Private Banking CEO roundtable: Between crisis and recovery

Peter Boyles, HSBC Our organization and probably most of the industry were focused on the implementation of new regulatory requirements such as Fatca [the US Foreign Account Compliance Act] and Dodd-Frank. We also conducted a strategic review of our business to ensure that it is fit for purpose and appropriately positioned to capture the growth opportunity offered by continued rapid wealth creation, especially in emerging markets.

Luis Moreno, Santander The uncertainty in the financial markets meant investors continued to be extremely risk averse. Regulatory pressure increased requirements for private banks in terms of capital, technology and training standards. This in turn increased costs in private banking and forced us to adapt our internal structure (for example, by adding additional compliance functions).

Phil Di Iorio, JPMorgan Many clients remained risk averse and, as a result, continued to hold high cash balances, so we spent a lot of time advising them on how to invest intelligently in assets that provide higher returns than cash and core fixed income. As a global organization, we have also seen increasing demands on our resources to respond to complex regulatory changes in almost every major market where we operate.

Jurg Zeltner, UBS Client activity was low, mainly because of the global political uncertainty, the European debt crisis, the fear of an economic slowdown in Asia and the fear of the US fiscal cliff. Besides developments in the markets, the regulatory complexity and compliance remain important topics.

Hans Ulrich Meister, Credit Suisse We were challenged by uncertain investor sentiment, the regulatory environment and the increasing costs of doing business.

Tucker York, Goldman Sachs The main challenge for us this past year was how to best advise clients from a risk-management standpoint in the current environment. The financial crisis of 2008 is still fresh in people’s minds. The current macro environment consisting of political change, dissatisfying economic growth and fiscal challenges does not instil investor confidence. Additionally, we believe that financial asset returns will be lower over the next few years. At the same time, it is our perception that clients are under-risked relative to their long-term benchmark target. Therefore, advising clients on how to best navigate these near term-issues against a long-term investment horizon is the pressing issue for our investors.

Jane Fraser, Citi The volatile markets were a challenge last year due to the macro uncertainties, but they recovered as the tail risk in the eurozone diminished.

Euromoney What were/are your clients’ biggest concerns?

PB, HSBC The chief concerns were both economic and political. The eurozone recession and bailouts of fringe countries, and China’s economic slowdown were the main concerns. The fiscal cliff in the US also worried clients. As a result most stayed defensive in their investment strategy during the year.

LM, Santander Customers were concerned about peripheral eurozone debt, the future of the single currency and the uncertainty surrounding central bank monetary policy and the financial industry. Those concerns are abating as markets seem to be normalizing in Europe.

Sofia Merlo, BNPP Our clients’ biggest concerns were focused on protecting their financial assets and banking with solid and resilient institutions. Our clients were also concerned by the management of their financial assets in a low interest rate environment and volatile markets.

PDI, JPMorgan The main issues we see from clients are centred on the impact of geopolitical issues on global markets. Not surprisingly, continuing issues in the Middle East, continued economic challenges in Europe and uncertainty around the US fiscal situation have caused clients to defer their decision-making. At the same time, with historically low interest rates around the world, clients are worried about where they are going to find income in their investments. But perhaps the most important client concern is about better managing volatility in their portfolios.

HUM, Credit Suisse In general, our clients are becoming more and more focused on the quality and depth of the advice we’re offering them. Particularly given today’s geopolitical environment and the related impact on markets, the quality of the relationship with the client adviser is a key differentiating factor.

Jane Fraser is chief executive of Citi Private Bank

TY, Goldman Sachs The financial crisis was so wide-ranging, and the headlines have been so persistent, that it can be difficult to distinguish between crisis and recovery. Yet the fact remains that, from an investor’s point of view, there has been some good news. Indeed, we find prospective clients have seen strong improvement in some asset classes and are asking if they have missed the move? The answer is no. While we helped clients foresee much of this strengthening, we believe there are still attractive opportunities despite what we expect to be an overall low-return environment for some time to come. Fundamentally, clients need to be mindfully making a shift to post-crisis thinking. Clients in each region or country have also had to deal with their own tax and regulatory concerns. In the US, for instance, our wealth advisory services group spent a great deal of time helping clients and their attorneys prepare for expected changes in the tax code this year.

