilty to helping US clients evade taxesandpaida$2.6bnfine.

US regulatory action and the imposi-tion of fines also led to the closure of twoprivatebanks–WegelinandBankFrey.

The fallout is not confined to Switzer-land. Rules on international complianceand transparency are altering thebroader climate for tax havens. Theserules include the US government’s

Foreign Account Tax Compliance Act,which requires overseas banks todisclosetheaccountsofUScitizens.

In October, 51 countries agreed toswap tax information automatically.The initiative, drawn up by the OECD

and sponsored by the G20 group ofleading nations, aims to end taxevasionviaoffshorebankaccounts.

Giles Williams, a partner at KPMG,says: “Banks need to be ready tomeet the request and to be able to

demonstrate that they are in compli-ance with the rules when challenged.This will push costs up, [which will]havetobornebytheclient.”

Private banks also have to treadcarefully over conflicts of interestbetween product manufacturers anddistributors, as well as navigating regu-lations ensuring the suitability of partic-ularproducts totheclient.

The rules on the use of commissionhave also been toughened. For example,the UK’s Retail Distribution Reviewbans the payment of commissions tofinancialadvisers.

The rising burden of regulation andcompliance is also pushing up operatingcosts in wealth management. The cost-to-income ratio for the global privatebanking industry, tracked by consul-

tancyScorpioPartnership,roseto91percent in the UK last year, up from 63 percent as recently as 2007. Globally, thisratio has increased to 83 per cent, upfrom62percent,overthesameperiod.

With banks facing further change, forexample via the structural separationsbeing pushed through in UK’s ringfenc-ing plans – which will require banks thathold at least £25bn of deposits to erect aboundary around their retail operations– the burden of compliance is likely toweighevenmoreheavily inthefuture.

“This is an industry that, on the faceof it, should be straightforward – youcharge a fixed fee based on the assets aclient has with you, and if there areinvestment losses, these are borne bythe client. But it never works out likethat,”saysMrWilliamsatKPMG.

Climate change for tax havens as compliance is enforcedWealth management

US-led demands for greatertransparency and tougherregulation are fostering riskaversion, says Sam Fleming

F or decades, the army of finan-cial advisers employed bywirehouses, or brokerages,such as Morgan Stanley andMerrill Lynch, has trampled

unchallengedacrossAmerica.Charged with managing substantial

investments on behalf of clients, the topbrokers have been able to demand heftycompensationfromemployers.

But when the herd of advisers growstoo large, it is time for a cull. Bank-owned brokerages, under pressure toimprove returns, are seeking to reducethe size and salaries of their 50,000-strongbandof financialadvisers.

At the same time, the US wealth man-agement market remains as fiercelycompetitive as ever. Larger brokerages,known as wirehouses because they his-toricallywiredinformationtoanetworkof local brokers, are facing a wave of

competition from independent finan-cial advisers, disruptive technology, andan intensification of traditional rival-ries.

Larger wirehouses are seeking tocarve out new business niches whilehoping that a wave of mergers and regu-latory changes will help them pushdownstaffcosts.

“It’s like an intellectual capital armsrace,” says Sophie Schmitt, senior ana-lyst in the wealth management team ofconsultancy Aite Group. “The wire-houses are all aiming for the same high-net-worth client base. They need to dif-ferentiate.”

A decade of intense consolidation hasleft fourwirehousesdominant intheUS:Morgan Stanley, which bought the retailbrokerage Smith Barney from Citigrouptwo years ago; UBS; Wells Fargo; andMerrill,nowownedbyBankofAmerica.

Simplyreducingexpensesbydecreas-ing financial advisers’ compensationcan be tough to pull off. Clients are noto-riously loyal to their brokers and oftenfollowthemtonewfirms.

“If you cut compensation you savecosts,” says Mike Roche, a lawyer atSchuyler Roche & Crisham who repre-sents brokerage firms. “However, themarket is going to dictate that – if onebrokerage firm were to substantiallyslash payouts, the advisers will simplygotoanother firm.”

The big four brokerages had beenhoping that a pending rule from theFinancial Industry Regulatory Author-ity (Finra), the US independent securi-ties watchdog, would help tilt the bal-ance of power in their favour and limitthe scope for disgruntled brokers toseekbiggersalarieselsewhere.

The US regulator had proposed thatbrokers should disclose to their clientssign-on bonuses – paid to brokers whenthey switch firms – above $100,000.Many in the industry believed such arequirement would help loosen clientties once customers realised how muchmoneytheirbrokersweremaking.

Those hopes looked to be dashed inJune, when Finra withdrew its proposedrule change from the US Securities andExchangeCommission.

A spokesman for Finra said thatalthoughtheregulatorhadpulled its ini-tial proposal, “Finra continues tobelieve that recruitment disclosuresremain an important investor protec-tion issue and plans to develop a revisedproposal and file it with the commissionlater intheyear.”

In the meantime, more radical solu-tions are waiting in the wings. “Roboadvisers”, which use automated tech-nology to manage and rebalance clients’portfolios fora fractionof thecostof tra-ditional brokers, are making inroadsinto the market and some believe simi-lar technology could be applied to wire-housesseekingtobringdowncosts.

