Big get biggerA champions’league of globalwealth managersis emergingPage 2

Inside »

Smaller banksfighting backFamily-owned firmswin clients withpersonal servicePage 2

Asia assets surgeMore new wealth isbeing produced inthe region thananywhere elsePage 3

Compliance costscast shadowTough new rulesput pressure onbanks’ marginsPage 4

Haven from cutsInvestment bankersescape lay-offs byswitching to wealthmanagement armsPage 4

FT SPECIAL REPORT

Private BankingThursday November 28 2013 www.ft.com/reports | @ftreports

On the face of it, privatebankers and their clientsare looking at a brighterworld. This year has seenthe comeback of market

confidence, a reduction in volatilityand healthy growth in many assetprices.

Yet there is still no escaping fromthe word “uncertainty”. Six yearsafter the start of the financial crisis,private banks and their clients con-tinue to operate in an environmentcharacterised by low interest rates,lacklustre economic growth and awave of regulation that increasescosts and complexity.

It is thus no wonder that privatebankers continue to be wary.

“The market trends go against

everyone,” says Jacques de Saussure,senior managing partner of Pictet &Cie, the Swiss private bank and fundmanager.

“We have had a low interest rateenvironment for four to five years,market activity is low, Switzerland isseeing the end of bank secrecy andthe cost of regulation is impactingeverybody,” he adds.

Notoriously conservative privatebankers are not yet convinced thatabundant talk about a return to eco-nomic growth, rising equity pricesand a renewed search for yield will beenough to change the fundamentalissues facing their sector.

They say that positive factors suchas a prospect of rising interest ratesand a shift from bond markets into

equities cannot counter severe head-winds from tightened regulation, arelentless pressure on costs and cli-ents’ cautious investment patterns.

These structural issues continue toweigh on profits and are set to triggeran extensive shake-out in the sector.

Tim Monger, financial institutionspartner at Boston Consulting Group,says: “The profitability of the indus-try will not return to pre-crisis levels,at least for the medium term, as cli-ents tend to invest in lower-marginproducts and costs are continuing torise.”

Consultants at rival Roland Bergerestimate that margins have fallen 20basis points in the past five years,thanks to lower client activity, lesscomplex products and a focus on the

super-rich – a clientele notorious fordemanding low fees.

At the same time, tightened regula-tion affecting areas from money laun-dering to investment advice has sentprivate banks’ costs spirallingupwards. In the past five years, pri-vate banks globally have gone fromspending 61 cents for each dollar inrevenue to 73 cents, says BCG.

The global crackdown on tax eva-sion is another costly issue, particu-larly in Switzerland, where US fineshave already helped force two privatebanks – Wegelin & Co and Frey & Co– out of business, and where arecently struck agreement betweenthe two countries is set to cause awave of penalties.

One banker says: “The tax issue

will have a massive impact on theSwiss private banking sector nextyear. For aggressive banks with ahigh number of US clients, the finan-cial consequences will be substantial.”

With banks forced to adapt rapidlyto these structural changes, the busi-ness of investing rich clients’ moneyis undergoing a Darwinian processthat will leave only the strongest.

“The smaller banks in particularrealise that they are going through aperiod where it isn’t certain if theycan remain profitable,” Mr de Saus-sure says.

“We will see more banks that willeither be acquired or decide to closeor abandon their banking licence and

Continued on Page 2

Only thestrongestwill surviveshake-outTougher rules, rising costs and cautious clientsare countering amore positive outlook andmaking bank chiefs wary, writesDaniel Schäfer

When it has come to sellingtheir investment creden-tials, many private bankshave faced an uphill strug-gle in the years since 2008.

The crisis experience formost private banking cli-ents was not a pleasant one:many found themselvesstuck in complex productsthat their bankers hadpitched to them as exclu-sive investments. At best,these proved highly illiquid,and at worst, blew up.

As the easy liquidityrolled out of markets, itbecame clear that many cli-ents had been paying heftyfees for the privilege.

Private banks insist theyhave now turned a corner.In an environment in whichmarkets are dominated bythe unprecedented easingactions of major centralbanks and growing politicaluncertainty around theworld, the value of goodfinancial advice has per-haps never been higher.

Private banks have wisedup to the need. Organisa-tions such as UBS now havededicated chief investmentofficers to provide broad,

global advice on asset allo-cation and strategy.

“What we are trying to dois show that we’re not justsalespeople any more,” saysone Zurich-based banker.“What we want to push areproducts that make sensefor our clients first and ussecond.”

Part of that process isthat private banks havefocused less on high-margin, complex or struc-tured products and more onsimple, broad tactical assetallocation.

Alexander Friedman,chief investment officer atUBS Wealth Management(see profile below), hasadvised clients to put theirmoney into straightforwardequities this year.

He has been proved right.Developed market equities,in particular, have enjoyedbig returns. The S&P 500 isup 26 per cent so far thisyear, while the FTSE 100has risen 14 per cent.

Mr Friedman has alsocalled for investors to slashtheir holdings of invest-ment-grade bonds – corpo-rate and sovereign – froman average of 16 per cent tojust 2 per cent.

Private bank clients are,nevertheless, conservativeby nature. Most still main-tain a disproportionateshare of their investmentsin cash. Private banksreport that clients hold, onaverage, 20-30 per cent of

their assets in cash or cash-like securities – and insome cases, much more.

All this exacerbates theconflict between a client’swishes and those of thebank to make a profit.

The key is for banks tofind products that are bothsuitable for their clients’low or moderate risk appe-tites but also offer decentfee-earning potential.

