The effects of the sub-prime crisis on larger banks have created an opportunity for those in the wealth management industry that remain unaffected.

The effects of the sub-prime crisis on larger banks have created an opportunity for those in the wealth management industry that remain unaffected.

This is one of the findings of a report created from output from the Meeting of Minds event hosted by Owen James and Scorpio Partnership earlier in 2008 intended to enable wealth management industry leaders to work through the strategic issues facing the industry and put together an action plan for change.

“We are getting opportunities to pitch against the big names because we’ve come out of it clean,” said one participant.

“We weren’t on the radar until the big names got tainted,” said another.

The report also points to clients’ increased understanding and acceptance of absolute returns, which has led the previously sceptical to seek out wealth management advice and management as another advantage.

These findings support those of research published by Compeer and Advent Software this week which showed that the wealth management industry is experiencing strong growth and continued high levels of new business. The report said that prevailing market conditions were prompting clients to review their financial affairs, in turn opening opportunities for new advisors to take on some new assets.

But, according to the Meeting of Minds report, chief investment officers are more pessimistic than chief executives with regard to the impact that the credit crunch has had on their business.

Using a scale of 1-100, with 50 being the mean, if individuals marked themselves as more than 50 it was considered to be upbeat and less than 50 viewed a more downbeat perception. The CIOs scored themselves at 39 per cent whilst the CEOs scored themselves at 45 per cent - indicating that the CEOs were mildly more positive.

The report also found that mid-sized firms saw an increased challenge in having to convince clients that they did not offload their “toxic waste” to private clients. Another concern referenced was around increased regulation of investment banks possibly making it harder for them to innovate and achieve alpha returns.

Participants were asked to prioritise what they believed were the top three issues affecting the sector and their own firms.

Whilst performance of client portfolios was top of mind for CIOs, managing client expectations around performance in a low return environment was also seen as key.

Perhaps unsurprising given their differing roles, CEOs’ concerns were more closely related to strategic business growth, although reputation and trust post-credit crunch and ever present concerns around shortage of talent also figured highly for many.

Looking at those issues related specifically to their own businesses, CIOs were more strategic in their outlook. They expressed concerns about how their firms would meet ambitious growth targets without compromising performance and service levels for existing clients and grow funds under management in a “hostile environment”.

Regarding their own firms, CEOs were less concerned about achieving growth and more concerned with pedestrian issues such as regulation, attracting and retaining talent and IT.

Whereas the financial services industry has a tendency to an ostrich mentality in times of financial crisis, the report noted that on this occasion firms did “up the ante” with communications and successfully provided clients with a clear explanation of the sub prime crisis and how it was likely to affect them.
“It gave us an engagement with the client that we haven’t had before and we learned the value of being proactive,” said one CEO.

CIOs and CEOs have faith in their own business models and attributed the highest likelihood of growth going forward to private banks, both part of a group and independent, and family offices, over other business models including asset managers, stockbrokers, IFAs, intermediaries or life insurance companies. CEOs thought that private banks that were part of a group had the greatest likelihood of significant growth (44 per cent) and CIOs thought independent private banks were more likely to grow significantly (25 per cent).

However, participants acknowledged that currently, the industry is struggling to articulate itself.

When asked to define a private bank, CIOs responses varied from the glib - “An organisation which helps rich people get richer” - to the explanatory - “A private bank should be a discerning buyer of third-party investment products assembled in carefully structured portfolios to express asset allocations aimed at meeting clients’ financial objectives which in turn are congruent with their personal objectives. A banker’s remuneration should be tied to meet clients’ objectives. This is what a private bank should be but rarely is” - to the flippant: “Like a good hooker – anything you want me to be!”

CEOs responses were more focused on breadth and provision of a wide range of services, as well as the necessity of holding a banking licence.

According to the report, in order the achieve the growth that firms are looking for,  changing the image and reputation of private banking is crucial, particularly in light of criticisms of the wider industry where clients are questioning how banks can look after their money when they don’t seem to be able to look after their own.

Whilst like much of the industry, participants in a Meeting of Minds were sceptical of serving clients as clusters, seeing this as standardising in an industry which is founded on personal service, the authors of the report see segmentation as key to success. “Properly segmented delivery is still personal, but product and service is drawn from a specific rather than a general pool… Segmenting helps you to gain market share in the groups you target because you’re known to be special, and therefore differentiated, in those areas,” they said.

It attributes industry fragmentation, where no one bank has more than 5 per cent market share, to the lack of segmentation employed currently and too many banks trying to be all things to all people.

Participants gave numerous and diverse reasons why they thought HNW and UHNW individuals would use a private bank rather than another advisor, but a holistic approach, reputation, independence and the personal touch were high on CIOs lists. CEOs regarded an integrated approach from a “one stop shop” and relationships as key. “A good private banker can add value to clients over and above what they are working for” said one.

Whilst participants acknowledged image problems, whereby both existing and prospective clients viewed private banks as “crusty” and “amateurish” due to lack of clear market positioning, a product led approach and unacceptable quality in client reporting, the authors contend that the problem is even worse.

“This group aren’t making a deliberate choice not to select a private bank, they don’t even have us on their radar.”

The solution is not straightforward, but to get in early and work hard to get to know clients in their environment, not waste time trying to attract the self-directed who will only ever be disappointed, and relevant and accessible marketing are all seen as crucial to success.