“These businesses are all about

offering excellent value for money totheir customers and I guess [wire-houses] need to be seen to be goingdown this road and investigating thisavenue for cutting costs further,” saysFrancis Groves, senior research analystat MyPrivateBanking, and the author ofa recent report that estimated roboadviser services will claim $14bn ofassets under management by the end ofthisyear.

While wirehouse brokers are unlikelyto be replaced by robots in the immedi-ate future, there is no arguing that pres-sures are bearing down on the once-virileherd.

A McKinsey report published thisyear estimates that wirehouses will cap-ture only 2 per cent of net new moneyflowing into mutual funds and otherasset management products over thenext fouryears.

By contrast, independent financialadvisers and brokers are each forecastto take a 28 per cent share of net inflowsoverthesameperiod.

Thatmeansmanywirehouses lookingto boost their profits are aiming, not justat cutting expenses, but also increasingrevenue through new business andsmartdifferentiation.

Many are seeking to increase feetransparency while others are attachingmore services – such as goals-basedwealth management – as they attemptto move away from commission-basedtofee-basedadvisorymodels.

Ms Schmitt at Aite says that alongwith providing more transparency onfees, wirehouses will be fighting to jus-tify their expense with extra offeringsthat set them apart from the pack ofindependentupstarts.

Shake-up inprospect ascompetitionintensifies

US brokers Disruptive technology and pricecutting are adding pressure, saysTracy Alloway

Niche: companies such as Morgan Stanley need to differentiate — Eric Thayer/Reuters

Rüschlikon is just a 20-minute boat ridefrom the centre of Zürich, yet a worldaway from the intense rivalry of thecity’s financialpowerhouses.

Every autumn, the sleepy lakesidesettlement hosts the Private BankingSummit, where delegates seek safe-guards for their threatenedindustry.

“Swiss private banking is in turmoil,even though no Swiss bank went downas a result of the financial crisis,” Shelbydu Pasquier of Geneva law firm Lenz &Staehelintoldthemostrecentgathering.

The current state of affairs is theresult of a combination of unfriendlyeconomics, regulatory and politicalattacks from the US and EU, and con-sumerpressure fornewtypeofbanking.

The old Swiss offshore model – help-ing foreign clients structure their affairsto minimise taxes back home – is fadingfast,but thefutureremainsuncertain.

Further changes looming in 2016regarding tax compliance and the auto-matic exchange of information couldsignal a total transformation of the busi-ness models of Swiss private banks andthe type of clientele they attract, saysJürgBirri,partneratKPMGinZürich.

“What if a private bank deals with 90countries and only 30 of them enterautomatic exchange agreements withSwitzerland? Do we get rid of the clientsin the 60 other markets,” Mr Burriaskedatthesummit.“Itwillmeanbanksmustfocusontheirkeymarkets.”

Luigi Pigorini, Citi Private Bank’schief executive for Emea, predictsupheavals in the next two years. “At the

moment, Switzerland is very attractiveto us, and a lot of our clients fromemergingmarkets like it,”hesays.

“But Switzerland will go through arestructuring after the OECD commonreporting standards in 2016. Manyunprofitable banks, which competed onsecrecy,are likelyto fallbythewayside.”

Banking functions currently carriedout in Switzerland could be exported toother centres, such as London, which“has always been very attractive and isbecomingmoreso”, saysMrPigorini.

Commentators agree that banks inZürich and Geneva will see higher regu-latoryexpenses ina lower-marginworldthan before 2008 along with anti-se-crecy pressure from the US and EU.Many have local operations in Europeand Asia. “They no longer rely on off-shore private banking as their mainagenda,” says Gerard Aquilina, inde-pendent family office adviser and pri-vate banking veteran. “They will have to

focus on relationship excellence ratherthansecrecyandconfidentiality.”

Servicing legitimate clients such asthe millionaires of the Middle East,without local tax issues, will remain apriority. But in order to survive in this“multi-shore” world, Swiss banks mustoffer a better service than their rivals,says Ray Soudah, founder of strategicconsultancyMilleniumAssociates.

“Clients of Swiss banks in Hong Kong,Dubai and Abu Dhabi are very upbeat,”says Mr Soudah. “But their bankers areall depressed, moaning about compli-ance, competition and regulation” andfailingtocater tocustomers’ interests.

However, others say the banks willrecover. “Swiss banks have brands thatdon’t disappear that easily,” says IvanSacks, who chairs private client law firmWithers.

“Switzerland may have taken a hit onits reputation but it will remain one oftheworld’skeyfinancialcentres.”

Tougher operating environmentcalls for a new business modelSwitzerland

Quality of service andconcentration on coreclients are the wayforward, says Yuri Bender

Bernd Amlung does not mince hiswords. “It was a massive undertaking,”he says of the past two years spenttrying to turn around Deutsche Bank’sneglected and underperformingasset and wealth managementbusinesses.

“We knew we had to become muchmore efficient, much more stable,”says the 46-year-old, who is head ofglobal wealth solutions at DeutscheAsset & Wealth Management(DeAWM). Deutsche Bank announcedplans to combine its wealth and assetmanagement arms in September 2012,after the sale of the latter fell through.Michele Faissola was tasked withleading the restructuring.