As such, banks havebegun to increase thenumber of alternative

investment products theyoffer clients.

Some, such as DeutscheBank, have made big invest-ments in hedge fund Ucits –tightly regulated, onshoreversions of hedge fundproducts – which theybelieve are more palatableto risk-averse clients. Flowsinto these funds havesurged in recent years. Thesector manages around$250bn of assets, accordingto Eurekahedge.

But regular hedge fundand alternative investmentproducts are coming back

into vogue. With equitymarkets looking frothy andbonds plagued by the possi-bility of tapering, hedgefunds have merit as a mid-way alternative, offeringequity-like returns withbond-like volatility.

“We see opportunities inhedge funds, which haveperformed well in the yearto date and benefit fromfalling correlations withinmany asset classes,”HSBC’s private bank toldits clients: “We also believethat select real estate andprivate equity can addvalue to portfolios for inves-tors who take a longer-termview, as we believe there iscurrently a high premiumfor somewhat less liquidassets.”

It is not just in assetclasses that banks are giv-ing advice. Credit Suisse,Julius Baer and UBS haveoutlined ambitious targetsto expand their privatebanking business in part bylending more to wealthy cli-ents. Loans to bolsterinvestment returns or toallow clients greater flexi-bility in their finances areseen as profitable areasaligned with client needs.

Private banking mayhave undergone a period oftranquillity and reinventionin the wake of 2008, butpractitioners say now is thetime for it to make its markagain as a positive and prof-itable line of business.

Advisers wise up to the need topolish tarnished credentialsInvestment

Hefty fees forcomplex productsare a thing of thepast, says Sam Jones

Alexander Friedman’s appointment twoyears ago to the new role of chiefinvestment officer at UBS WealthManagement was intended to telegrapha clear signal: the Swiss institution wasputting its investing missteps andscandals behind it, writes Sam Jones.

Mr Friedman has an impressiverecord when it comes to managing thefinances of the wealthy. Until March2010 he was the chief financial officerof the $36bn Bill and Melinda GatesFoundation and served on itsmanagement committee – a role he stillperforms. Mr Friedman oversaw thefoundation’s finances during a periodwhen it more than doubled in size.

The foundation hired him after a five-year stint at Lazard as a mergers andacquisitions specialist. He has also held

a supervisory seat on the board ofActis, an emerging-markets focusedprivate equity firm, and set up his owninvestment vehicle, Asymmetry.

Mr Friedman has amassed animpressive set of business connections.He is chairman of the Seattle ArtMuseum investmentcommittee, a member ofthe Council on ForeignRelations and a formerjudge for the FinancialTimes-Goldman SachsBusiness Book of theYear awards.

Mr Friedman has made politicalconnections, too: after gaining a BAfrom Princeton and a law degree fromColumbia Law School, he became anadviser to the secretary of defence inthe Clinton Administration.

At UBS, the establishment of thechief investment officer’s office hasbeen central to the bank’s effort tocompete with the likes of BlackRockand Pimco. Mr Friedman’s links in theinvesting world have been valuable, ashas his investing nous.

A dependable, institutionalopinion on global financial

matters – from FederalReserve tapering toAbenomics – is somethingclients at UBS have until nowlacked.

Profile Alexander Friedman, UBS

AlexanderFriedman:impressiveconnections

‘What we are tryingto do is showthat we are notjust salespeopleany more’

2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 28 2013

Private Banking

The wave of scandals thathas engulfed global bankssince the financial crisishas created opportunitiesfor smaller, family-focusedwealth managers, as clientsfavour a return to simplerbanking relationships.

Bankers say that somewealthy clients are dis-mayed by the seeminglynever-ending stream of mis-conduct at big banks, froma series of rate-rigginginvestigations to the mis-selling of mortgage andinsurance products.

As a result, clients arewilling to sacrifice thebroader investment choiceoffered by bigger institu-tions for a more personal-ised, traditional service atfamily-run businesses.

Under pressure to cutcosts, clean up their opera-tions and meet tougher reg-ulations, many of the big-gest international bankshave also been forced totrim their wealth manage-ment businesses, accordingto analysts, giving clientsfurther reason to look else-where.

“The private bankingindustry has lost its focus,”says Matthew Parden, man-aging director at DuncanLawrie Private Bank, whichtargets clients in the south-east of England and the Isleof Man with £500,000 to £5mof investable assets.

“It was traditionallyabout offering a superiorservice with a personalcommitment to clients asindividuals. But for manybanks it is now about cost-income ratios and bottom-line service,” he says.

One reason for thechange. Mr Parden says, isthat many larger privatebanks are tied to the for-tunes of their high-streetparent companies, some ofwhich are reducing branchnumbers and closing pri-vate banking operations.

A recent report from Led-bury, a market researchgroup focused on wealthyindividuals worldwide,

found that a number of bigbanks – including CreditSuisse, Barclays, HSBC,Lloyds Banking Group andCitigroup – had outlinedplans to pull back fromsome private banking activ-ities in recent months.

This withdrawal is driv-ing some clients to moretraditional, family-ownedwealth managers, whichsay they offer a more per-sonalised service, as theyare too small to need callcentres and have fewer cus-tomers per manager.

The Ledbury report sup-ports that view. James Law-son, a director at the com-pany, says client satisfac-tion tends to be higher atthe smaller houses.

“Our report found thatclient satisfaction amongthe smaller financial advis-ers was about 80 per cent –almost twice as high as thetypical client of a largerinternational provider,” hesays.

