Any time, any place

Global high-net-worth individual (HNWI) wealth is forecast to exceed $70trn by 2017, with the lion's share of the world's 14.6 million richest people residing in Asia-Pacific and North America.

And this is just the top end of the market - the RBC Wealth Management and Capgemini World Wealth Report 2015 counts HNWIs as those with $1-5m in investable wealth (millionaires next door). In the UK, the Financial Conduct Authority takes a rather different view for the purposes of retail financial services regulation, defining HNWIs (among other criteria) as 'having an annual income of more than £100,000 or having investable net assets of more than £250,000'.1

What does this mean for the British private banking and wealth management industry? And how have developments such as new technology, the struggle banks face in absorbing prudential and financial crime prevention regulation costs, and internationally mobile clients been shaping the way relationships are managed?

Special relationships

The term 'private banking' means that unlike the ordinary banking customer who uses their bank to deposit a salary and make payments, the HNWI (for a transparent fee structure) receives a more personal service through one point of contact to deal with, not only routine financial administration, but also guidance on how to manage personal liquidity and keep on top of the resulting tax liabilities.

While the Swiss banks have made something of a reputation for themselves for this particularly discreet form of banking (the UBS group has around $2trn assets under management), most international banks are developing their private banking offerings as the rich get richer.

Charles Boulton, managing director of HSBC Private Bank UK, points out that the group's global footprint - with a particularly strong one in Asia - puts it in a good position to provide clients with wealth, business and family succession solutions, 'in the largest and fastest growing markets in the world'.

He says that HSBC private banking clients are generally 'high or ultra-high-net-worth individuals often with complex needs and international interests, who typically have £3m or more available to invest with us'. The bank's role, he says, is to 'help these clients to grow, and manage and preserve their personal wealth'.

Across the private banking industry, the emphasis is on the personal relationship management. If this means holding a conference call at 4am GMT because the client is in Singapore, the relationship manager gets up early. Backed by a supporting team, the typical HSBC private banking client (although no bank will admit to a 'typical' private client as all are very individual) gets access to:

• An investment counsellor (for bespoke investment advice);

• A credit adviser (who works with the client on borrowing requirements); and

• A strategic financial planner (who supports the client on how to structure finances for the future,
  for example at retirement).

HSBC has its own internal programme of research and has interviewed more than 2,800 business owners with an average wealth of $4.6m in the UK, Hong Kong, Singapore, mainland China, the US, Germany and France. The findings will be published in the first quarter of 2016.

Founded in 1692 and now part of the RBS Group, Coutts operates within the RBS wider strategy to become a smaller, more UK-focussed bank.2

The international arm was sold in March 2015 to Union Bancaire Privée, the family-owned Swiss private bank.
As regulation squeezes bank margins across the board, many are reviewing
their portfolios and prioritising what they do best.

With Coutts' history of providing clearing bank services to the nobility and landed gentry, this means living the brand of banking for the rich and famous of British society. While nobody is allowed to say who a client actually is and prospective clients need £1m in investable assets rather than the FCA minimum of £250,000, the bank segments its clients into clear groups. These are:

• Entrepreneurs (tailored to the specific growth needs of this group);

• Sports and entertainment;

• Private office (ultra-high-net-worth individuals);

• Executives (such as City brokers, traders and FTSE 250 directors);

• International (includes non-domiciled international clients with significant interests in the UK);

• Landowners (including much of Britain's nobility and landed gentry); and

• Professionals (law firm partners, bankers, etc).

Head of executives and professionals at Coutts, Rebecca Hughes spoke to PCA about the way in which all HNWIs in these groups structure their wealth at different times in their lives.

'You don't get much time with these clients and your job is to structure their wealth so that they can free up their time. They have to have a banker they know they can speak to in any time
zone at any time of the day or night,'
she explains.

According to Hughes, the most important objective for her clients is financial peace of mind. They trust the bank to do a good job so that they can get on with their risky day jobs. I ask if a trader who might have moments of 'sitting on a difficult position' typically applies the same principles of risk appetite to their private wealth management.

They don't. When it comes to private money, most clients want their provider to deliver wealth growth to preserve spending power and, ultimately, replace their income on retirement.

As far as Hughes (who joined from Lloyds 15 years ago) is concerned, her team of relationship managers are the 'go to' if a client has investment interests outside the in-house offerings. 'If it's vintage cars, racehorses, fine art, or wine, we have connections.'

Both HSBC and Coutts confirmed that while technology plays a part in private banking, digital tools have to be integrated with face-to-face contact. Says Hughes, 'Yes, our clients want to use their phones and the Coutts app is very popular, but they don't want to self-serve all the time and have that individual relationship with their banker to structure their wealth.'

It is this balance of keeping the personal service in the mix, while ensuring all the investment in online services for clients pays for itself, that banks have to grapple with now. If too much personal service is cut in the quest for efficiency, the client will leave in search of a bank that makes them feel special again.

