WealthBriefing recently held its inaugural Breakfast Briefing, “Towards Best Practices in Private Banking” with ERI Banking Systems, Ernst & Young and SG Hambros at Threadneedles Hotel in the City of London. The event was attended by an invited audience from the wealth management industry and was chaired by Stephen Harris, WB editor.

Ian Woodhouse, director Ernst & Young Financial Services, presented on market trends and looked at the positioning of players, providing an insight into the emerging new business models in the industry.

Focusing on what he termed the emerging cross-border model, Mr Woodhouse spoke about rapid change in the industry and major performance gaps, concluding that traditional siloed and high cost models are unsustainable, particularly in a bear market.

According to Mr Woodhouse, there are some fifteen models for change in private banking. He made the point that private banks are increasingly tied to the equity cycle, that globalisation is occurring at a fast pace and that change has been dramatic.

He noted that not all firms have been equally successful in the midst of this change and whereas those private banks at the upper echelons were achieving margins of 100 bps with a cost:income ratio of less than 60 per cent, those at the bottom end still have cost:income ratios of more than 70 to 80 per cent and are achieving margins of more like 70-80 bps.

“You don’t have to be big to be successful, just excel in three or four areas”, said Mr Woodhouse. “The sector has the biggest gaps in performance of any financial services sector, which is an opportunity for those that wish to take it. We are in the midst of a long bull run, but in the last bear market, profits fell 20 per cent.”

Mr Woodhouse believes that gaps in performance can be attributed to the fact that duplication has a high cost and traditionally private banking operations are siloed according to country, with multiple locations, systems and entities and high people costs.

He told the morning session that models in the industry are changing and becoming less duplicative, which is in turn decreasing the cost:income ratio:

“Models are moving from a siloed approach to a more horizontally shared model, with globally consistent processes, client verification processes shared across geographies and standardising across product provision. Companies have started to standardise elements such as performance tracking, asset allocation and create centres of excellence or Trust and investment management,” said Mr Woodhouse.

According to Mr Woodhouse, private banks are adopting different options depending on their situation and the timeframes within which they wish to implement new approaches. These extend from continuous improvement, to planned roadmap to big bang. Each approach has attendant risks attached, which increase with the speed of delivery.

Mr Woodhouse pointed to a number of elements which need to be addressed and said that looking at the top 40 global wealth managers, the mid-size Swiss banks are increasingly taking a horizontal approach.

He also identified a number of critical success factors, the most crucial being buy-in and vision from the top team.

Jean-Pierre Flais, chief operating officer of SG Hambros Bank & Trust provided a case study from his own firm’s experience, which demonstrated many of the methods and critical success factors put forward by Mr Woodhouse.

He provided an illuminating overview of how Société Générale has implemented a cost-effective, cross border solution for its processing for SG Hambros, the “Anglo Saxon” arm of the private banking business.

Mr Flais said that SG Hambros has £7 billon in assets under managerment and 500 staff across banking, investment management, tax planning and fiduciary services and is located in London, Jersey, Guernsey, Bahamas and UK regional offices. He described optimising the operating platform as a “radical and risky process”.

Mr Flais admitted that the initial trigger for the solution was defensive and that in the 2003 bear market it was important to reduce the cost:income ratio and make savings for shareholders.

He emphasised the importance of clearly determining objectives and the scope of the project at the outset, along with a clear path to achieve these objectives. The solution SG Hambros implemented was a combined one, including not just IT but legal, back office and processing.

Referring back to Mr Woodhouse’s presentation, Mr Flais described SG Hambros’ approach as “phased roadmap”. He explained how the business went from over ten autonomous legal structures to a flatter, more rationalised legal structure of four banks and two trust companies.

The process also included implementation of a common IT structure based in Jersey; a single trust structure in all locations from four and “neutralizing” the support function between trust and banking. Looking at the success of the project, Mr Flais said:

“The results have been a significantly reduced cost:income ratio (from 82 per cent to 70 per cent, including investment in the business) and a fifteen per cent saving on operational and back office costs. Our main achievement was the ability to absorb more volume of business as revenues have grown, so we are ready for acquisitions. It also enables us to address challenges such as Basel and MiFID more efficiently.”

SG Hambros has recently acquired ABN Amro’s UK private client business. Mr Flais said that one of the unexpected benefits of the project was the ability to create a common harmonised platform which was able to absorb and accommodate new business, such as that created by the ABN Amro acquisition.

Echoing Mr Woodhouse, Mr Flais pointed to a number of success factors, referring to effective management and governance and the importance of a strong management drive which is not diverted or distracted, particularly where a phased approach is adopted. He also referred to efficient handling of technical issues including migration planning, post-live hand holding including training staff and upgrading of communications links. Mr Flais emphasised the importance of the ease with which new structures and processes can adapt to different offshore regulatory and compliance environments.

“Change management systems are about people as much as structures and systems,” Mr Flais said. “Internal communications and consistency of message are vital.”

Mr Flais told the audience that a functionalised rather than a centralised approach has also helped with getting “buy-in” locally as not all group functions are based in London. He revealed that the next steps are to extend the approach from SG Hambros across all of SG Private Banking. Even with the best-laid plans, it is important to be flexible:

“What happens is always the unexpected”, concluded Mr Flais.

The presentations were following by a lively questions and answers session chaired by Stephen Harris.

The presentations are available as video and audio downloads by clicking here.