As the credit crunch bites deeper and investors fret about their portfolios, it is more vital than ever for advisors to communicate as clearly with their clients as possible.

As recession bites, wealth management clients are thinking long and hard about how to handle their private banking relationships. According to industry experts, cynicism tends to be heightened where clients feel they have been sold products when what they’ve been looking for is advice.

However, there are specific qualities and services that clients are looking for in their private bank that can help to overcome the scepticism.

An obvious point in these tough times is forging and maintaining strong relationships with clients, as there is a risk that clients can potentially feel unloved and taken for granted.

“It’s at times like these when you “earn your corn” so to speak,” Phil McIlwraith, SG Hambros’ group commercial director for private banking told WealthBriefing. “Clients appreciate honesty, good advice. It pays dividends to stay close, to reassure and find solutions.”

Although banks are facing a difficult period, they need for the moment to focus more on client relationships and less on remuneration, according to consultant, Michael Maslinski.

Mr Maslinski observes that as private banking clients are finding the current financial turmoil deeply worrying, it is now that they most need help and advice. “This is therefore a great opportunity to build strong relationships. It is often said that you make friends in the bad times and make money out of them in the good times and this was never more true than now,” he said.

One key area of focus in ensuring that firms weather the economic downturn is in communicating with their clients. "How and where firms deploy their ongoing marketing budgets and the messages they communicate to high net worth clients will likely become more important in difficult wider economic conditions," Graham Harvey from Scorpio Partnership, said.

While the instinct for many firms is to slash discretionary marketing spending to save money, this is the wrong thing to do in the environment, as brand becomes an even more crucial means of differentiating between firms.

“We're seeing an increased demand in how to leverage client engagement as banks recognise the need to move beyond simply tracking customer satisfaction scores,” said James Lawson of Ledbury Research. He believes firms need to fine-tune how they communicate with clients so that it is a genuinely two-way process.

One firm that routinely comes top in client satisfaction surveys conducted by industry consultants is C Hoare & Co, the veteran

UK private bank. Its chief executive, Alexander Hoare, puts this down to the firm’s family-ownership, length of service and experience of staff, focus on client service and not trying to expand too quickly. He does not see the firm’s services, people or business model changing much in this recession.

Mr Hoare believes that the security the firm represents is key to its success. “Customers are attracted by the safety we offer: far from being a borrower on the money markets, we are a depositor into the Bank of England.  Our deposit rates reflect this lack of risk, and balances have never been higher,” said Mr Hoare. “Our first experience of recession was the [18^th Century]

South
Sea bubble and we've weathered every recession since."

Nader Goodarzi, who is head of wealth management, Ansbacher, agrees that wealthy individuals are currently adopting a safety first attitude. "Clients have become more interested in the instruments in which their investments are held and are concerned about credit quality."  

The fact that Ansbacher is part of Qatar National Bank, a sovereign bank and 50 per cent owned by the Qatari government, is a positive factor. “By virtue of our parent, we have a large proportion of Middle Eastern clients and they like to know who they are dealing with. A name they know instils them with more confidence," he said.

SG Hambros’ Mr McIlwraith said while clients have become more risk-averse across the core elements of their portfolios of equities, bonds and cash, within all asset classes, they have become more discriminating about who they use and how they allocate assets.

“Funds have a place, but clients are increasingly turning away from opaque structures. They prize transparency and liquidity and will be willing to forgo some of the upside for these features,” he said.

The industry has undoubtedly become more reliant on the sale of complex investment since the last recession and this has had the effect of undermining trust between clients and relationship managers as market volatility has become heightened and client assets have fallen in value.

There is a tendency for clients to be more sensitive to fees in an economic downturn. However, far from wanting everything for free “in many of the customer satisfaction studies we do, clients show little price sensitivity”, said Ledbury’s Mr Lawson. “What will be important is to ensure that clients know what the fees are today, not at the end of an under-performing year.”

Others believe that fees will come down as a factor of increased competition. "Firms will not be able to charge a premium just because they have a well-known name," said Mr Goodarzi, who also believes that the ability and willingness to provide credit in the difficult times can provide firms with a useful unique selling point.

"Credit is a scare commodity and we are judicious in the way we extend credit to the right clients. The lending environment now presents a different picture. Valuations have changed and it has become more difficult to value risky assets so equity to loan values have increased," he said.

Mr McIlwraith agrees. “The supply of credit is drying up rapidly. Those firms that have a balance sheet and have the capacity to lend for the right reasons have a great USP,” he said.

Arguably, one of the benefits of the credit crisis is that investment issues have become mainstream and clients better informed. Mr Lawson said successful banks will recognise that their days of information advantage are now gone.

“Clients know, or can find out, as much, if not more, than the private banks. The response to AIG products in the

UK has also showed how clients are communicating with each other, banks need to work with this dialogue, rather than try and suppress it,” he said.

A number of firms say clients have become savvy about counterparty risk and new clients increasingly ask questions about the firm’s balance sheet exposure.

“Tier one capital ratios are now headline news in the popular press and we think it’s good that clients are more informed about investment issues,” concludes Mr McIlwraith.

It remains to be seen which firms rise to the challenge of meeting the high expectations of their increasingly educated, demanding and sceptical client base in 2009.