Mr Amlung, who joined thecompany straight from college, hadworked with Mr Faissola in Deutsche’sinvestment bank. “When he got thejob, he took me with him,” he says.

It was, as Mr Amlung emphasises, abig task. As well as combining wealthand asset management, the bankmoved its exchange-traded fund armand other businesses into the divisionand exited ‘non-strategic’ operations.Recently, it offloaded Tilney, a UKwealth manager.

The overhaul has been brutal, withemployee numbers in the divisiondropping from 7,060 in September2012 to just under 5,940 by June thisyear. DeAWM had to carry out a “hostof tough measures to optimise ourset-up”, Mr Amlung admits.

However, after two years, there are

signs the restructuring efforts arebeginning to pay off. In November, thedivision reported its third consecutivequarter of positive inflows, with €17bnin new net money during the threemonths to the end of September.“Clients are increasingly embracingwhat we are doing,” says Mr Amlung.

DeAWM is now the seventh-largestprivate bank in the world, accordingto research firm Scorpio Partnership,with its private banking assets undermanagement growing by 13.7 per centin 2013, above the industry average of11.3 per cent.

DeAWM’s private client business, thepart of its wealth management armtargeted at the super-wealthy attractedinflows of €5bn in the latest quarter.The division has a starring role inDeAWM’s strategy for its privatebanking business, because theredefined target customers are thosewith at least €25m in investable assets,

and often with $100m-plus. This is oneof the reasons why it sold Tilney, whichMr Amlung says is focused on “lowerhigh-net-worth” individuals. “In theUK, we have a clear plan to cater to theultra-ultra-high-net-worth. London is ahub for these clients.”

Last year, a PwC report on privatebanking warned of pressures in manymarkets, because of environmentaland regulatory costs. But Mr Amlungreckons the wealth management sectoris “very attractive” at the moment.

Europe’s ageing population offers anopportunity for growth, as do thenewly rich in emerging economies, hesays. Wealth creation in emerging

markets is one of the trends that willaffect private banking in the nextdecade, he adds.

“We are a clear number one in ourhome market and want to maintainthat. But we are increasingly focusedon wealth creation in emergingmarkets,” he says. The business istargeting the rich in Asia, LatinAmerica and the Middle East.

The other big trend in wealthmanagement is the changing roleof technology. As a father of childrenaged nine and 11, Mr Amlung is acutelyaware that digital natives – those whohave grown up with technology – show“different client behaviours” from theirpredecessors. But the older generationsare demanding better technology, too.

“They want access to marketinformation through applications andso on. The trend is a massive one,” hesays. “We have an exciting pipeline ofdigital tools and apps that will come tofruition in the next few years.”

Most recently, DeAWM introduced anew private banking platform inSwitzerland, aimed at making iteasier for employees to advise clientswhile keeping costs down. “The beautyof technology is it makes you moreefficient, but at the same time youcan improve services,” Mr Amlungsays.

He mentions costs and efficiencyregularly. The current low-yieldenvironment, the shift to lower-marginproducts and the cost of regulationare all hitting revenues, which meansthat managers have to keep a veryclose eye on costs.

Two years after the integration wasannounced, the London-based MrAmlung is looking forward to his nextchallenge. “I work quite a lot,” he says.“But it’s very exciting, in particularnow that we are seeing some of thevery hard work we did during theintegration bearing fruit.”

Two years into a big restructuring,hard decisions pay off for DeAWMInterviewBernd AmlungDeutsche Asset & Wealth Management

Integrating wealth and assetmanagement was brutal buteffective, says Attracta Mooney

Bernd Amlung:‘We knew we hadto become muchmore efficient,much more stable’

Shelby du Pasquier, a Swiss lawyer,says that 2014 will probably be seen as“an annus horribilis” for Swiss privatebanks.

Mr du Pasquier spends much of histime negotiating with US authoritieson behalf of Swiss banks.

The continuing clampdown on taxevasion has led to fines and forcedsales. Today, Mr du Pasquier says,Switzerland has 283 banks, a drop ofmore than 15 per cent over the pastfive years.

UBS agreed to settle with the USDepartment of Justice (DoJ) in 2009,following an investigation intowhether it helped US clients evadetaxes.

UBS was fined $780m and agreed to

share details of some client files withSwiss federal authorities. Fines alsoforced the closure of two smallerbanks, Wegelin and Bank Frey.

But Mr du Pasquier expects theconsolidation, triggered by the fines,to continue through both M&A activityand liquidation.

He says the US is cracking down ontax evasion generally. “This has, inturn, led to an aggressive challenge onoffshore banking centres, of whichSwitzerland remains the largest.”

He explains that banks are sheddingnon-tax-compliant clients leading tothe disappearance of unprofitablebanks and “the emergence of a smallernumber of larger, stronger ones”.YB

Tax evadersUS authorities are crackingdown

$2.6bnSize of penaltiesimposed onCredit Suisse byUS authorities

83%Cost-to-incomeratio for privatebanks – up from62% in 2007

‘Thewirehouses are allaiming for the same high-net-worth client base’

Monday 24 November 2014 FINANCIAL TIMES 3

Private Banking

Contributors

Jennifer HughesAsia financial correspondentDaniel SchäferInvestment banking correspondentSam FlemingFinancial policy correspondentTracy AllowayUS financial correspondentYuri BenderEditor-in-chief of Professional WealthManagement, an FT publication

Attracta MooneyReporter, Ignites Europe,an FT publicationJeremy GrantSingapore & Malaysia correspondent

Emma BoydeCommissioning editorSteven BirdDesigner

Andy MearsPicture editorDaniel MitchellIllustrator

For advertising details, contact:Peter Cammidge, +44 (0)20 7775 6321,or peter.cammidge@ft.com,or your usual FT representative.

