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Private banking, forever synonymous with Switzerland, may just have passed a turning point. Technology, regulation, globalization, the move away from secrecy to investment advice, and need for scale have resulted in the playing field being levelled on a global stage for those who want it. In Euromoney’s 12th private banking survey, a US bank tops the ranking for the first time. JPMorgan Private Bank is voted for by thousands of peers in the industry as the world’s best global private bank, beating Swiss stalwarts UBS and Credit Suisse.
It has been a slow transition for the US banks to embrace wealth management globally. Other than Citi, most have focused more on investment banking globally, and wealth management domestically. And those US banks that did embrace wealth management globally early on have since retreated. Merrill Lynch’s Asia wealth management business was sold to Julius Baer in 2012. Morgan Stanley’s Asia wealth management operation was scaled back, and it has no presence in Europe in wealth management. “It made sense for us to focus on the US and Latin America,” says Greg Fleming, head of wealth management at Morgan Stanley.
Tucker York, head of global wealth management at Goldman Sachs, says going global is a difficult decision for a US wealth manager in light of the opportunities in the US market. “I can’t speak for other banks, but we know that when we go into a new market, it requires a tremendous amount of resources, so we have to justify that investment in the context of the outstanding opportunities we see in the US.”
And opportunities there clearly are in the US. It is home to the majority of the world’s private wealth and will continue to be for some time to come although China is closing fast.
In 2013, private wealth in North America rose 15.6% to $50.3 trillion, according to Boston Consulting Group. The consultancy expects private wealth in North America to grow to $53 trillion by 2018 compared to $40 trillion in China and $16 trillion in Japan. Indeed, US–based respondents to Euromoney’s survey this year are more optimistic about revenues than private banks in any region other than the Middle East. Over 90% of North American respondents expect revenues this year to be higher, versus 81% in Western Europe, 75% in Asia and 73% in Latin America.
The Swiss private banks, on the other hand, have always based their businesses on serving clients around the globe. Attracting offshore wealth from all over the world to Switzerland, it was a natural transition to move onshore for their global clients. Both Credit Suisse and UBS have had a lengthy presence in the US, Asia and Latin America, and both firms appear in the top three rankings for best private bank in both Asia and Latin America.
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It made sense for us to focus on the US and Latin America Greg Fleming, Morgan Stanley |
But the playing field is evening out. The US banks that have committed to wealth management, and that have the scale to invest in a global platform are now competing head-to-head with the long-standing Swiss leaders.
Has the diminishing cachet of being Swiss allowed US banks to become more competitive? It’s hard to find anyone that agrees, even the Americans. “I used to run our Swiss bank and have always been impressed by the high level of service and discretion in the Swiss banking culture. I don’t think that has changed,” says Goldman’s York.
Juerg Zeltner, chief executive at UBS Wealth Management, does not think the Swiss finish has lost its appeal. “Switzerland is still like the Wall Street of private banking,” he says. “It is still a benchmark and people think positively about Swiss private banking. In terms of flow, Switzerland is still growing, although so are other centres like Hong Kong, Singapore and New York – so there is greater competition, but that doesn’t mean that Swiss roots are not an asset. It’s like German cars are known for being good – and they are.”
Indeed the results of Euromoney’s 2015 private banking survey point to the Swiss having considerable clout on a global stage – even if the US banks have risen to meet them, and in some cases taken their place at the top of the rankings.
And taken together it is the US and Swiss banks that dominate the top global positions this year. Best global private bank for clients seeking investment banking capabilities is Goldman Sachs, followed by four Swiss and US banks. In research and asset allocation, UBS wins, while the top five are again all Swiss and US names. Likewise in asset management, where JPMorgan wins.
So how have the US banks managed to gain market share globally alongside the Swiss banks? In one sense, it is obvious by looking at who they have replaced – the European banks. In the top global 10 rankings only BNP Paribas, and Deutsche Bank appear, with Santander and Barclays dropping out and being replaced with Goldman Sachs and Pictet. Even in Western Europe, the top three rankings are Swiss and US players. In Asia, Deutsche and BNPP are the only Europeans in the top 10.
The global ambitions that the European banks once had seem to have diminished. For starters, many have been too sidetracked with lingering cost pressures and restructurings while the US and Swiss banks – although chiefly UBS – were quick to move and therefore recover from the financial crisis. While the European banks would have been the obvious beneficiaries of the growth in European wealth, and the demand for balance sheet from high-net-worth clients, outside of BNPP and Deutsche, not many European banks have focused their efforts there.