Roger Weatherby, chiefexecutive of WeatherbysBank, a 240-year old family-

owned private bank thathas its roots in the Britishhorseracing industry, saysdemand for more tradi-tional banking has beenamplified by the financialcrisis.

“Clients who thoughtthey had a close relation-ship with their bank sud-denly find their wealthmanager has gone – theymight have three relation-ship managers a year anddon’t feel known anymore.”

Mr Weatherby also saysthe big banks have beenunder pressure since thecrisis to reduce their loan-to-deposit ratios, meaningmany have been forced tocut lending.

Boutique private banks,whose growth is limited toretained earnings becausethey lack a diverse share-holder base to tap for funds,have kept to more conserva-tive lending ratios.

Another attraction ofsmall family-owned groupsis that the family’s ownwealth is typically managed

alongside clients’ invest-ments, providing an addedincentive for vigilance.

James Hoare, portfoliomanager at 350-year-oldC. Hoare & Co, says therehas been a significant“flight to quality” since thefinancial crisis.

“A lot of that is based onthe unique corporate struc-ture of unlimited liabilitypartner banks, where thefamily’s wealth is com-pletely aligned to custom-ers,” he says. “During therecent crisis, customershave appreciated that.”

There are a number ofdrawbacks to family-ownedprivate banks, however.

One pitfall is that theygenerally cannot competewith the dominant high-street providers on choice.

Banks such as Barclays,Credit Suisse and UBS canoffer clients a far moresophisticated range of prod-ucts, including access totheir investment bankingoperations.

Indeed, Ledbury’s re-search shows that, ratherthan deserting the big play-ers, some clients are mov-ing in the opposite direc-tion, consolidating theirholdings with them.

Its report showed that theproportion of wealthy cli-ents that have at least 75per cent of their investmentportfolio with their mainbank has risen from 22 percent to 33 per cent in thepast year.

“The pendulum hasswung. Where before, cli-ents wanted to mitigaterisks by diversifying theirportfolios, some clients arenow more comfortable withthe convenience of one pro-vider,” says Mr Lawson.

“Local providers may wellhave the ability to buildand maintain strong rela-tionships, but they won’talways have the most suita-ble offerings.”

Among the worst hit bythis shift are the wealthoperations of some of theUK retail banking brands,which sit in the middleground between the biggestinternational banks andlocal family-owned banks.

Ledbury’s report showedthis group of banks had suf-fered a 7 percentage pointfall in market share to 18per cent in the past year.

Wealthy investors find that goodthings come in small packagesLocal operators

Clients are playingthe simplicity card,writes Sharlene Goff

C. Hoare & Co may havebeen founded during thereign of Charles II, but theonce seemingly antiquatedpartnership structure of theworld’s oldest family-ownedbank is regaining freshattention, writes DanielSchäfer.

Its owners – sevendescendants of the foundingfamily – have unlimitedliability for all its actions. Asa result, the London-basedprivate bank likes to play itsafe. It hoards a third ofcustomer deposits at theBank of England and hashanded out the equivalent ofonly 40 per cent of itsdeposits as loans.

The bank also likes tostay small. It has only twobranches and caters tofewer than 7,000 familiesand wealthy individuals.

Instead of

grandiose plans, it prefersspending a sizeable amountof its profits on technologysuch as its mobile andonline banking applications.

“Forty years ago peoplewere wondering if twobranches were really enoughfor us. But the rise of onlinebanking shows that if youjust wait long enough, thenthings come back to you,”says Jeremy Marshall, chiefexecutive.

Profile C. Hoare & Co

JeremyMarshall:having twobranches isenough

keep their client relation-ships as independent assetmanagers.

“There will be a wave ofsmaller banks consolidatingnext year and in 2015. Thereis always a market fordomestic niche players, butit will be difficult for highlyregulated cross-bordergroups to stay independ-ent,” Mr de Saussure adds.

Bankers are also not veryhopeful of any respite as aresult of an uptick in clientactivity.

Jürg Zeltner, chief execu-tive of UBS’s wealth man-agement arm, says therewill not be a sudden returnto a “risk-on” environment.“I think we are settling intoa new norm. We will see fora long time relatively highliquidity reserves for cli-ents,” the head of the larg-est private banking busi-

ness in the world by assetssays. Clients have for sev-eral years been sitting oncash levels of about 30 percent, curbing their own andbanks’ ability to makehigher returns.

This is one of the reasonsbanks are set to be forcedinto a wave of joint ven-tures, partnerships and out-sourcing projects in middleand back office areas.

Examples of this trendabound. A number of largebanks are in talks withvarious providers aboutoutsourcing backgroundchecks on clients, whileUBS has recently out-sourced a large part of itsprocurement, and DeutscheBank has outsourced itswealth management backoffice operations in Switzer-land to Avaloq Group.

Continued from Page 1But beyond those support

functions, even highlyrewarded relationship man-agers are no longer sacro-sanct as the efficiency ofbanks’ client-facing parts iscoming into focus.

Banks have inflated theircost structure throughouttheir activities and func-tions, says Mr Zeltner.

Many banks are movingto a system where fewerrelationship managers arecovering more assets.

BCG’s Mr Monger saysthis does not necessarilywork to the detriment ofthe client. “In the past,banks have often overserv-iced their clients,” he says.

“They are now starting tobecome more sophisticatedabout the amount of servicethey provide for differentclients. They are movingfrom a one-size-fits-all to atailored approach.”