Follow us on Twitter: @ftreports

deals in recent years with some bankssimplygivingup.

RBS last month appointed GoldmanSachs to handle the sale of the interna-tional arm of Coutts as part of its widerretrenchment. Earlier this year, Singa-pore’s DBS bought Société Générale’sAsian private banking unit, while in2012, Julius Baer scooped up MerrillLynch’s lossmaking internationalwealthbusiness.

Barclays meanwhile has folded itswealth business into its retail business,triggeringanexodusofprivatebankers.

Asia has been the centre of manychanges sweeping through the industry.

Wanting to tap the growing wealth inthe region is natural enough, but in situoperators warn it is still a tough proposi-tion.

BassamSalem,chiefexecutiveofCiti’sprivate bank in Asia-Pacific, says:“Banks come here, they open for busi-ness – then they find costs are as high ormore than in their home country. Theyalso find highly regulated markets andtheydiscoverthatclientsareelusive.”

He points to the age-old tactic of hir-ing supposed “rainmakers” from otherbanksfor theirconnections.

“But most of those aren’t capable ofmoving the assets over, as they under-estimate the stickiness of a client rela-tionship with an established institu-tion,”headds.

Private bankers suggest that aroundthe world, it typically takes perhapsthree or four years of purely social con-tact before the wealthy open anaccount.

It can then take a few more yearsbefore big sums – the sort of money thatbankers want – start to be deposited.

Claude Haberer, chief executive ofPictet Wealth Management’s Asia busi-ness, says his company’s longevityunder one family – it is run by the eighthgeneration of Pictets – helps it maintainperspective.

Continued frompage1

“Sure, we have to expand the business– this is not a philanthropic venture. Butwe, of all people, understand the long-termnatureofprivatebanking.”

One of the struggles all privatebanks face is marrying a long-termbusiness – and clients’ long-termdesires to maintain and add to theirwealth – with the vagaries of the finan-cialmarkets.

Currently, the ebb and flow of globalinterest rates – US rates look set to movehigher, while Europe and Japan areheading intheotherdirection–are lead-ing the wealthiest to demand more anal-ysis and increasingly sophisticated trad-ing ideas fromtheirbanks.

The prospect of higher rates in the USfor example, implies that a multi-decade bull run for bonds – the ultimatebuy-and-hold investment for manyincomeseekers– isabout toend.

Should it do so suddenly, it wouldwreak havoc on unprepared portfoliosaroundtheworld.

Bankers say, however, that their cli-ents are already adjusting their portfo-liosbybuyingshort-termdebt.

They are also looking at other assetclasses, including hedge funds, as thescars of the 2008 financial crisis fade –and they struggle to meet their long-term target returns. Their approachhowever, has changed from the gung-hopre-crisisera.

Jean-Christophe Gerard, head ofHSBC’s private bank investmentgroup for Europe, the Middle East andAfrica, says: “In the past, it was fund-of-funds and that was it. Today, we still seeallocationsthatwaybutmoreandmore,people like to invest on an advisorybasis, where they select funds with ourhelp.

“They’re generally more selectivenow, as they really want to extractmore performance from theirinvestments.”

Currencies are another market backin vogue. Low volatility had loweredinterest, but sudden moves, such as thedollar’s recent surge of about 10 per centagainst the Japanese currency havepushed clients to reconsider their expo-suretomarketswings.

“We’ve done some big hedgingstrategies for our clients,” says Mr Ger-ard. “It’s another way of addingperformance to portfolios and it’s pick-ingup.”

Asia’s billionaires move to top of tree

‘Banks come [to Asia] . . .then they find costsare as high ormorethan in their home country’

G iven the scale of wealth inAsia – in value and num-bers of rich families – itwould seem reasonable toassume that family offices

areentrenchedintheregion.Credit Suisse estimates that globally

there are close to 34,000 “ultra-high-net-worth” individuals, which it definesas those with a net wealth of $100m ormore. About a quarter of those are inAsia.

Yet family offices have been rare.Credit Suisse reports that, of an esti-mated 3,000 single family offices glo-bally, only 3 per cent are in Asia. At leasthalf of them were set up in the past 15years, which is not long considering themulti-generational history of theirequivalents inEurope.

Solving family conflicts, ensuring thatwealth is transferred to future genera-tions, consolidating assets, and –increasingly in Asia – dispensing adviceon charitable activities are all part of theroleofa familyoffice.

“In the west, family offices are moremature and clearly defined. They aremuch more structured compared withAsian family offices,” says DharumaTharu,chiefoperatingofficeratOclaner,a Swiss-based multifamily office that setup in Singapore in 2009. Yet familyoffices are becoming seen as not onlydesirable, but essential, by the growingranksofwealthyfamilies inAsia.

