Private bankers face bleak future
Wealthy clients are reconsidering their use of advisers
After suffering bonus cuts of 30% to 40% and helping angry clients through portfolio losses, private bankers face a yet bleaker future.
Taking account of the market slump, analysts say the assets of the wealthy have fallen in value by a quarter to $30 trillion (€22.6 trillion) at the end of 2008 from $40.7 trillion at the start of the year, based on calculations by advisers Merrill Lynch and Capgemini.
The pot would fall further after stripping out family assets, including businesses and family homes, which fall outside the clutches of private banks. Ed Jewson, chief executive of consultant Jewson Associates, said clients are starting to reconsider their adviser options following performance assessments.
The slump has reduced ad valorem fees earned by asset managers in the wealth arena, triggering problems for boutiques.
Retrocession payments that asset managers make to private banks for places on distribution platforms have been scrapped for ethical reasons, or reduced due to market conditions.
Structured product sales, which used to attract a large fee, and a hefty spread, have slumped. Hedge funds and equity products are selling, but only slowly.
Even the quality of income from equities is under scrutiny following dividend cuts. Rating agency Standard & Poor’s said the cut in US dividends totalling $77bn in the first three months of the year represents the worst quarter since 1955.
Fees from bond and cash products are low. Attempts to use gearing to secure better returns have received mixed reception, following problems for money market and structured bond funds last year, during the credit crisis. Members of AIG action groups are threatening to sue advisers over the erosion in value of its enhanced money market fund.
Confidential settlements with clients are taking place and errant advisers are being ousted. Advisory fees charged for the reorganisation of portfolios are likely to fall this year, amid confusion over where cash should be invested.
Banks that secured a decent profit last year from spreads on low-yielding deposits, as well as loans, are facing harder times, with interest rates at rock bottom levels. Borrowings from Lombard loans, secured on investment portfolios, are being less frequently accessed. The average fall in the size of loan books at large Swiss banks in the second half of the year was 10%, according to analysts.
Private banks are also under pressure from their owners, shareholders and regulators to avoid rewarding individuals for failure. The pressure is particularly strong on banks rescued by governments.
Fallout is expected to hit offshore banks, including private banks based in Switzerland, now G20 global leaders are determined to increase their tax take.
UK private bank Kleinwort Benson had to fight to secure 2008 bonus payments after its owner Commerzbank, backed by the German Government, said it preferred a “no bonus” culture. Bonuses 35% below levels in 2007 were eventually agreed. One headhunter said: “I would say we are generally looking at bonus cuts of 30% to 40% compared to last year.”
Shaun Springer, chief executive of recruitment consultant Napier Scott, said private bankers fared better than their colleagues in investment banking last year. Overall banking bonuses in London were down 62%.
Springer said the averages calculated in his latest survey of opinion hid a wide differential between the best and worst producers: “I would say it is wider than it has ever been.” The difference in average packages at top-tier UK-based banks – £295,000 (€326,000) at executive director level – compared with the second tier – £220,000 – is narrower.
Nick Dogilewski, a recruiter at Omerta Group, said: “Top rainmakers would be expected to earn packages of around £1m a year. But there are not likely to be more than three in any one firm.” Springer said top producers in the Middle East did particularly well last year.
James Gorman, co-president at Morgan Stanley, has consistently argued that the wealth industry’s biggest challenge involves establishing a meritocracy to eliminate poor-quality producers.
One analyst said: “Weeding out underperforming advisers and reducing back office costs is not a simple task.” He said it needs to be attempted, with cost-income ratios at Swiss banks set to rise from 65% to 70% this year.
A headhunter said: “A number of lateral hires who entered the industry from other professions last year, like sports stars, ended up failing to make the grade, and have now left. Just because you know your peers does not necessarily mean you can win business from them.” People hired at the peak of the market have struggled to meet expectations.
Reto Jauch of Reto Jauch Associates, based in Zurich, said few sectors grew faster during the credit boom than private banking, due to rapid growth in wealth generation. Now the market has gone into reverse, executives are more cautious. Jauch said: “In future, the bonus part of salaries is likely to be much more based on shares with a longer vesting period rather than cash.”
EFG International, one of Europe’s fastest growing listed wealth advisers, recently told its advisers that a quarter of their 2008 bonus will be paid in restricted stock, exercisable over three to five years: A spokesman said: “We have modified profit participation arrangements to include a higher proportion of long-term equity to reinforce the prevailing long-term mindset.”
Apart from cutting bonuses, large banks are also tending to increase the long-term equity element. At a senior level, equity incentives are tending to be deferred over three years.
Top management at UBS will suffer bonus clawbacks over three years if risks taken fail to deliver. Cash compensation will be deferred and 75% of their equity incentives must be retained by executive directors for eight years.
Advisers who dislike the increasingly tough regime are considering quitting, particularly if the bank for which they work is tainted by backing investment scandals, typified by Bernard Madoff.
One headhunter said the industry was on a steep learning curve: “It may well suit an adviser to sit tight amid the uncertainty, and learn all they can about changing regulatory requirements before moving to a new firm.”
He added few banks are interested in taking on teams of advisers. RBC Wealth Management and Deutsche are among a small number of recruiters. Private banks such as Julius Baer and EFG, active recruiters during the boom, have cut back their hiring programmes.
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