A rapid move to mobileand online technology playsa crucial role. “Some clientsmight get much less face-time but a much better iPadapp,” he adds.

With clients continuing tobe risk averse and devel-oped countries mired inslow growth, private banksare also forced to looktowards Asia.

Mr Monger estimates that70-75 per cent of growth inthe next five years willcome from emerging mar-kets and mostly the Asia-Pacific region, despite thejitters in those markets thisyear. In five years, theregion is set to overtake theUS as a centre for wealth.

“Everyone is trying to fig-ure out how to get into thismarket,” he says, addingthat this trend plays intothe hands of the largerbanks that can afford toinvest in those regions.

“We will see a substantialtransformation of ourindustry and the survivorswill come out of thisstronger,” Mr de Saussuresays. “There is still moneyto invest; this is certainlynot the end of our busi-ness.”

Only the strongestare likely to survive

30%Typical cash levels forprivate banking clients

In wealth management, big is onceagain beautiful. Regulatorsaround the globe might be debat-ing if banks are too big to fail butin private banking, the giants are

becoming ever more dominant.Last year, the top 20 wealth manag-

ers gained market share from smalleroperators with an average increase inassets under management of 10.9 percent, according to Scorpio Partner-ship, a consultancy and researchgroup.

“In spite of a number of challenges– both economic and regulatory – wehave seen the confirmation of a newchampions’ league of global wealthmanagers,” says Sebastian Dovey,managing partner at Scorpio.

The top 20 command more thanthree-quarters of total assets undermanagement, as wealthy clients oftenwant a single bank relationship.Squeezed margins and tougher regula-tion, meanwhile, are hitting smallerrivals disproportionately.

“The barriers to entry have becomehuge,” says Jürg Zeltner, head ofUBS’s wealth management arm,which last year overtook Bank ofAmerica as the largest private bank-ing operation in the world measuredby assets under management.

“To be able to deal with clients’cross-border demands, with regula-tory compliance and to make money

in an area that is under margin pres-sure is quite an agenda,” he adds.“This is an annuity business and youneed a sustainable growing assetbase.”

Large global banks including Mor-gan Stanley, Deutsche Bank and Gold-man Sachs have in recent years redis-covered wealth management as prof-its have come under pressure in tradi-tional areas such as investmentbanking. UBS itself launched a strat-egy to concentrate on its core wealthmanagement business by drasticallypruning the bond trading business ofits investment bank.

Large and diversified banks havebeen more successful in containingcosts than pure-play private banks.The former spend 75 cents for everydollar they earn in revenues in theirwealth-management arms, whilebanks focused solely on wealth man-agement had a cost-income ratio of 88per cent in the past year.

Diversified groups can reduce costsby centralising certain administrative,compliance and portfolio managementfunctions. They can tap into theirretail banking network to build apresence in growth markets.

Smaller operators, on the otherhand, are struggling to keep costs incheck amid myriad regulatory andrisk-management demands.

“All the trends in the market are

pushing you to be bigger, whether itis regulation, service models or inter-nationalisation,” says Tim Monger,financial institutions partner at Bos-ton Consulting Group.

Even the largest players have beenforced to curb some of their activitiesamid relentless pressure on costs andprofit margins.

Rapidly rising expenditure to makesure banks do not break anti-moneylaundering rules are making it partic-ularly uneconomic for all but the lead-ing global wealth managers to remainactive in smaller markets.

Barclays this year announced itwould pull out of more than 100 mar-kets and cut staff in its wealth man-agement business to boost the unit’sfeeble profitability.

The UK bank said it would reducethe number of countries in which itprovides wealth and investment man-agement services from about 200 to 70by the end of 2016.

Its decision followed rival CreditSuisse’s announcement this year thatits private bank would exit or with-draw from about 50 markets world-wide by 2014 to bolster profitability.HSBC also wound down its Irish pri-vate banking arm in October lastyear.

“There was a dash five years ago toopen up booking centres across theglobe, only for the banks to realise

later that they are not profitable,” MrMonger says. “Now this is reversing.”

A string of other large banks includ-ing Bank of America Merrill Lynchand Morgan Stanley have sold over-seas operations. This represents anattempt to concentrate on those coreregions where they are among themarket leaders.

“Critical mass is becoming moreand more important in order to beable to achieve the right economics,”says Jeroen Rijpkema, chief executiveof ABN Amro Private Banking.

“Even the bigger players thinkabout which markets they are good inand which smaller ones they won’tmake a difference in and where it isbetter to exit.”

ABN Amro Private Banking is anexample of this trend. It sold its Swissprivate banking operation two yearsago and bought LGT Bank in Ger-many, a market in which it alreadyhad reasonable scale.

Bankers say the consolidation trendwill continue. The biggest wealthmanagers look likely both to spin offregional entities and act as buyers ofprivate banking operations.

UBS’s Mr Zeltner adds: “We are anatural consolidator in this industry.We are always looking for very tar-geted acquisitions that either give usfurther scale or an entry into a newmarket.”

‘Champions’ league’ rules the roostGlobal groupsBig banks have raisedmarket share but even the giants are refocusing, saysDaniel Schäfer

We are thechampions: thegiants of privatebanking arebecoming evermore dominantGetty

Large anddiversifiedbanks havebeen moresuccessful incontainingcosts thanprivatebanks

FINANCIAL TIMES THURSDAY NOVEMBER 28 2013 ★ 3

Private Banking

The Louis XIII casino andhotel in Macau will besomething to marvel ateven in the midst of one ofthe most gaudy and ludi-crous cities in the world.