“The phrase ‘family office’ has gaineda bit more traction over the past coupleof years and a lot of Asian families arebecoming more open to having suchstructures,”MrTharuexplains.

Generational change is one of the big-gest drivers of that. Patriarchs whofounded their businesses are increas-ingly aware of the need to have a propersuccession plan, experts say (see story,page4).Afamilyofficecanhelptostruc-turethat.

One factor driving the trend towardsgreateruseof familyofficeshasbeentheimpact of the 2008 financial crisis onthe relationship that Asian businesseshave with banks. Trust between clientand bank was eroded in the wake ofthat, with Asian families downgradingtheir relationships with paid financialadvisers.

“The idea of a multifamily office inAsia is creeping in because of moresophisticated families seeking an alter-native to their banking relationships,”says Nadav Lehavy, managing directorin the Singapore office of SandAire, aLondon-based multifamily office whichopenedinSingapore in2012.

In addition, the next generation in afamily, whose members will often beeducated at overseas business schools,will be much more focused on looking atwaystopreserveandincreasethefamilywealth, while the patriarch may still befocusedonthebusinessempire.

“Global diversification is especiallyimportant in Asia as the ‘next gen’ isincreasingly tasked as stewards of thefamily’s wealth,” says Mr Lehavy. “Theysee a need to diversify from regional‘concentrationrisk’.”

At the same time, these families areinterested in co-investing, when thefamily office also takes a stake – hencethe “club deal”, where a number of

families get involved in the same deal,perhapswithanother financial sponsor.

“Families want to see you have skin inthe game, they want to see that if some-thing goes wrong it’s not just theirmoney, it’s yours as well,” explainsStephen Diggle, founder and chief exec-utive of Vulpes Investment Manage-ment.

Otheremergingtrends includeafocusby families on philanthropy, one of thecore functions of a family office, and ofwomen’s roles in family businesses. Theyounger generations are more inclinedto consider philanthropy as part of thescopeofa familyoffice’sactivities.

“When it comes to generational

transition, some cultural taboos arebreaking down, such as the role ofwomen,” says Noor Quek, managingdirector of NQ International, a familyofficeadvisoryfirminSingapore.

“You have daughters who’ve comeback from Ivy League universities orOxford [university] and they are notgoing to accept that brother or unclealone will run the business. More andmore of the fathers and brothers arebuying intothis,”shesays.

Yet Asian family offices still have along way to go before they look like theircounterparts in the west. One big dis-tinction is that, because so much of afamily’s wealth is tied up in a business(compared with Europe, where a busi-ness empire may have generated sub-stantial financial assets generationsago), Asian single family offices oftenhave to balance the succession and own-ership interests of business or industrialassetswithmanagingfinancialassets.

Bernard Fung, head of family officeservices and philanthropy advisory forAsia Pacific at Credit Suisse, explains:“We will invariably look at industrialand family wealth together, since indus-trial assets are still by far the largest partof thefamily’sholdings.”

The bank estimates that wealthy fam-ilies have direct or indirect sharehold-ings of at least 20 per cent of almost1,500 listed Asian companies with mar-ketcapitalisationsexceeding$500m.

Yet Mr Fung points out that this tendsto result in investments being driven bythe controlling owner of the family busi-ness into areas they know best, ratherthan what may be financially most ben-eficial, for example, those that diversifyfrom the underlying risks of the familybusiness. “There is often too much cor-relation between financial assets andbusiness assets. Many Asian businessfamilies create holding structures toabsorb the free cash flows that the busi-nesses don’t need for reinvestment. Thefamily offices that manage these oftenend up being told to invest in what theownersunderstandbest.

“Unless they are properly advised andare prepared to practise investmentgovernance and implement appropriatepolicies, there is usually insufficientdiversification, and not enough separa-tion between business assets and finan-cialassets,”saysMrFung.

Role of family offices expands from a narrow baseAsia Thewealthyare embracing analternative to theirtraditional bankingrelationships, reportsJeremy Grant

Bright lights ofShanghai: only3 per cent of theworld’s familyoffices are inAsiaDreamstime

The trustbetweenclient andbankwaseroded inthewake ofthe 2008financialcrisis

4 FINANCIAL TIMES Monday 24 November 2014

Private Banking

E urope’s centuries-old privatebanks have seen better times.The continent’s economiccrisis, a clampdown on taxevasion and stricter regula-

tionareendangeringtheirbusiness.In addition, US, Canadian and South

American banks, including GoldmanSachs, Bank of Montreal and BTG Pac-tual, are encroaching on their hometurf.

Brazilian investment bank BTG Pac-tual spent $1.7bn this year on a deal tobuy BSI, the Swiss private bank, whileCanada’s BMO snapped up the UK’sF&C Asset Management in a £700macquisition. At the same time, GoldmanSachs, the US investment bank, quietlylaunched a European lending unit forits private wealth management clients,in another push beyond its volatiletrading business into more traditionalareasofbanking.

What will be the impact of thesebanks on the competitive landscape?And why are these banks attractedto a continent that is still characterisedby slow growth and sovereign indebted-ness, as well as by a fierce rivalry amongitsdomesticprivatebanks?

