Walter Stresemann, Founder and Managing Director of Magnolia Private Office, a trust and fiduciary company in Geneva, analyses the new challenges and opportunities the private banking sector is facing.

What is a private bank? We usually use the term for any corporate body specialising in wealth management for High-Net-Worth individuals. The original definition, however, meant unincorporated banks – those owned by an individual or partners with unlimited liability, and therefore unlimited personal responsibility. Not banks, but bankers.

While only one of these ‘banks’ still exists – Bordier & Cie – this old definition still gets to the heart of what private banking should be about today.

Gone are the days where a client needs help accessing basic investments – anyone can now stash their money away to be run by a simple trading algorithm. Instead, the private banker must adopt a ‘family office’ approach, providing highly tailored advice to address myriad client needs, and matching the client with the most appropriate services from their networks, such as product experts, financial planners, or tax specialists.

Digital Transformation

Digitisation is surging forward. Some 85% of HNW and UHNW individuals use at least three mobile devices. They expect to be able to scan their investments and banking services at a glance, seamlessly and in real-time, on their tablet, smartphone, or computer. More than half of HNW clients over the age of 40 say they would leave their private bank if an integrated, seamless channel is not provided, and the next generation will be no less demanding.

Serving this client base effectively requires open architecture enabling collaboration between providers of diverse products and investments from equities to real estate to works of art, sourced from the banker’s or client’s network, all available within one secure digital experience.

Wealth managers are acutely aware of the apparent drawbacks of ‘going digital’: in a recent survey, more than half were concerned about being able to present data intuitively and provide clients with genuinely useful oversight. However, COVID-19 has required most clients to embrace, or at least experiment with, digital channels. Clients who might have previously dealt with their banker in person, on the phone or via email now, are now embracing more of the bank’s digital offering, thanks in large part to the requirements of the extended COVID-19 lockdowns. This means they have heightened expectations of digital-enabled private banking even after the pandemic is over.

All that said, the wealth manager who maintains a genuinely holistic view of his clients’ interests will continue to thrive in a digitally-enabled future. Personal contact, and the ‘trust factor’, are not going away – they may indeed become more important. Right now, for example, clients are confronting a host of very personal uncertainties created by COVID-19, ranging from place of domicile (where is genuinely ‘safe’?) to inheritance planning.

Clients increasingly also want access to private markets, and to dip into investments otherwise touched by private equity. The pandemic has given this a renewed salience, with a drive to hedge unstable equities and low-yield debt. These are all investment and ‘real life’ decisions best guided by the steady hand of a trusted adviser.

Expertise is still highly valued, but it needs to be well delivered.

Genuinely differentiated ‘human’ expertise was already in demand long before COVID-19. Clients themselves are increasingly savvy. Usually, they grew up with better access to information, and wider consumer choices, than their parents. They demand transparency, wanting to know exactly what they are getting for their money. They negotiate fees, with a keen eye on what competitors have to offer. Old loyalties have given way to a demand for ‘client experience’, with 45% of millennials saying they would regularly switch to alternatives in search of the best solution. So expertise is still highly valued, but it needs to be well delivered.

Structural Changes

Compliance costs represent another pressure on the sector. They currently consume 4% or more of revenues, with some warning that this toll could rise to as much as 10% in the coming years for firms who cannot enact the right efficiency savings.

Global anti-money laundering rules, spearheaded by the intergovernmental Financial Action Task Force, have been criticised as the world’s least effective policy experiment, with the amounts of laundered money seized utterly dwarfed by the costs passed on to banks and other businesses. Common Reporting Standard regulations, while yielding mixed results in the global battle against tax evasion, have burdened private banks with analysing the residence status of their clients. MiFID II has created costs as well.

All of these pressures serve to drive sector consolidation – the word on everyone’s lips for the past decade. Nowhere is this clearer than in Switzerland, with the number of independent banks primarily involved in wealth management reducing by 31% between 2010 and 2017.

The costs of servicing an increasingly global client base are also tangible. Once upon a time, Swiss bankers could expect many of their clients to come to them from abroad. Nowadays, more and more HNWIs are based in the Asia-Pacific region, forcing Europe’s more intrepid wealth management businesses to make inorganic acquisitions overseas.

In search of revenue growth, some private banks are working their way down the value scale, not to UHNWIs or HNWIs, but ‘mass affluent’ individuals with one to five million dollars in assets. What they can really offer to such clients is not always clear – is the move just a number-boosting ploy, to get more AUM on their books? If so, private banks are probably heaping more pressure on their own profit margins, since ‘mass affluent’ clients seem to be less loyal than their wealthier counterparts, adding to retention costs.

Private banks can only hold off from confronting these challenges for so long. Differentiation is surely the way forward: a ‘family office’ approach, in which wealth managers exit less profitable parts of the value chain such as custody, and focus instead on high-quality advice, good networks, and enabling the digital access and remote service that clients now expect. The private bankers able both to master the technology ecosystem and to maintain their ‘human face’ will be the ones who thrive in the years to come.