This $1bn resort isexpected to have a giantruby coloured illuminated“jewel” above its entranceand will charge a minimumHK$10,000 (US$1,290) anight for the most basic ofits 236 rooms. The smallestbets on its 66 gaming tableswill be HK$5,000 and shop-ping at the Graff Diamondsstore and other luxury out-lets in its mall will be byappointment only.

Welcome to the world ofAsia’s rich.

Asia is producing morenew wealth than any otherpart of the world at anypoint in history. Over thepast five years, the assets ofrich individuals have grownat triple the rate of thewealthy elsewhere, whilethe number of rich peoplehas increased by twice thatof other regions, accordingto the recent annual surveyby Capgemini and RoyalBank of Canada.

Their number grew byalmost 10 per cent to reach3.7m last year, according tothe survey, while theirwealth expanded by 12 percent to $12tn.

For “ultra-high-net-worth” people, who havemore than $30m in netassets, the story is a littledifferent. More people fromthe US and Europe enteredthis club in the past year

than from anywhere else –the population in China andBrazil actually declinedslightly – according toresearch by Wealth-X andUBS (see story above).

There are only 199,235such individuals in thewhole world, but unsurpris-ingly they are the mainfocus of private banks andwealth managers. They willoften have $20m tied in abusiness, with $5m in prop-erty and $5m to play with,says Mykolas Rambus, chiefexecutive of Wealth-X.

“The reason this marketis so lucrative is that a lotof the wealth is not veryliquid yet,” he says. “Theyare likely to have a mone-tising event within a coupleof years, like a listing, andthey tend to spread theirwealth around among anumber of banks.”

There are many morepotential clients amongthose with $5m or less, butthey might only have liquidassets of $250,000 or less.“You cannot make moneyout of that in today’s highcost regimes,” Mr Rambusadds.

The newly rich can bemuch more demanding cli-ents for private banks and

other wealth managers,partly because they cantake some convincing that aservice they have neverused or thought about isworth paying for.

On top of this, as they arenormally still tied in withtheir businesses, theirinvestment expectations arefor much higher returnsthan those who have beenwealthier for longer and aremore interested in preserva-tion.

“For the new rich, invest-ments in wealth manage-ment compete directly withtheir businesses for capital,so any investment needs togenerate a higher returnthan they could get by rein-vesting in the company,”says Kathryn Shih, head ofUBS Wealth ManagementAsia Pacific. “Also, theyhave a home bias; they liketo know the companies theyare going to invest in.”

Of course, those whosewealth is really new arealso more interested inflaunting it – or at leastbuying some of the trap-pings such as cars, watches,properties and so on.

But private banking exec-utives say these things arebought early – and often

with borrowed money – bythe merely affluent, ratherthan the really rich.

For those with $30m ormore, the first thing theywant to buy once they hitthat bracket is an aircraft,according to Bassam Salem,chief executive of Citi’s pri-vate bank in Asia.

“The newly rich are a bitmore exuberant in terms ofshowing their wealth ini-tially,” he says. “But ittakes a little while tobecome ultra-wealthy formost. The richer you are,the less you want to show itin many countries.”

The exception to this ismainland China, wheremore people have becomevastly rich in a muchshorter time because of theexplosive pace of growth inrecent years. The averageage of Citi’s ultra-rich cli-ents in Asia excludingJapan is about 70, accordingto Mr Salem, whereas inChina it is 35.

Mr Rambus makes a simi-lar observation, noting thatthe average age of million-aires in China is about 33,but that of the world’sultra-wealthy is 52.

In spite of cathedrals toexcess such as the comingLouis XIII resort in Macau,Mr Rambus says the superwealthy in Asia, as in otherparts of the world, arebecoming less visible interms of splashing the cash.

“There are many coun-tries where visibility is notgood culturally and whereit is becoming less advisa-ble if you want to keep yourwealth,” he says.

So, once the Louis XIIIopens to its exclusive clien-tele in 2015, it is more likelythat anyone who makes anoise about having stayedthere is perhaps eitherlying, or at the lower end ofthat casino’s clientele.

Surge in Asian millionaire clientsprovides lucrative opportunitiesNew rich

China takes aleading role inadding glitz, saysPaul J Davies

Eike Batista, one-time richestman in Brazil, is not the onlyformer billionaire in thedeveloping world.

His spectacular rise to out-rageous fortune has been followed byan even more spectacular collapseinto personal bankruptcy. Mr Batistawas undone when his oil companyfailed to find any of the black stuff,sparking a cash crunch across his net-work of companies.

But the wider slowdown in Brazil’seconomy also hurt him, as it has hun-dreds of others in the ultra-wealthybracket – generally defined as peoplewith net assets of at least $30m.

It might seem unnecessarily elitistto focus only on the waxing and wan-ing wealth of a global group of just199,235 people, but this is exactlywhere the world’s private banks puttheir efforts. Individuals with just $5mor $10m do not have enough cash toplay with to cover the costs of thehighest level of private service.

Brazil was one of less than a dozencountries that saw the number of itssuper-rich decline this year, accordingto an annual report by Wealth-X andUBS. More than 600 people droppedout of this league in Brazil, as thetotal assets of this group fell almost$100bn from 2012 to $770bn.

China, the next biggest loser, lostalmost 600 multimillionaires and thegroup’s total assets fell by $65bn to$1.5tn. The other two Bric nations,Russia and India, registered a smallrise in ultra-rich numbers and wealth.

All the other countries that sawtheir ultra-wealthy populations shrinkwere also emerging markets, apartfrom Canada and Finland.