For one thing, Europe’s economymight be growing much more slowlythan its US and Asian counterparts, butit still has solid fundamentals of wealth.In 2013, European wealth exceeded itspre-crisis peak to reach a record of€56tn, according to the Wealth ReportEurope published by Julius Baer, one ofSwitzerland’s largestprivatebanks.

However, these numbers mask a clearnorth-south divide. For example, Swit-zerland and Germany, respectively,added €1tn and €2tn in net householdwealth to their pre-crisis highs. Spain

and Greece have seen declines of €1.4tnand€170bnrespectivelysince2007.

The overall trend is clear: at 1.7 percent last year, the continent’s wealthmight not be growing rapidly, butis nevertheless growing faster than eco-nomic output. Also, the concentrationofwealth isontheriseagain.

“Europe makes sense if you have avery well-defined target market,”says Luigi Pigorini, chief executive ofCiti Private Bank for Emea. “For us, thiscan only be the ultra-high-net-worthsegment as it is growing and there is a lotofwealth inthisarea.”

The bank has grown its assets undermanagement by at least 10 per cent inthe past four years, thanks to a concen-tration on an elite of super-rich clients,mostly with more than $100m undermanagement.

The divide between rich and poor isexpected to deepen further in Europe.“As long as capital returns exceed eco-nomic growth rates in Europe, familiesowning capital are set to gain a largerslice of the continent’s consistentlyexpanding wealth cake,” says RobertRuttmann,oneof the leadauthorsof theJuliusBaerreport.

There is also a generational shiftbehind this trend, as business ownerswithout an heir opt to sell theircompanies.

“The private sector in Europe isrecovering faster than people think,”says Christopher French, Goldman’shead of private wealth management forEmea.

“And there are a lot of owners of smalland medium-sized companies that selltheir businesses and become our cli-ents,”headds.

Goldman Sachs’ approach differenti-

ates itself from the all-encompassingstrategy of many large European wealthmanagers,whooftencater toabroadcli-ent group ranging from those with €1mof investablemoneytobillionaires.

With a minimum account size of$10m and an average account balance of$40m, Goldman’s wealth managementdivision caters for a far richer clientelethanmostof itscompetitors.

Its London unit operates from a sim-ple, open-plan office at Goldman’s Euro-pean headquarters on Fleet Street, insharp contrast to the plush Mayfairhomesof itsprivatebankingrivals.

Its recently launched European lend-ing business has a goal of building up a$5bn loan book within the next threeyears. The unit is part of London-basedGoldman Sachs International Bank andcaters to roughly 1,700 of Goldman’smost wealthy clients across Europe, theMiddleEastandAfrica.

The lending business is part of a wider

trend in the industry to provide mostlysecured loans for a wide variety ofpurposes including liquidity facilities,portfolio diversification, tax payments,or luxurypurchasessuchasyachts.

Some banks have used acquisitions inEurope as a stepping stone for a forayinto Asia, the fastest-growing wealthmarket intheworld.

When BTG bought BSI this year, itdoubled the Brazilian bank’s assetsunder management to more than$200bn. But even more importantly, itopenedadoortoanexpansioninAsia.

BTG also plans to set up a Londonoperation for the private bank, as itseeks to tap into the continued influx ofinternational wealth into the UKcapital.

BTG is interested in acquiring furtherwealth management portfolios andteams, not least from those venerableEuropean houses suffering from tighterregulationandfiercercompetition.

Rising wealth inEurope attractsrivals fromthe AmericasCompetition Newcomers are keen to get a sliceof a growing pie, reportsDaniel Schäfer

Goldman Sachs’HQ in London:it has launcheda Europeanlending unit forits wealthmanagementclientsBloomberg

No matter how wealthy they are, investors are still human.Our research shows that, when it comes to managing their

money, private clients suffer from the same behaviouralbiases as other investors. Indeed, since they tend to have anabove-average level of financial knowledge, private clientsare particularly prone to taking active, concentrated orbackward-looking bets.

One of the most important roles of a wealth manager is tohelp clients understand their financial personality and stickwith a stable, diversified, forward-looking investment plan,even in volatile markets.

Since 1984, US research firm Dalbar has compared thereturns investors generate on their equity fund holdings withthe performance of the S&P 500. Investors’ equity fundreturns greatly underperform the market, a phenomenonknown as “the behavioural gap”.

According to the most recent edition of Dalbar’s research,the behavioural gap widened last year. Since the study began,the average annual return on the S&P 500 was about 9 percent, whereas the average equity fund investor only achieveda return of 5 per cent. So the equity fund investor missedalmost half the returns available from the market.

Investors cannot blame this solely on expenses and otherdrags on performance; they must recognise that their ownbehaviour plays a role. A number of factors are probablyinvolved, but three stand out.

First, is overconfidence. This particularly affects thewealthy, who may feel they have a superior grasp of financialmatters. The overconfident tend to trade more actively thanthey should, as many investors think they can “read” themarkets and time them correctly. This is rarely the case.

Second, is home bias. They prefer markets close to them,which they think they know best. Wealthy investors aretheoretically well placed to counteract this, but they may beso expert in a particular region or sector, especially wherethey have built their fortunes, that they are reluctant to putmoney elsewhere. Concentrating on what is closest to youdoes not give you the best diversification, nor does it usuallygive you the best return.

