In pursuit of success on a silver platter

By Ian Fraser

Published: Sunday Herald

Date: October 3rd, 2004

Despite a drive by high street banks to corner the market in financial advice to the rich, independents still rule. By Ian Fraser

IT seems like a no-brainer. Private banking, meaning looking after the banking and investment needs of Britain’s growing ranks of wealthier customers, has long fascinated the UK’s high street banks.

If the banks can somehow persuade their rich clientele to switch to a more sophisticated but higher-charging banking platform — offering a mix of trusted advice and fund management over and above traditional current accounts — then it would make for even more profitable business.

Customer loyalty and the ability to cross-sell a range of financial products should also be greatly enhanced.

There are, of course, a few strong long-established players in the market including Barclays Private Clients (which now also includes leading private client stockbrokers Gerrards) and the two Royal Bank of Scotland subsidiaries, Coutts & Co (founded 1692) and Adam & Company (founded 1983). There are also a few establishment private banks such as the family-owned C Hoare & Co.

Swiss banking giant UBS is building up a significant presence in the UK market through the acquisitions of Global Asset Management, Laing & Cruickshank and independent financial advisers (IFAs) Scott Goodman Harris. It has hired 130 private bankers since setting up in the UK in 2000.

Yet despite the best efforts of retail banks to target the UK’s “mass affluent” (people with investible assets of more than £100,000) and “high net worth” individuals (people worth £250,000 excluding their home), research shows that IFAs have tightened their grip on the market.

Findings from Tulip Financial show that 40% of the UK’s high net worth individuals use an IFA, with stockbrokers the second most influential advisory group, used by 29% of such customers. Accountants (18%), were next followed by private client fund managers (11%), with only 6% using private banks. About 32% of respondents said they use no adviser

Another survey from Market Dynamics Research & Consulting (MDRC) shows many potential customers are reluctant to sign up with private banks. Richard Williams, an MDRC director, said:

“Our results suggest the marketing strategies, brand development and distribution mechanisms of the wealth management and private banking industry are impeding the take-up of their products and services. The practice of rebadging standard financial products to offer to the high net worth individual does not seem to have met customer needs.”

Michael Maslinski, of consultants Maslinski & Co, said:

“The obsession with managing by targets can lead to a very crude and unsubtle approach. The likelihood is that people are just trying to sell a product. If you pose as an adviser and then start selling, people aren’t going to like it. There will be an erosion of trust.”

This problem may face players such as HBOS, seeking to treble the size of its UK private banking operations. Similar issues could face National Australia Bank as it stretches its Clydesdale Bank brand into UK private banking. Bank of Scotland Private Banking (BoSPB) has 40,000 customers but has earmarked 100,000 existing Halifax customers who meet its criteria. These people will be invited to transfer to BoSPB.

Generally, however, it seems the lessons of the dotcom bubble have been learned. At that time high street banks were falling over themselves to cater for the financial needs of the “mass affluent”.

John Evans, editor of Lafferty Group’s Private Banker International, said:

“Since the crash, a lot of organisations have pulled out , with even giants like Merrill Lynch falling by the wayside.”

A combination of loss of trust in financial institutions, reduced consumer appetite for risk and mounting mistrust of US institutions because of dubious practices in the US IPO market, meant the enthusiasm of customers with around £100,000 to invest was severely dented.

Many also had poor experiences with banks that purported to cater for their needs. Merrill Lynch’s internet-based joint venture with HSBC was terminated in 2002 amid substantial write- offs. Merrill also scrapped plans for a regional network in the UK. The offices, including one on Edinburgh’s Castle Street, were shut after the four-year experiment turned sour in 2002. Most of the staff defected to private client asset managers Rathbones.

Other doomed ventures included Lloyds TSB’s Create, an “offset” account marketed to people with incomes of more than £60,000 or liquid assets of more than £100,000. Lloyds sought 250,000 customers but got only a few hundred takers. The plug was pulled within six months.

PBI’s Evans said:

“Many million of dollars were spent on the mass affluent. But nobody really cracked it. Today the mass affluent thing is really history. The economics never really stacked up. You cannot have a group of very well-qualified private bankers handling the investment needs of people with £100,000 or less to invest.”

The banks are now much more focused on profitablility and are instead looking to high net worth individuals. MDRC’s Williams said: “The numbers of high net worth individuals has recovered nicely to an estimated 470,000 in the UK, broadly the same level as it was in 1999.”

Recent research from Merrill Lynch/Cap Gemini showed the number of people in the UK with £550, 000 to invest jumped 8% in 2003 to 383,000.

But Williams warned: “A lot of customers became risk averse after 2000. But they’re now recognising they could be earning more from their investments.”

While some US players have gone home to lick their wounds after the dotcom debacle, some industry observers believe they have led UK players to shake off traditional approaches. Maslinksi said:

“There is now a greater focus on absolute return strategies, rather than benchmarking the market. They also introduced a more sophisticated approach to risk management and the notion that portfolios should be widely diversified, rather than simply invested in long equities.”

Even a “conservative” player like Coutts has today piled more than £3 billion of its clients money into riskier alternative vehicles, such as hedge funds.

Lessons have been learnt and as the numbers of wealthy individuals continues to rise in the UK, private banking could prove a goldmine for the banks that can find the right formula.

The PAM Top 10 by assets under management, 31/12/03

  1. Barclays £27.4bn
  2. Coutts & Co £21.7bn
  3. Brewin Dolphin Securities £14.2bn
  4. Gerrard £13.0bn
  5. Merrill Lynch £10.4bn
  6. HSBC £10.2bn
  7. UBS Wealth Management £9.9bn
  8. Lloyds TSB Private Banking £9.5bn
  9. Goldman Sachs Intern’l £8.0bn
  10. = Charles Stanley & Co £6.8bn
    = Rathbones £6.8bn

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