Euromoney Which asset classes were most successful last year with clients?

LM, Santander Customers faced an uncomfortable dilemma. While many felt extremely risk averse, they also felt obliged to try to prevent negative interest rates eating into their wealth. We saw investors taking positions in high-yield fixed-income instruments, corporate debt, non-investment-grade bonds and emerging market debt denominated in hard currencies. They also took the opportunity to lock into the high yields offered by some peripheral eurozone bonds, especially after the ECB liquidity injections.

Vincent Lecomte, BNPP In line with our client attitude to search for yields and risk aversion to equity, the most successful asset classes have been fixed-income products (mostly high yield, emerging markets and buy-and-hold bond funds), structured products (mostly credit-linked notes and alternatives to cash) and life insurance. We also saw a return to alternative products in private equity and Newcits [Ucits-compliant] hedge funds.

Phil Di Iorio is chief executive of JPMorgan Private Bank

JZ, UBS We saw an increasing demand for bond funds – in particular actively managed bond funds. The demand was also strong for credit and in particular high-yield corporate bond funds, reflecting the UBS house view that recommends an overweight position relative to government bonds.

HUM, Credit Suisse Generally speaking, investors whose portfolios were broadly diversified saw more success. Real assets such as stocks, real estate and gold performed well last year and certain fixed-income segments such as high-yield and emerging market bonds were also attractive.

JF, Citi Clients made good returns in fixed income throughout 2012. Government bond yields fell across the globe, due in part to central bank interventions and slower economic growth. Credit and risk spreads fell materially as well, in part due to demand for yield and in part due to improved confidence in the global financial system. Clients did especially well in corporate credit.

TY, Goldman Sachs High-yield corporate bonds in the US, emerging market local debt and some select equity markets were particularly successful recommendations for many of our clients. An S&P hedge was also very important leading up to the election and fiscal cliff negotiations, as the hedge helped us maintain our long exposures into the year-end rally. In particular, we were able to stay in our Japanese and European equity tactical tilts, which then outperformed substantially into the end of the year. On a more specialized front, we also helped clients opportunistically invest in the dislocations in the housing market. Overall, our recommendation to stay invested despite higher volatility paid off for clients in 2012.

Euromoney What new investment opportunities are your firm and its clients looking at?

LM, Santander Equity is beginning to gain weight in clients’ portfolios as fixed-income investments become expensive and the economic cycle is more visible. Absolute and relative valuations make the asset class attractive for investors, with a preference for large-cap stocks with potential to increase remuneration via dividends. Cyclical sectors will probably gain weight in investor portfolios if economic growth strengthens. Clients are also looking more closely at real estate investments. There is a slow global recovery in this sector, with some exceptions, that could be played by investing in the US with its favourable tax treatment and good liquidity.

SM, BNPP For 2013, we believe new investment opportunities are along several themes: the quest for yields – so, high-yield corporate bonds, stable high-dividends players and yield-enhancing solutions in hedge funds and structured products; the return to equity; and opportunities from a successful discount model in developed countries, middle class expansion in emerging markets, and opportunities from urbanization.

PDI, JPMorgan We see a number of interesting investment opportunities as markets both recover broadly and continue to have dislocations. We have strong conviction in both public and private equities, and continue to believe that exposure to China is an important component of portfolios. We expect stock correlations to be lower in 2013, which means that long-short equity strategies may present solid investment opportunities. There is continued value and interest in credit, so we are developing more short-duration and floating-rate solutions.

JZ, UBS: We have noticed a growing interest in emerging market corporate bonds, which is an asset sub-class that had relatively little visibility for our client base before.

TY, Goldman Sachs For two years, we have seen opportunities in bank stocks, and think they have even more upside for multiple reasons, including their continued attractive valuation, their dividend yield and their potential as an inexpensive way to capture the upside in the housing market. We also think there will be continuing opportunity in emerging market local debt, select European large-cap equities and US high-yield corporate bonds.

Euromoney Is being global necessary? What is your firm’s geographic strategy?

Peter Boyles is chief executive of HSBC Private Bank

LM, Santander We think being global is not the most important driver of success. What matters is being solvent and providing value and a wide range of solutions to your customers’ needs. Santander’s policy is to carry out private banking as much as possible in the countries where it has a strong retail presence. We believe that providing a full range of quality services at local and international level, along with analysis of global markets and access to suitable investment vehicles, are elements that customers recognize and value.