Third, are backward-looking tendencies. Investors try topredict the future based on past trends – even though pastperformance should not be relied on as a guide – and mayalso regret losses in the past, and make misguided attemptsto avoid similar regrets in future. Wealthier investors musttake particular care to shield themselves from this tendency,as they can access more information on past behaviour.

Wealth managers who invest globally have already helpedthousands of clients reduce the impact of behavioural biaseson their portfolios. They can help investors improve long-term performance byfollowing a few simple rules.

They should make asuitable asset allocation andensure clients stick with it.Long-term allocationaccounts for more than 80per cent of returns. Once theallocation is set, clientsshould not to change theirpositions too often, so theydo not distort the maindrivers of their returns.Managers should also limitthe size of tactical bets.

Wealth managers should also persuade clients to diversifyportfolios globally rather than stick with concentrated bets oncertain regions or industries. Diversification helps avoidunforeseen pitfalls in individual areas of the market. If clientshave concerns – for instance, over inflation or volatility – it isstill possible to diversify portfolios and respect those needs.

In addition, wealth managers can steer clients towardsforward-looking investments. During the October marketsell-off, some clients may have wanted to revise theirpositioning entirely and adopt a much more cautious stancein light of events. Investors should instead have used this asan opportunity to rebalance their portfolios and ensure theirasset allocation was still in line with their long-term plans.

This principle is important over the longer term as well.Because of the outperformance of high-grade bonds in recentdecades, some clients may be tempted to maintain anoutsized allocation to this asset class. But with yields not farfrom record lows, this would probably be the wrongapproach long-term.

Clients need a more constructive approach towards riskierassets if they wish to generate meaningful long-term returns.

MarkHaefele is global chief investment officer atUBSWealthManagement

Smartermoneyhelpsmind thebehavioural gap

Investorsmustavoid fallingprey tooverconfidence.Thisis especially trueofthewealthy,whomay feel theyhaveasuperiorgraspoffinancialmatters

Wealthy clients of Swiss private bankJulius Baer gather in the lobby of TheCrystal, one of the world’s most ecologi-cally friendly buildings, located in Lon-don’s Docklands. They are attending asummit dedicated to new ideas, long-termprofitabilityandsustainability.

The Julius Baer initiative, supportedbyBorisCollardi, itsyouthfulchiefexec-utive, marks the start of a race amongbanks to be seen as relevant to a chang-ing society, and willing to invest outsidethe limitsof traditionalportfolios.

Forsaking the 60:40 equity-to-bondsformula so beloved of wealth managers,

Julius Baer’s focus on direct investmentsinsmallerventures isattractingclients.

Showing its wares at the Next Genera-tion Conference was SenseCore, manu-facturers of wearable technology. Jaz-min Sawyers, the UK’s long jump silvermedallist in the 2014 CommonwealthGames, demonstrated the clothing,which analyses respiratory, heart andtemperature data, helping improve per-formance and detect ailments. Sen-seCore has so far received €10m ininvestment fromthebank’sclients.

Other Julius Baer projects includesupporting “smart cities” and electrictechnology for Formula E races, the firstof which was held in Beijing in Septem-ber. The Swiss bank believes these sus-tainable, futuristic investments makesense in a world of low bond returnsandunpredictableequitymarkets.

“In the next few decades, we are notjust looking at the rise of China, India

and Brazil,” says Burkhard Varnholt,Julius Baer’s chief investment officer.“We will favour those countries thattruly understand . . . sustainable devel-opment, at a political and economiclevel. That idea embraces the responsi-bilitywehaveas investmentmanagers.”

This approach has been adopted byother private banks. With traditionalportfolios expected to deliver onlysingle-digit returns, recommending ahandful of smaller ventures has alsobeen embraced by US bank Citi, whichrecently held a seminar in Londonwhere12start-upspitchedto itsclients.

Bankers involved in the Citi event saythe companies were not high-techenterprises, and instead were well-man-aged “old economy” companiesinvolved in oil exploration, car partsmanufacturingandclothingretail.

They say that there are plenty of initi-atives in the tech space, but that clients

show particular interest in investing inthenutsandboltsof theeconomy.

These story-led opportunities can beused to tempt clients out of a cash-hoarding mentality. “A modest expo-sure to cash as ‘dry powder’ for futureinvestment opportunities makes sensein a client portfolio,” says DanielKuehne, head of investment solutionsandmarketsat JuliusBaer.

But the cost of holding excessive cashwill become starker as monetary policyand economic growth trends potentiallydiverge in 2015, he says: “This leavesscope for interesting opportunitiesformoretrading-oriented investors.”

For 2015, the bank thinks clientsshould revisit emerging market equi-ties, particularly as Asian countries willbenefit from lower oil prices and thewealth this generates is likely to spillover intogreaterconsumerspending.

However, Mr Kuehne recommendsclients seek stockpicking opportunitiesrather than broad investments in acountryorsectorequitytrackingfund.

The “great rotation” from bonds intoequities has not happened, says DidierDuret, chief investment officer at ABNAmro Private Banking, who says inves-tors are clinging to cash. Their concernsrelate to risks of eurozone stagnationplus fears of liquidity-fuelled assets thatcouldseeviolentcorrections.