“Wealth is growing, even if GDP is not,” says Vincent Lecomte, co-head of BNP Paribas Wealth Management. “There were 15% more millionaires in the main countries of Europe the first half of 2014.” BNPP has been focusing on the growth in wealth among entrepreneurs and business owners.
The US banks looking for global expansion have therefore had less competition, particularly from local banks, than in the past. Goldman launched a lending platform in EMEA last year that one could argue would not have seen such appetite had smaller European banks not had their balance sheets constrained. Similarly for JPMorgan, Europe has been a source of growth. Phil Di Iorio, chief executive of JPMorgan Private Bank, says that Italy, France and the UK have been strong markets for the business the last three years. “Italy is one of our fastest growth markets globally right now. There has been a lot of M&A activity and cash-outs there, but the local banks are balance sheet-constrained,” he says. With European clients’ greater appetite to cash out of businesses, he adds, money is on the move and that creates opportunities for global players to win assets from European local banks.
Peter Charrington, Citi Private Bank’s global chief executive, says his bank has also benefitted in Europe from some of the challenges facing the European banks.
UBS’s Zeltner says the US banks are not alone – his bank has also been committed to Europe but he admits it is a challenge for the Swiss-based institutions. Credit Suisse for example, sold off its German onshore business to ABN Amro last year. UBS however has stuck with it and Zeltner says it is paying off. “In Europe, we have an opportunity for organic expansion. Europe is a much more transparent market than in the past,” he says.
“We started a European initiative that made money and we have never given up. Yes it was expensive and there were setbacks but it is worth it. Swiss banks do not have easy access to Europe – if you are domiciled in Europe you can freely operate in European markets – so that makes it more challenging for the likes of us Swiss banks. You need therefore to build an onshore Euro-bank. We are in the core five countries and are growing there and gaining market share. It’s important to be there – there is old wealth that gets invested internationally so being global is critical.”
There is also likely to be more money on the move in Europe now that the Swiss franc has been unpegged from the euro. Smaller Swiss private banks that tend to have largely European-based clients may be forced to shut their doors now that their commissions have been sliced by 20% as a result of the spike in the Swiss franc against the euro.
To an even greater extent the European banks have retreated from Asia, reducing their global footprint further and leaving the competitive landscape to the US, Swiss and regional Asian banks. UK-based Coutts is selling its Asia wealth management business. Société Générale sold its Asian private banking business to DBS. Barclays has dramatically scaled back from around the globe, pulling out of 130 countries by the end of this year.
Citi's Charrington says it will be difficult for those who do not have a global presence to get back in the game. “Costs are rising, and the costs of serving clients are increasing. Unless you have the infrastructure and the global presence set in place already it is going to be difficult to start afresh,” he says. “You can buy your way in through acquisition but that is an expensive move and one that results in a challenging integration process.” He expects in the next few years there to be even fewer global players, with some high quality regional competitors and then local boutiques.
Charrington adds that market share has been gained, not just as a result of competitors falling away, but due to clarity around strategy. “We’ve won business because we have been very clear about what our model is, and it is one that is differentiated,” he says. As part of Citi’s institutional business, the private bank has been focused on providing high-net-worth clients with objective advice.
The shift to an advice-led model has evened the playing field further. Indeed while Citi is pushing for a differentiated model (having its private bank sitting within its institutional clients business), the models of the global private banks have converged. Whereas private banking was based on secrecy and focused on offshore accounts – two areas which played to the strengths of the Swiss banks – changes in regulation and greater emphasis on transparency have diminished their importance. This move has collided with the desire by clients to focus on performance and advice – areas the US wealth managers have a stronger hand in.
Says Di Iorio: “The Swiss model is in the beginning stages of a multi-year evolution away from a primary focus on safekeeping of assets and towards a more transparent model based on high quality advice, performance and competitive fees – areas that US-based banks have focused on for some time.”
Indeed, the continued success of UBS Wealth Management can be attributed in part to Zeltner’s shift in focus for the Swiss bank to a model based on advice and performance. “It’s no longer about being Swiss and having your booking centre in Switzerland and having a brand. It’s about what you can offer. Clients are looking for smart market insights. That is the value of the bank,” says Zeltner.