Chile, Colombia, Kazakhstan, Peru,South Africa, Syria and Tunisia alllost members of their super wealthyclubs, according to Wealth-X.

Developed countries by contrast didrather well. Germany saw more than2,000 people join or re-enter thisleague, while Europe as a wholeadded almost 5,000 and the US gainedmore than that. These two blocsbetween them added $1.5tn in assetsthis year – as much as all Chinesesuper-rich hold. The total wealth ofthe US and European ultra rich is astaggering $16.76tn, out of a globaltotal of $27.77tn.

Recovery in equity markets and

other asset prices because of the floodof central bank money is behind mostof this growth in wealth rather thanfresh entrepreneurial success or eco-nomic growth.

For private banks, however, theemerging markets still merit closeattention. Bassam Salem, chief execu-tive of Citi’s private bank in Asia,says the emerging markets of the Mid-dle East, Latin America and Asia

Wealth dips in Brazil and ChinaEmerging markets Managers predict growth in ultra rich despite hiccup, writesPaul JDavies

OceaniaAfrica

LatinAmerica

Asia

MiddleEast

EuropeNorth America

That’s rich The state of the world's ultra high net worth population*

Number and wealth of UHNW individuals, 2013 Arrows show change on 2012

58,065$7,675bn

44,505$6,590bn

14,150$2,110bn

2,775$350bn

5,300$880bn

3,955$485bn

Individuals Population change Wealth changeWealth

Source: World Ultra Wealth Report 2013, Wealth-X/UBS * Individuals with net assets of at least $30m

70,485$9,680bn

199,235 $27,770bnGlobal UNHW total 2013 6.3% 7.7%

7.9%

9.0%

8.7%

10.4%

3.8%

5.4%

4.1%3.4%

9.5%7.7%

15.3%23.9% 2.2%

2.1%

make up roughly half the global pri-vate banking business and will pullahead of the developed world. “Theemerging economies are slowing, butthey are still producing better growththan the developed world,” he says.

Wealth among the rich in emergingmarkets has grown with great rapid-ity in recent years, even if it is stut-tering slightly now. The Middle Easthas continued to boom, adding morethan 700 to its super-rich populationand $170bn in assets.

However, it is often harder thanpeople expect to make money out ofthe wealthy in emerging markets, MrSalem reckons, because much of theirwealth is often tied up in their busi-nesses, while the costs of running aprivate bank in terms of property,people and regulatory compliance arehigh and increasing.

Staff – especially the vital relation-ship managers – can be very expen-sive in Asia and other emerging mar-kets, because they are in very shortsupply. Barend Janssens, head ofemerging markets at RBC WealthManagement, says the talent shortageis a big inhibitor to private banks.

“Good private bankers who speaklocal languages and understand localcustoms are highly sought after, andwith demand for their skills higherthan supply, costs are going up,” hesays. “The industry needs to find away to groom talent in sufficientnumbers to keep up with high clientdemand.”

The demand is there and shouldkeep growing – in spite of this year’shiccups. Roland Berger, the strategyconsultancy, predicts that globalbankable assets will grow to almost€40tn by 2017, from €29tn at the endof 2012. The fastest growth, it predicts,will come from Asia-Pacific, which itforecasts will see assets increase by 10per cent annually to reach about€14tn by 2017.

UBS for one still sees Asia as themost promising market in the yearsahead. Kathryn Shih, head of UBSWealth Management Asia Pacific,says it will see the fastest growth outof all the emerging markets.

“Asia-Pacific has been growingfaster than other emerging marketsbecause it has had more politicalstability, which promotes economicstability,” she says.

When Vontobel signed a preliminaryagreement with ANZ bank in Singa-pore this month, it brought togetherwhat appeared to be two unlikelyfinancial partners.

Vontobel is a Swiss-based privatebank with heritage stretching back tothe 19th century. The other is aMelbourne-based banking group thatgenerates almost 18 per cent of itsprofits from Asia, outside Australiaand New Zealand.

But on closer inspection, the twobanks need each other in the highlycompetitive world of Asian privatebanking, where there are many play-ers – yet few, if any, with a suffi-ciently established regional brand toattract a critical mass of customers.

Vontobel will obtain access toANZ’s growing presence – and thusclients – in Asia, while ANZ willbe able to use Vontobel’s “strongglobal equity asset managementcapability”, says Stewart Brentnall,chief investment officer of ANZ Glo-bal Wealth. “Putting the two togetherwill allow a more rapid growth thaneither bank would achieve on itsown.”

Whether other banks will emulatethis kind of arrangement – so far rarein the Asian private banking business– remains to be seen. But the forcesbehind it are here to stay.

McKinsey, the consultancy, said inits 2013 annual global private bankingsurvey that, while assets under man-agement grew 17 per cent in Asia lastyear – which is more than double therate for North America or westernEurope – profit margins were just 17basis points. That compares with23bps in western Europe and 32bps inNorth America.

Intense competition, a tendency forwealthy Asians to use multiple pri-vate bankers, and high staff costs arelikely to force consolidation in thewealth management business in Sin-gapore and could push operators outof business, top private bankers say.

Deepak Sharma, chairman of CitiPrivate Bank and co-chair of the Sin-gapore Private Banking Industry

Group, says the business is “undertremendous test”.

Société Générale, the French bank,is looking to sell the rest of its privatebanking business in Asia, followingthe recent disposal of its Japaneseunit, according to people familiar withthe process.