According to the Financial Times (July 2015), 'a third of wealth managers are now turning away clients unless they have more than £1m to invest. And some are telling 'moderately rich' investors they will be dealt with by call-centre staff rather than a relationship manager.'3 The cost of operating in the UK regulatory jurisdiction puts pressure on profits, because 'less affluent customers bring in lower fees, which can be a short-term drag on profitability'.

Small is beautiful, close and personal

Where larger banks choose not to tread, the boutique private banks are seizing the opportunities - and making sure they hang onto their new clients. Many of Nedbank Private Banking UK's referrals are the result of clients feeling 'forgotten and unloved' by their former private banks, and Nedbank takes a long-term view on the lifetime value of a client. 'They come to us for a more personal relationship, one where they are going to be better understood and better served because there are fewer clients in our portfolio than the place they are leaving,' says its UK head, Rob Currie.

The South African financial institution set up its UK private banking arm in 2008 to serve mainly South African clients residing in or domiciled in the UK. But the client base is now a 'very broad church', says Currie. While Nedbank also has its suite of mobile and digital channels such as the Nedbank App Suite (the single platform was developed in response to client demand), a Nedbank private banking client wants what it says on the tin - a private banker they can talk to.

'They want to know that when they have given an instruction, that instruction is done right first time, and they want a confirmation that it has been dealt with. This could be payments, buying or selling investments, share dealing, moving money between currencies - that private banker is the pivot point,' explains Currie. He adds that the current interest rate environment has prompted a lot of requests for currency hedging.

While the lawyers and accountants provide support on the structuring, the bank runs their investments and advises them on the best way to invest their surplus money. Sometimes this means leveraging portfolios to obtain liquidity against their invested assets.

'We had one client who had a portfolio with us, and he thought about encashing some of it to put down a deposit to buy a million pound house. He was going to put down half a million to buy the house, so we said why don't you leverage against your portfolio as interest rates are low?'

Currie explains how the bank gave the client another million pounds as a normal mortgage so that 100 per cent of the property was financed by Nedbank. 'The other difference between private banks and retail banks is speed of execution and doing things in a timely manner.' This enables clients to drive better bargains and negotiate higher because they have got the liquidity that turns them into cash buyers, or the client knows there is a private banker standing behind them.

Independent wealth management

Of course HNWIs turn to non-bank owned wealth managers as well and may well only use their private bank for banking, and keep their investment portfolios (or at least part of them) elsewhere. And in the climate of some HNWIs being not quite rich enough for certain private banks, there are some good opportunities.

Rathbones is listed on the FTSE 250 and does not segment its client base. Investment director James Maltin told PCA, 'We pride ourselves on delivering the same level of service to all our clients. Our minimum investment level is £100,000 and we have clients with £100m. We cover the whole range of HNWI types - old family money, new entrepreneurs - and it really does not matter if you are royalty or you have accumulated your wealth through inheritance.'

With its roots in the timber merchant business - the Rathbone family moved into managing money at the beginning of the 20th century - Rathbones will sometimes find itself looking after three generations of the same family.

'If it's an account for grandchildren related to a larger account, given the timeframe, we will run that 100 per cent in equities,' says Maltin. After all, this is the asset class that outperforms everything else over 20 years (if you can wait that long) which is why it is so popular with pension funds.

Most of Rathbones' business comes from word of mouth, although they do get referrals from independent financial advisers. While it has around 30,000 clients on its books and communications by telephone and email do play a part in client relationships, 'you cannot beat the in-person meeting', reflects Maltin.

As with the private bank clients, the fund manager earns their keep by understanding the client's risk appetite, and what the funds will be used for. The investment process is the same for all clients, and is divided into three building blocks, each playing complementary roles:

• Liquidity. This means selecting assets such as government bonds, high-quality corporate bonds and cash, which are easy to buy and sell during periods of market distress or dislocation.

• Equity-type risk. These are assets that drive growth in the portfolio and include equities and other securities with a high correlation to the equity markets. But they can lose value during market stress. This category also includes riskier corporate bonds, private equity funds, industrial commodities and some hedge funds.

• Diversified assets. These have the ability to reduce or offset equity risk during periods of market stress and potential investments such as precious metals, unleveraged commercial property funds and
  some hedge funds have to pass a range of tests across a range of market environments before they
  are included.

Outlook for the industry

Despite the increased pressure on costs, tougher regulatory demands and the requirement for greater transparency, most industry commentators believe that the private banking and wealth management markets are in good health with good growth opportunities - but the rules of the game have changed.

High net worth individuals are getting younger, more knowledgeable about the financial markets, and increasingly, more particular about social impacts and outcomes of their wealth allocations.

Automation is here to stay, so the winners in 'the new normal' will be those firms that have invested in getting this right, but make sure that the personal service remains meaningful
and relevant. 

References

1. See the FCA's Policy Statement

2. RBS annoucement of its new direction

3. See, 'Independent UK wealth managers pick up younger clients', Financial Times, 1 July 2015.

Clarissa Dann is editor-in-chief of
the transaction banking publication, Trade & Forfaiting Review. She oversees Private Client Adviser in her role as head of financial publishing at the Ark Group