VL, BNPP Being global is key for our local and international clients. We have several aims geographically – to remain number one in France and Belgium and to be in the top three in Italy; to become a top-tier wealth manager in Asia; to capture growth in markets such as the Gulf, eastern Europe and Latin America; and to roll out business models in international retail markets, such as with Bank of the West and in Turkey.

PDI, JPMorgan Being global as a private bank is critical to long-term success because both markets and clients have become more globalized. We are growing fastest in markets outside the US, with a particular focus on expansion in Asia and Latin America. But being global doesn’t just mean opening more offices around the world. Clients expect us to offer products and solutions that are tailored to the local market and in the local currency. As regulations evolve around the globe and become increasingly complex, it is imperative to have local expertise to manage local compliance requirements.

JZ, UBS Being a global firm offers key competitive advantages. By operating globally, it means we have analysts and economists across the world. So when we talk about commodities in Brazil we are not doing so based on studies we have bought from others, but on the opinions of our experts on the ground. It also means we have access to new growth opportunities in regions such as Asia and Latin America, for example.

HUM, Credit Suisse We are committed to a long-term international growth strategy, focusing on faster-growing and large markets and the further development of our onshore booking centres as key growth areas.

TY, Goldman Sachs Being a global firm is important from two perspectives. First, our clients are sophisticated, worldly people – they understand the impact of globalization and want our perspectives on its nuances and implications. From a management perspective, part of our corporate strategy has been to chase GDP and invest our resources in markets that exhibit high potential growth. This also helps us tap local pools of talent.

Euromoney What do you expect to be the focus among clients for 2013?

PB, HSBC Clients continue to look for yield both in fixed income and equities – this is likely to accelerate as yields come down in all markets. I also see greater demand for expert advice on investment, family governance and philanthropy as a key development.

LM, Santander The prevailing instability and uncertainty mean customers need to have more confidence than ever in their bank, based on its solvency, brand strength and range of products and services. These requirements bring improvements in the information banks provide to their customers and in the advice they give. Banks have to provide transparent, high-quality and competitive products.

SM, BNPP Clients are more and more demanding. They expect excellent client service. They are also looking for new ways to interact with the bank using digital solutions. And they want a differentiated offering on investments, such as access to private equity funds, special investment in vineyards, or other services such as philanthropy or art advisory.

PDI, JPMorgan We see more and more that clients want to manage volatility just as much as they want to manage exposures to asset classes. They want advisers who can understand their needs and concerns rather than those who apply a standard asset allocation that only takes broad risk profiles into account. Technology continues to be an evolving issue for private banks, especially as we move from the current generation of clients to the next one.

JZ, UBS As the markets continue to be less predictable, the quality of investment solutions and advice becomes a differentiating factor for clients. For those clients that do not have discretionary mandates, portfolios need to be reviewed much more regularly.

HUM, Credit Suisse From an investment standpoint, trends in wealth creation will prove interesting for clients in 2013, as it continues to shift towards emerging markets, with higher growth rates fuelled by entrepreneurial activity and relatively strong economic development. Clients are also looking at the huge spectrum of possibilities to become active in the philanthropy sector and for advice on how to get engaged and succeed in their philanthropic endeavours.

JF, Citi Emerging markets will be the engine of global GDP growth, particularly in cities. Global connectivity will continue to increase, and digitization will open up new possibilities for client interaction and help reshape the client experience. We also see increasing opportunities for investors to participate in the emerging social-finance sector via impact bonds or green bond issuances. With liquidity rising, these investments are now becoming recognized as a means for families and individuals to express their personal values through a mainstream investment vehicle, linking their philanthropy to their longer-term wealth management.

TY, Goldman Sachs We expect the political, economic and tax uncertainties that have so dominated the news over the past year to continue, but hopefully also continue to abate – if only gradually. From an investing perspective, we see growing acceptance of a post-crisis perspective, combined with an acceptance that we are facing a low-return environment.

In light of the 10th anniversary of Euromoney’s private banking poll, Euromoney asked the chief executives of the top-ranked global private banks to discuss how the industry has changed over the past 10 years.

