Most private banks and wealth management departments claim to have an open approach, whereby they source the products they offer clients from a range of institutions. But few are fully open, and some don't even put up much pretence of adopting such an approach - which might not necessarily be a bad thing in today's turbulent market environment, say some.
The 'rule of thumb' regarding the relative openness of a private bank hinges on the relative strength of a financial institution's private banking arm compared with its investment bank, say market participants. For example, private banks that have no investment banking capability - such as Julius Baer or Banque Pictet - must adopt an open approach. And large wealth managers with investment banks seen as relatively weak in terms of product innovation, such as Citi and HSBC, tend to adopt a more open approach.
Meanwhile, US wealth managers with powerful investment banking arms - such as Goldman Sachs Private Wealth Management or Merrill Lynch Private Bank - are viewed as more closed than most, especially for high-margin products. "The US banks tend to be slightly more open on the flow products and more closed on the more sophisticated ones," says the structured products head at a European bank in Hong Kong. "For example, we presented one very innovative product to Goldman Sachs (Private Wealth Management), which they said they liked, but they didn't market it because they couldn't price it." Goldman Sachs declined to comment.
This more closed approach is not just limited to US securities dealers. A Hong Kong-based official at a European private bank says wealth managers will often tend to take products from their own group, since the relationship may well be stronger and checking quotes is likely to be quicker and simpler. She adds that a private bank's preferred product supplier will usually be its own group's investment bank. Indeed, she says 80% of her firm's wealth products are sourced internally and 20% externally. Rough, off-the-record figures cited by other private banks reinforce this point, with even those viewed as the most open sourcing around half of their products in-house and half externally.
In some cases the banking group will offer incentives for its private bankers to take products from their own investment bank arm, says one Hong Kong-based banker, although all the private banks Asia Risk spoke to said they do not have such a set-up.
Shutting up shop?
Nonetheless, it seems that some private banks might be moving towards becoming more closed shops, following the turmoil in the markets this year. "In order to protect their integrity, private banks need to close," says Mark Paine, managing partner at independent advisory firm Meyado Private Wealth Management in Singapore. "This may or may not suit clients, but it is part of this banking shake-up that is long overdue. Private banks should consider IFA (independent financial advisor) ties to maintain distribution."
Indeed, Todd James, head of structured products at HSBC Private Bank in Hong Kong, believes problems associated with gaining secondary pricing, along with heightened concerns about counterparty risk may push his firm - one of the most open institutions - to seek closer ties with the group's investment banking operation.
The decision to use external counterparties requires a thorough due-diligence process regarding counterparty selection and monitoring, says Adam Tejpaul, Asia head of global investment specialists at JP Morgan Private Bank (JPM PB) in Hong Kong. "Those that opened the gates to external providers without (using such a process) find themselves needing to revisit their exposures today," he says. "At JP Morgan, we deal with relatively few external parties and make decisions on an ongoing basis as to the quality of those relationships and the value they add to our clients."
JPM PB - winner of Asia Risk's inaugural private bank of the year award (see Asia Risk October 2008, page 43) - is "somewhere in the middle" in terms of being open or closed, says Tejpaul. The bank manages some $400 billion of assets globally, and focuses on ultra-high-net-worth clients, which it categorises as those with $25 million or more of liquid net worth. Where JP Morgan's investment bank has specialities or specific appetite for market risk, the private bank tends to buy internally. "But we don't do everything, and where we don't do things internally, we look externally to make sure we have every tool needed to implement our market views," says Tejpaul.
"Historically, one of the reasons as a private bank you looked to external issuers and structurers was to seek innovation," he adds. "That's becoming less so today - a lot of these structured products are becoming more and more commoditised. So now PBs are looking more for speed of execution and competitive execution in terms of pricing."
Speed and price are big differentiators, agree other bankers. "A lot of products need to be priced the same day, so we have turnaround in pricing of two to three hours now," says the wealth management head at a Hong Kong-based bank. The important thing is not whether a bank's architecture is open or closed, but the realisation that the bank has to be more competitive and more ready to diversify, adds the banker, whose firm focuses on clients of between $1 million and $25 million in net worth.
Ultimately, though, being a completely closed shop is not a viable choice, say private bankers. "In terms of the pros and cons of being open or closed, we don't see there's much of an option with high-net-worth (HNW) clients to be totally closed," says JPM PB's Tejpaul. "It's key to be able to offer them a full choice. There are limited options for being closed any more."
Others echo this point, even those that are widely viewed as among the least open. For example, Tony Stanton, chief investment officer for Asia-Pacific at Merrill Lynch Global Wealth Management (GWM) in Hong Kong, says: "There is no benefit to having a closed architecture - ours is totally open", referring specifically to the funds business. He cites the merger of the bank's investment management unit with BlackRock in 2006, saying the bank doesn't manufacture any fund products internally and is, by definition, open architecture. "Today we offer 600-plus mutual funds and 100 different hedge funds, virtually all of which are disassociated with Merrill Lynch as a manufacturer," says Stanton. He refrained from commenting on the structured products side of the business.