Investors must seek global companieslessdependentonmacroheadlines, saysMr Duret. “In a hesitant recovery,industrymattersmorethangeography.”

Yet Swiss private bankers such as

Pictet say client memories are still rawfrom equity downturns of 2002 and2008, leading to huge underexposure totop performing markets in Japan,Europe and the US. Yves Bonzon, chiefinvestment officer at Pictet WealthManagement, says: “They are too cau-tious and we keep telling them that theprice of short-term tranquillity will beexpensiveoverthe longerterm.”

Some banks have “spent a lot ofenergy” creating strategies allowingcautious clients to increase equity expo-sure gradually, while waiting in frustra-tion for a big correction that nevercame, says Eric Verleyen, chief invest-mentofficeratSGPBHambros.

Among markets he has recom-mended are allocations to the US, Japan,China and the rest of Asia. “We haveenabled clients to boost equity expo-sure, while avoiding entering the mar-ketat thehighestpoint,”headds.

Next generation of opportunities is sustainable and story-ledAlternative investing

Clients are being steered toa range of non-traditionaloptions, says Yuri Bender

Letting go is always hard to do – espe-cially of something you created. This isthe challenge facing Asia’s private bank-ers as they talk Asia’s first generation ofultra-wealthy through the process ofhandingovertheirwealthtotheirheirs.

Globally, some $4.1tn of wealth will betransferred between generations in thenext decade, according to predictionsby Hubbis, a wealth management advi-sorygroup.

In Asia, the combination of strongpersonalities who are still activelyengaged in business, plus sprawling,complex empires and an oft-held beliefthateventalkingaboutdeath isbadluckmakethetaskeventrickier.

UnlikemanyAmericanandEuropeandynasties that built their fortunes inbusiness, Asia’s wealthiest families are

still overwhelmingly led by the com-pany founder, according to the annualbillionaire survey conducted byWealth-XandUBS.

The survey found that only 13 percent of the region’s billionaires owe alltheir fortune to inheritance. This isreflected in their age, too – they arethe world’s youngest, with an averageage of 61, compared with a globalaverageof65.

MichaelBenz,globalheadofStandardChartered’s private bank, says: “Thereare two main themes – the financialneeds of their businesses, and helping them prepare for succession – and thereareallkindsofscenarios inthat.”

The handover issue becomes moreimportant as the wealth rises, too. In the12 months to June this year, the numberof billionaires in Asia rose 10 per cent to560 according to the Wealth-X/UBSreport. Asian billionaires’ wealth grew19percent inthesameperiodto$1.4tn.

A big question is when and how anyhandovershouldtakeplace.

A survey by Deloitte found that 89 percent of business-based wealthy familiesthought family business managementsuccession was important, but only 80percent felt theirnextgenerationwould

be able to take over. Their offspring,however, were keen that the handoverstartedsoonerratherthanlater.

Family generations adopt differentapproachestowealthmanagementtoo.

“It is true the first generation liketrading – stocks, currencies – becausethey have risk-taking tendencies,” saysBassam Salem, chief executive of Citi’sprivate bank in Asia-Pacific. “The sec-ond and third generations have less ofthat; they are generally more cautious,orat least less trading-orientated.”

Issues that must be navigated in suc-cession planning include the number ofchildren, their education and compe-tence, and their interest in the business.All of these must be considered beforethe complexities of investment, truststructures and tax planning are evenconsidered.

Popular misconceptions among fami-lies, according to Hubbis, include think-ing there is plenty of time, that selling abusiness or an asset will be easy, thatgiving up ownership must mean a loss ofcontrol or income, and that equal andfairarethesamething.

Claude Haberer, chief executive ofPictet Wealth Management’s Asia-Pacific operations, says the crucial thing

is getting clients to think about thelongerterm.

He says: “There are many risks theyneed to consider that aren’t market-based – the industry they’re in, thecountry, political risk and so on – whenthey start thinking like that, then theystart thinking long-term.”

Private bankers in Asia are using theircolleagues’ experience elsewhere in theworld, since the issues between genera-tionsareoftenthesame.

“I don’t think there is really a ‘Chinaapproach’ or an ‘India approach,’” saysMr Haberer. “The next generation eve-rywhere tend to be looking for profes-sional wealth management analysismorethantheirparents,whooftenwanttocontroleverything.”

Bankers say that Asia’s wealthy fami-lies are also beginning to think aboutphilanthropy, a conversation thatcomes about when private bankers askclients what they want to leave behindastheir legacy.

“I don’t think it will necessarily looklike the US or Europe,” says Mr Benz. “Itshows up in different ways, but thedesire of people who’ve made a lot ofmoney to give something back is a verygeneralone.”

Asian dynasties address handover questionSuccession

Second and thirdgenerations tend to bemore cautious than theirentrepreneurial forebears,writes Jennifer Hughes

‘There aremany risksthat needto beconsideredthat aren’tmarket-based . . .political risk,and so on’

€10mAmount thatJulius Baer clientsinvested in a newtechnology firm

12The number ofstart-ups at arecent event forCiti clients

GUEST COLUMN

Mark Haefele