Asset Management

Wealth Management: A test of competence - how families can assess their private banks

By Paul Golden

Campden FB's latest online survey has questioned families and family offices about their views on the private banking industry. The full results will be released in the autumn, but the uncertainty surrounding the sector is borne out in responses such as "we need more control and involvement" and "private banks have not invested enough in quality personnel."

One of the most telling comments was: "Bankers have no interest in clients anymore, only a self indulgent interest in derivatives and their own personal egos." There was also criticism of the ability of private bank staff to direct wealth holders: "Too many private bankers do not have the necessary level of competence to provide appropriate families with the necessary financial guidance," said one respondent.

Bruce Weatherill, formally global leader of PwC's private banking/wealth management practice for more than a decade before setting up his own consultancy in 2008, says with private banks increasingly looking at wealthy families and individuals as a distinct strand of their business change is coming. "There will be a big shake out in the industry as increased professionalism takes hold. Those who improve their offering stand to make a lot of money," he says.

The survey also asked for the single most important factor families look for when considering a private bank. Easily the most important answer was level of client service, followed by trust, quality of advice and range/quality of products/services offered. Interestingly, few were preoccupied with the length of their relationship with the bank and even fewer concerned by reputation or transparency. Privacy and confidentiality were taken as read.

In such an environment, therefore, how can wealth holders assess the competency of a private bank and its bankers with regard to these factors?

Bonny Landers, CEO of Hong Kong-based single family office Sterling Private Management and a former private banker, believes you need first to ascertain whether your private banker is really a private banker. She says: "It used to be that if you were a wealthy individual you had someone in the private bank and that person handled your investments as though it were his/her own money. But in the past 10-15 years they have become the conduit through which banks showcase their products and put them into clients' portfolios."

According to Landers, a lot of families have suffered as a result of this approach and she is concerned that the banks have not learned the lessons of the downturn. "Even now, some of the private banks are going on a hiring spree and bringing in people who really aren't what a private banker should be," she explains.

The extent to which private bankers really understand the requirements and investment preferences of wealthy families can be gauged in a number of ways. For example, the family should ask for a proposal and thoroughly examine its contents to see whether anyone was taking note of what they asked for.

According to Jane Abitanta, founder & principal of consulting firm Perceval Associates, this is a huge problem in the private banking sector because managers don't listen well. "Often this because because they feel they know the answers and because they are so pressured for time," she says.

Her advice to wealthy families is to ask for due diligence materials and references – and to make sure they are properly checked. She also advises families to carry out background checks on all their investment managers.

A further solution is for families to engage an independent adviser to help them. Dr Gregor Broschinski, head of private wealth management at Sal Oppenheim, says the input of such advisers can help clients obtain an impartial view of the bank's capabilities and credentials.

However, Weatherill warns that there is a dearth of such experts who can objectively measure the quality of the advice families receive from their banks. He says it is also hard to source comparative data at the ultra high net worth level because all portfolios are different. As a result, many are increasingly turning to legal advisers for guidance.

But Broschinski says a wide range of data can be made available to wealthy families. "In addition to performance data, risk assessment indicators and costs are made transparent to the client. Furthermore, prognosis models provide important information on the asset behaviour in different market phases and serve as a sort of stress test. Parallel to the client portfolio, an ongoing external as well as independent survey and assessment of model portfolios is carried out by independent companies."

According to Chris Bevan, co-founder of Jersey-based trustee and corporate services provider BKS, while such data may exist, getting access to it is difficult. "There are lots of rating agencies one can turn to for information on the financial security and stability of a private bank. However, often you may not be exposed to the private bank but to some other third party, particularly where structured products are used," he says.

Broschinski says the shareholder structure and risk-bearing capacity is crucial to any assessment of the financial security and stability of a private bank. "Depending on the size of the bank, an independent rating is accessible. In addition, clients should question the business model of the private bank and whether it focuses only on private clients business or whether it also has a comprehensive credit business with corporate clients or investment banking."

It also needs to be recognised that families have different tolerances for risk; consequently, it could easily be argued that one cannot compare private banks' performance as they are often tailored to the special needs of a particular family. "The assessment of performance tends to be a subjective one, which is based upon how well the private bank listened and interpreted the families needs together with the style of service delivery," says Bevan.

Abitanta says the real issue is that very often families do not understand the advice and how it was put to use in their portfolios. She says US banks tend to be more forthcoming with data than their counterparts in Europe – and the larger the family assets, the better the data.

"For the individual family's portfolio, this data is not usually independently or externally verified unless the family assets are large enough. However, the family can ask for verification of the performance data quoted in marketing materials and whether it meets AIMR (Association for Investment Management and Research) standards," Abitanta says.
She says wealthy families should expect to dictate the level and frequency of communication with their bank depending on size of assets and profitability of the relationship, but that they need to be clear about what they want and need and must be willing to make reasonable demands. "I have seen many cases where families ask for very detailed reports all in the name of 'transparency' when in actuality, they may not really understand what they are asking for and how they will use the data," says Abitanta.

According to Weatherill, communication has to meet regulatory requirements but it should be much more often than that and include tailored reporting. "If you have had the family's money for three generations you probably don't need a monthly meeting and clients at that level tend not to churn their portfolios frequently anyway so they would not expect a full portfolio analysis every time they met their banker," he says.

Bevan agrees that the level and frequency of communication a wealthy family should expect from its bank is difficult to quantify. Quarterly reports are standard practice, but a call on a specific event might indicate that the bank was actually thinking about the family on an ongoing basis – even if they don't often get to meet the decision makers.

If the family assets are large enough and the relationship is profitable enough to the bank, the family should expect to have very senior contacts. But Abitanta is not convinced that the investment decision maker is the best person to act as the main point of contact. She believes that the family should have a senior contact they can go to when there are issues or they need something extraordinary, while the investment manager needs to be more readily available.

The disparity in performance of wealthy families' portfolios over the last few years has emphasised the importance of dealing with a reliable and competent private banking services provider. Those who take the time to do their homework on the institution, the people they might be dealing with and the performance data they generate will reap the benefits well into the future.

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