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This shift in focus to a superior asset allocation and investment advisory model has served UBS well so far. In the third quarter of last year, its wealth management division (excluding Americas) reported profit before tax of SFr767 million ($823 million) – the highest quarterly profit since the second quarter of 2009. Furthermore, net new money was SFr31 billion in the three quarters to the end of September last year, with the America’s business recording $5 billion alone. Recurring net fee income, which shows the growth of discretionary and advisory mandates, grew 10% year on year.
It’s not an easy model says Zeltner. “There is absolutely no time to stop. Things change more or less overnight. Greece leaving the euro would not have been on the radar four months ago. You therefore need an investment DNA and investment processes that can cope with the complexity of today’s market.” Generating returns was indeed cited by Euromoney’s survey respondents as the biggest challenge for the industry this year.
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When we go into a new market, it requires a tremendous amount of resources, so we have to justify that investment in the context of the outstanding opportunities we see in the US Tucker York, Goldman Sachs |
York says global private banks stand to win from the move towards investment advice – further consolidating their position. “We have seen more and more boutiques come to market in the past several years and while there is a place for both types of providers, the so-called independent investment boutiques cannot deliver the investment opportunities we offer or match the depth and breadth of resources we have.”
That the US, Swiss and European banks have had a head start in addressing the client demands for advice, asset allocation and transparent asset management is clear from Euromoney’s survey. Respondents in Asia, Latin America, the Nordics region and Central and Eastern Europe list asset management as the top area for investment in 2015. For North American and Western European respondents it ranks third behind client user experience technology and regulatory risks and controls investments.
Technology is where the top global players will be competing. Clients are putting ease of information and convenience in line with, or just below, their demands for investment performance and superior advice.
“The Swiss were the pioneers in private banking and have made wealth management what it is,” says Morgan Stanley’s Fleming. “But as the millennials start to come through, history will matter less and less and technology will matter more and more.” And it’s not just the clients that will be millennials – but their advisers too, he points out. That means that internal systems have to be overhauled to attract the next generation of advisor.
Last year Morgan Stanley received a Euromoney award for best in innovation in wealth management in the Americas for its 3D insights platform and client-reporting platform it launched for its advisers. Fleming says the firm has been investing in its mobile apps and online product for clients.
Hans Ulrich Meister, chief executive of Credit Suisse Private Bank, says his firm has been heavily investing in capabilities to keep it closer to its current and next generation clients. “[They are] increasingly demanding real time, mobile technologies for every aspect of their banking relationship.” He says the firm is launching “new digital capabilities this quarter in Asia-Pacific, with a global rollout to follow”.
Phone and tablet capabilities followed by data mining were given as the top two technology investments globally that private banks are focusing on. Asian respondents said technology investments around use of social networks for clients to access the bank were their priority, which may be an indication of the mass affluent and younger demographic of their client base.
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Di Iorio believes technology will be the arms race of the wealth management industry. “The winners in the industry in the next three to five years will be those that provide an adviser-led in-person relationship complemented with digital capabilities and that is going to require significant investment from the industry,” he says.
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If technology will be the decider in who wins market share, then one would think the US banks will have the upper hand. They should, after all, be more in touch with financial services innovations that come out of Silicon Valley just by virtue of their location and investment banking relationships with US-based technology firms. That has not been evident so far however. The US retail banking system from a client user technology standpoint has been behind that of its European counterparts and if the US private banks are waiting on their retail arms to innovate it may hold them back.
Some wealth management firms are realizing they may be slowed down by their retail arms and are innovating separately. Citi Private Bank has been overhauling its client user experience with its “In View” offering. Di Iorio at JPMorgan Private Bank spent time in Silicon Valley last November meeting technology firms as his business innovates.
It will be imperative for all those with global ambitions to ensure they stay ahead when it comes to technology. Above all, because you can be certain that innovation will make it easier for clients to switch advisers and banks without the current headache of transferring accounts. It is the final part in ensuring the positions globally are solidified. With global footprint set, the model determined, it is technology that will enable the private banks to attract more clients. And this is where banks see their profits coming. Adding clients will drive profits this year, say 32% of Euromoney’s survey respondents, followed by increasing engagement with current clients.
There are still plenty of clients to add. Boston Consulting Group forecasts global private wealth to post a compound annual growth rate of 5.4% over the next five years reaching an estimated $198.2 trillion by the end of 2018. The few remaining global private banks have an incentive to innovate.