Peter Boyles, HSBC The private banking climate has fundamentally changed. Markets are at different growth levels, and we should expect lower levels to be the norm. Client needs have changed in an era of rapid digitization and the development of smart mobile devices. The industry’s footprint has grown in growth markets such as Brazil or in some Asian economies, which have stabilized and outpaced developed-market growth. And wealth advisers have enhanced their credentials and overall knowledge and moved to become the trusted advisers of wealth creators and families. Most importantly, though, the industry has become more regulated and increasingly tax transparent.

Vincent Lecomte, BNPP There are four major differences resulting from the globalization and the financial crisis we dealt with in the decade: there are more (and new) clients in new regions; the industry has become more global; the industry has become more complex and regulated, requiring large amounts of investment in systems and infrastructure in order to continue to run a fully compliant organization that meets its responsibilities; and there is greater competition, which requires an ability to attract, retain and develop the talent, in particular in the high-growth markets where competition is fierce.

Phil Di Iorio, JPMorgan In the past 10 years, clients who still had fresh memories of the dotcom bust then lived through the most important financial crisis in generations. So today they want a far more personalized and specialized approach to their overall wealth management, which often starts with a very individualized portfolio that they can maintain through the cycle. The world has also become far more complex, and clients are looking for ways to simplify their lives. So having a single provider who can address all their needs and provide advice that takes their entire balance sheet into account has become increasingly important. In investments, we’ve seen a tremendous increase in the use of alternatives in portfolios as clients have become more focused on absolute-return strategies and yield in public markets has become more elusive. There has also been an enormous shift from clients investing almost exclusively domestically to a desire for global exposure. Clients today see that the world is much more interconnected and that emerging markets have become more developed, so they want their portfolios to reflect the best opportunities wherever they exist around the world. Information has also become more important as technology has evolved and clients’ horizons have expanded globally. We need to get information to clients faster than ever before, and it has to be actionable and global in nature. Clients are receiving enormous amounts of information, so we have to differentiate ourselves by providing best-in-class ideas and advice first.

Jurg Zeltner, UBS Today, the markets are less predictable and buy-and-hold is no longer an option for investors. There is more regulation, especially in the cross-border business. The compliance rules for conducting cross-border business and meeting suitability requirements are numerous, to the extent that not every bank can afford to meet them, leading to consolidation in the industry and higher barriers to entry. Clients are knowledgeable and they think more globally today. This means that we must provide clients with access to know-how and insights from around the globe. At the same time, client advisers today are also better trained. All our client advisers must therefore be certified, and this year we are launching a masters programme for our senior advisers.

Hans Ulrich Meister, Credit Suisse The way we do business has changed greatly because of the economic and regulatory environment, not only in terms of how we address altered client behaviour, but also in terms of our operating models. As our industry transforms, the question becomes: ‘How do we ensure success and capture the opportunities of our growth industry moving forward and in the context of these pressures?’ Certainly there is no magic bullet, but the traditional banking business model is changing and it absolutely has to. Firms have to determine which model is suitable for which market and what this means for their overall organizational structure. For example, it’s feasible that you reach a point where it is simply impossible to conduct certain businesses profitably under certain regulatory conditions. This is true whether we are talking about global financial firms with integrated business models, pure private banks, boutique firms, retail businesses or local banks.

Jane Fraser, Citi We see three main differences today compared with 10 years ago. First, digitization has changed the way we run our business and serve our clients. Second, the regulatory environment has and will continue to change the shape of the industry. And third, we have seen a marked shift in the relationship between and among society, business and government.

Tucker York, Goldman Sachs It would have been hard 10 years ago to believe that technology would become even more important in all aspects of wealth management, but it has. From compliance to trading infrastructure to mobile apps, technology is infusing everything we do. There is no reason to believe its accelerating importance will lessen anytime soon. From the perspective of business strategy, the industry has become much less transactional; we have built out our broad capabilities to include wealth advisory and lending. However, all of that change has left the core of our business untouched – the relationship of trust between a client, the adviser and the firm. That will endure. 

See more:

• Private Banking and Wealth Management Survey 2013: A decade of private banking
• Private Banking and Wealth Management Survey 2013: Results
• Private banking for the next generation
• How UBS battled back in the US
• Further related articles