The move reflects the Frenchgroup’s cost-cutting and disposal pro-gramme, but it is also a sign of howintense the competition is in privatebanking in Singapore.

It may not always necessarily be thesmallest banks that are forced to cutback, however. “Smaller specialistshops are far more agile than the big-ger banks, because of internal inertia,compliance pressures and externalheadquarters making excessivedemands,” says Tim Gibson-Tullberg,head of southeast Asia at SheffieldHaworth, a recruitment company.

Western banks also face culturalhurdles. Their Asian rivals have beenpushing into wealth management inrecent years, in some cases making avirtue out of a decades-long presenceservicing southeast Asia’s ethnic

Chinese community, which is highlyentrepreneurial and accounts for adisproportionate share of the region’swealth.

United Overseas Bank, Singapore’sthird largest by assets, has a longhistory of serving the commercialbanking and resulting wealth manage-ment needs of the Chinese minority inthe region.

In Malaysia, where the bank openedits first branch 60 years ago, it isespecially strong in cities with ahigher concentration of Chinese busi-nesses such as Ipoh, Kota Kinabaluand Penang.

That means it is well positioned toattract business from people who mayhave relatively modest wealth now,but that is set to grow as their busi-nesses expand.

Jean Khong, a UOB spokeswoman,says: “We don’t believe in ‘suitcasebankers’, because nothing can replacelocal knowledge and the spirit of ahandshake.”

Unlikely pairing maypoint the way aheadAsia

Intense competition is likelyto lead to more tie-ups,reports Jeremy Grant

‘Nothing can replacelocal knowledge and thespirit of a handshake’

Daniel SchäferInvestment bankingCorrespondent

Paul J DaviesAsia financial correspondent

Sharlene GoffRetail banking correspondent

Jeremy GrantAsia region corporatecorrespondent

Camilla HallUS banking correspondent

Sam JonesHedge funds correspondent

Andrew BaxterCommissioningeditor

Andy MearsPicture editor

Steven BirdDesigner

Natalie CrokerGraphics artist

For advertising details,contact: Ceri Williams on+44 (0)20 7775 6321, emailceri.williams@ft.com.All FT Reports are availableon FT.com at ft.com/reports

Contributors »

Emerging economies areslowing, but they are stillproducing better growththan the developed world

4 ★ FINANCIAL TIMES THURSDAY NOVEMBER 28 2013

Private Banking

Five years after the collapseof Lehman Brothers, theworld’s investment bankersare still suffering from thehangover – but finding sol-ace in a switch to privatebanking.

With hundreds of thou-sands of lay-offs, the finan-cial services industry hasoffered few safe havens forinvestment bankers whohave either been fired orare living with the axe hov-ering above their jobs.

Even now, while eco-nomic improvement liftshirings in some areas, fir-ings are continuing, withdeclining mortgage lendingand soft fixed income trad-ing.

However, private bankingand wealth managementhave become a familiarhome for investment bank-ers, as their skills areincreasingly relevant to amore knowledgeable client.

Over the past year, Citi-group, the third-biggest USbank by assets, has trans-ferred some of its high-profile investment bankersinto the private bank.

Eduardo Martinez-Campos, global head of

investments at Citi PrivateBank and So-Yon Sohn,head of investments forAsia Pacific, both movedfrom the capital marketsbusiness in the past year,the bank says.

Mark Mason, chief execu-tive of Citigroup PrivateBank, says: “With newemerging wealth, there hasbeen increased interestfrom clients in having prod-uct expertise.”

The continuing growth ofprivate wealth is creatingopportunities for theworld’s financial advisers.

By 2017, global privatewealth could reach $171.2tn,as Latin America and Asianhigh net worth individualsdrive growth, says BostonConsulting Group (BCG).

As a result, western pri-vate banks are boostingtheir expertise overseas.

Morgan Stanley recentlysaid that its Japanese jointventure would take a major-ity stake in partner Mitsubi-shi’s wealth managementbusiness, underscoring theexpansion that banks see inAsian private wealth.

As the segment swells, itis new money that is driv-ing growth. New wealthwill account for about 80per cent of growth for pri-vate banks until 2017, fac-toring in moderate assetreturns, according to BCG.

The source of that wealth

is also changing, withentrepreneurship becomingthe dominant factor.

For financial advisers,that has brought a bigchange in the understand-ing that clients have con-cerning the management oftheir finances.

“For a wealthier client,their individual and per-sonal needs often blur withtheir institutional needs –that’s what an investmentbanking professional canbring,” says John Mathews,head of private wealth man-agement at UBS WealthManagement Americas.

Underscoring the chang-ing face of clients, technol-ogy entrepreneurs haveaccumulated their moneymore quickly than thosewith interests in other sec-tors, according to analysisfrom Barclays Wealth andInvestment Management.

The financial crisis hasalso changed the behaviourof many wealthy clients,bankers say. Such peopleare keeping a closer eye ontheir money, as well asdemanding more from theirprivate bankers.

“Clients are morehands-on in terms of howthey think about theirwealth. Hence, the rise infamily offices in recentyears,” says Citi’s MrMason.

Bank executives also saythey have moved furthertowards a team model forfinancial advisers, asopposed to individuals serv-ing clients’ needs. Havingformer investment bankerson the team can help.

“[Wealthy clients]demand so much more, theonly way to deliver that isto have different specialistson their teams,” says MrMathews at UBS.

Emerging competitorssuch as Wells Fargo are hir-ing thousands into theirbrokerage, private bankingand retirement business,creating a more competitivejobs market.

