Private Banks Should Become Creators, Not Just Managers of Wealth

Stephen Harris

2 June 2008

Last year I wrote an opinion of the week in which I contended that wealth managers should focus on their core activity, investment management.

At the time my view was countered by, amongst others, William Drake of multi-family office Lord North Street, who wrote an excellent opinion saying that I had misunderstood the wider role of the investment advisor – a piece that remains one of the best read ever on WealthBriefing.

Since writing my original piece it has become very obvious to me, and many other commentators with whom I discuss wealth management issues, that having a first rate investment proposition is absolutely necessary but not sufficient for a successful business in an increasingly competitive world.

As I meet managers of wealth in the world’s major centres I’m always struck by how similar they sound when describing their proposition. Without fail, they all say they are customer focused, as if the usual state of affairs in the industry is to be focused on something else. They all say that they operate in an open architecture environment with no product pushing. The “sweet spots” of net worth they seek to attract fall into two or three distinct bands. It’s worrying that those at the top of these organisations really do believe these to be unique positioning statements.

The problem of differentiation is one that marketing folk in private banks no doubt spend much time and effort trying to solve. But the result of their descriptions of their relative offerings leaves potential clients struggling to tell them apart.

And as Arvetica Consulting’s insightful recent study into private banks’ marketing shows, not only is much that is written to describe offerings practically interchangeable, but the vast majority of the language used is couched in terms of “we” “us” “our” and very rarely mentions the client first and foremost. We all know the most notable exception to this trend!

Not only does this marketing faux pas transgress the first rule of marketing, it also gives an insight into the innate conservatism and introversion of the industry.

In last year’s opinion I was, in effect, encouraging this attitude. Stick to what you know best, do this well and you’ll be bound to succeed I wrote.

But now I don’t think this is good enough. For sure those businesses that don’t have a solid investment proposition will fail when times get tougher and clients start to question why they should be paying what may seem to many, to be relatively high fees.

In a future environment in which even wealthy clients may start to ask the question “why do I need a wealth manager?” or “should I really be relying on a private bank to be a wealth manager?” private banks should perhaps re-consider a root and branch review of the range of services that they provide.

I don’t mean tinkering though. Forget just extending the range of alternative asset classes on offer. Forget another structured product or segmenting clients in yet another new way – something radical is called for.

But what? Well, in all my travels, private bankers often assure me that although there are entry point criteria, these are not set in stone. If someone of promise, perhaps a young entrepreneur, comes along they will be welcomed with open arms.

This of course makes perfect sense – get them whilst they’re young and they may turn out to be a customer for life, entrusting to the wealth manager the fruits of their labour when their liquidity event occurs.

And this is all very well, but the services on offer to these high and ultra high net worth individuals of tomorrow tend to be restricted to little more than a personalise retail service with the promise of wealth management when the time is appropriate.

A reappraisal of this relationship could lead to one of the proposition extensions mentioned above. What a promising entrepreneur needs above all else is access to capital. And the more promising the idea or the business plan, the more the entrepreneur is loath to forsake equity in his enterprise. So debt financing will always be the preferred route if non-usurious terms can be secured.

It seems to me, and other commentators such as Scorpio Partnership’s Sebastian Dovey, that this is where private banks could really make a difference to the future wealth of some of its most important clients and in so doing differentiate in a tangible and meaningful way.

New wealth creators don’t forget those who have helped them on the way up and are likely to be very loyal to an institution which has backed them with hard cash rather than just giving them a bank account. I am currently only aware of one private bank - a UK-base player - that has this service as part of its core proposition.

I’m not suggesting that private banks make an open-ended invitation to all comers to submit business plans for assessment and access to unlimited funds. But I would suggest that if banks have made the effort to identify some of the new business leaders of tomorrow, making an offer of modest unsecured lending to speed their businesses to the level at which the owners can benefit from wealth management services may not be such a bad idea.

I look forward to the day when I see a private bank proudly displaying in its marketing material the strap-line “managers and creators of wealth”. Such a bank would surely have the vision to thrive and prosper within a new investment management landscape.