Merrill Lynch GWM manages $1.5 trillion in assets worldwide, but doesn't break down those figures by region. As for client size, the firm "typically looks at $5 million to $25 million in net worth as the sweet spot", says Stanton, but it doesn't set a rigid bottom threshold at $5 million. Merrill Lynch GWM also services ultra-high-net-worth clients - "essentially the billionaires", he adds.
The benefits to clients of buying from a firm that is ready to distribute products from any issuer are obvious, agree bankers. "Under an open product architecture, a private bank is able to move beyond in-house products developed by its group," says Tan Sing Hwee, regional chief investment officer at Societe Generale Private Banking (SG PB) in Singapore. "It has the autonomy to select and advise its clients on third-party products and services sourced from other financial providers, ensuring the most suitable products and strategies for clients." SG PB - which manages EUR73 billion ($93 billion) worldwide, around $20 billion of which were in Asia as of the end of September - has "truly open architecture", adds Tan.
Meyado PWM's Paine makes a similar point. "It's very difficult to give truly independent advice as a closed shop, as you can never, hand-on-heart, say you're going to have the best product," he says. What's more, some private bankers say it's now particularly unlikely they would be able to internally source all the products they would require, in view of the retrenching and major staff cuts being made across the financial industry.
In any case, private bankers may prefer to have an uncontrolled choice of products. One Hong Kong-based head of private bank coverage at a UK bank says: "A closed PB may give you a competitive advantage in some ways. But I know that that situation can cause a lot of unhappiness within the company, in that the investment bank might be feeding the private bankers products they don't like. I don't think there's a PB around that doesn't want access to more products, as they all have the same client demographics."
Citi Private Bank (Citi PB) says it has an open architecture and that 30-60% of products in clients' discretionary managed portfolios - that is, portfolios left largely to the private bank to manage - could be non-proprietary. Citi PB is a division of Citi Global Wealth Management (GWM), which as of September managed $1.53 trillion globally, $288 billion of which was in the Asia-Pacific region.
"We have one of the most open architectures you can find," says Jennifer Tay, Asia-Pacific head of portfolio counselling at Citi PB in Singapore, who covers the fund business, but not structured products. The firm has no plans to change its approach, she adds. Citi does not have an internal asset management arm, so has no incentive to use only Citi-managed products, says Tay. (In mid-2005, the bank swapped its asset management business for Legg Mason's broker-dealer business.) It looks for "best-in-class" managers in the different asset classes, be they traditional or alternative investments, she says. Citi GWM's structured products business adheres to the same open architecture model as its funds business, says a spokeswoman.
The bank does due diligence on all the funds it offers its clients, says Tay. "It is a portfolio counselling business," she says. "We advise clients on asset allocation and managed portfolios with a medium- to long-term perspective." Citi PB deals with clients with a minimum net worth of $10 million and services 26,000 clients globally, 6,000 of which are in the Asia-Pacific region. Tay adds that 'One Citi' a new cross-business management structure at the bank - brought in by chief executive Vikram Pandit - will make sourcing products and pricing them more efficient. Products under the structure are all sourced externally, says the dealer.
Investors, meanwhile, are cautious due to uncertainty in the financial markets and concerns about the financial viability of their wealth managers. Merrill Lynch GWM's Stanton says there will be a "back-to-basics approach" in the coming months that focuses on the portfolio/client structure and has a significant fixed-income asset allocation: a move from more risky to less risky assets.
JPM PB's Tejpaul says alpha has taken over from beta as the main aim of clients. "Ten years ago, most portfolios were driven by beta - so they were usually long equities and long bonds," says Tejpaul. "But recently people have sought more alpha, so hedge funds and private equity funds have taken over in portfolios more and more. As global markets fall to more depressed valuations, the balance between beta and alpha will find a more neutral level again."
But perhaps the most significant trend on the client side is the reduced level of trust in private banks, brought about by events such as the big losses many Asian clients took on so-called equity accumulator products at the turn of the year (see Asia Risk September 2008, page 42). And this is something that will not be helped by a move towards being a more closed shop. "Clients are concerned that PBs are more keen to retain money than care for them," says Meyado PWM's Paine. "Being closed will exacerbate this situation."
Clients are now demanding more transparency, he adds. "The banks are actually realising that clients might want to know what is happening to their money," says Paine. "Complex note structures will remain, however, and are easy to market, but if clients could understand the derivatives structuring they might not be so keen to invest. What I mean is that the market will and should be driven from the bottom up - clients will determine what level of information they require, not the banks."
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