Executive search firmssay the trend of hiringinvestment bankers into theprivate banks has beengoing on for some time,reaching its height immedi-ately after the financial cri-sis.

“Private banks are keento tap into the products ofan investment bank, as cus-tomers become more sophis-ticated,” says WilliamFoley, partner at HammondPartners, the executivesearch firm, in London.

“Having technical privatebankers is also a bonus forthe investment bank, as theprivate bank is an obviousarea for them to distributeproducts to,” he adds.

But John Thiel, head ofUS wealth management andprivate banking for MerrillLynch Global Wealth Man-agement, does not thinkinvestment bankers alwaysmake the best fit for wealthmanagement, as they canbe more focused on transac-tions than relationships.

“If you get too focused ontransactions, you candestroy the relationship,”he says.

Investment bankstaff find havensfrom lay-offs

It is hardly likely to trigger an out-pouring of sympathy, but globalbanks and wealth managers arewarning that a sharp increase inregulatory requirements is one of

the biggest challenges they face in thepost-crisis environment.

Banks say they are being bom-barded with complex and time-consuming compliance requests fromregulators, which are costing themtens of billions of pounds.

While few dispute that regulationwas too lax before the crisis – anopportunity that many banksexploited – institutions say a tighten-ing of the rules needs to be balancedagainst efforts to foster a recovery.

Some critics fear global regulatorsare taking too retrospective a view –

burdening banks with onerousrequests that are aimed at tacklingpast problems, such as high leverage –rather than focusing on where thenext risks could emerge.

“Regulatory change is the singlebiggest challenge facing the wealthmanagement industry,” says DavidWilson, head of strategic analysis atCapgemini Financial Services, theconsultancy.

“The volume, breadth and long-termimpact of regulations are significantlyaffecting the top and bottom line forfirms, at a time when the industry isstill dealing with thin margins afterthe crisis years.”

Mr Wilson highlights the differenttypes of costs linked to tougher regu-lation. First, he says, are the direct

costs that come from hiring morecompliance staff, producing more doc-umentation and upgrading IT sys-tems.

Then there are a number ofindirect costs, such as the loss of reve-nue, as wealth managers are morerestricted in the types of productsthey can sell and in the way theytreat clients.

In addition, says Mr Wilson, wealthmanagers need to be braced for morepunitive fines if they are found tohave breached the tougher compli-ance rules.

“The cost of non-compliance hasbecome very significant, both in termsof fines and costs for putting mistakesright, but also in terms of reputa-tional damage,” he says.

There has been a spate of recent bigfines on banks, and analysts say thepenalties from regulators haveharsher.

“Banks have been fined, not justfor actual misconduct but for notbeing able to give proof they havecomplied,” says Christine Ciriani, apartner in the Geneva office of Capco,the financial services consultancy.

She says the tougher compliancerules require an entire change in cul-ture. “It used to be the case that aslong as banks could show they haddone their best to manage risks, theyshould be OK.

“Now they have to prove . . . theyhave done controls. That requireshuge investment to put systems inplace to capture an act they may

always have done but couldn’t prove,”says Ms Ciriani.

She says these developments meanbanks are likely to reassess the kindsof operations they do in-house.

Whereas, before the financial crisis,compliance costs would typicallyaccount for about 10-20 per cent ofthe money set aside each year forinternal investment, that has nowrisen to about 50 per cent, says Capco.

That expense, as well as increasednervousness about fines, hasprompted some big global banks tooutsource parts of their business tospecialist companies.

Banks are also leaving markets.This year, Lloyds Banking Group

sold its international private bankingarm to Swiss wealth management spe-

cialist Union Bancaire Privée, forexample, while last year Bank ofAmerica Merrill Lynch merged part ofits wealth arm with Julius Baer.

Capgemini’s Mr Wilson says bankswill also attempt to combat the highercosts by imposing new demands onclients, such as minimum account bal-ances, and limiting face-to-face adviceto customers with larger portfolios.

“Overall, it will be increasingly dif-ficult for firms to offer all services toall clients in all markets,” he says.

“Future leaders of the sector arelikely to be agile firms with nicheofferings and large firms thatcan . . . use the compliance challengeas a catalyst for a more strategictransformation built around tech-nology and process innovation.”

Tighter ruleslead institutionsto restructureRegulation Compliance can put pressure onalready squeezedmargins, writes Sharlene Goff Testing times: new regulations following the collapse of Lehman Brothers are

‘the single biggest challenge facing the wealth management industry’ PA

Recruitment

The newly wealthyare lifting demandfor specialist advice,writes Camilla Hall

Clients aremore hands-on when theythink abouttheir wealth –Mark Mason

New regulations will have a particularimpact on banks in Europe. KPMG, theaccounting firm, identifies 10 keyregulatory reforms facing the sector in2013. These include:

Capital EU directive CRD4, whichimplements the global Basel IIIstandards for capital reserves, and theFinancial Stability Board’s capitalsurcharge rules increase the amountand quality of capital banks must holdagainst their assets.

Liquidity Banks must hold more liquidassets to meet a potential run onfunds. KPMG says an extension to the

range of assets qualifying as highquality liquid assets may easeconcerns.

Customer treatment A series of newrules – from the European Mifiddirective to the UK’s Retail DistributionReview – aim to ensure customers aresold suitable products.

Systemic risk European banks,particularly, will be affected by newproposals to reduce risks to financialstability, including the structuralreforms proposed by the UK’sIndependent Commission on Banking(ICB) and the EU’s Liikanen report.

Called to account European banks in line of fire