Vincent Duhamel, head of Asia Pacific and Japan at Lombard Odier Darier Hentsch, outlines what Swiss and other private banks must do in today’s new-look private banking landscape to adapt their business models in order to be successful.
Date: June 15, 2012
Tags: Lombard Odier, Value proposition, Growth, Strategy, Differentiation, Switzerland
To what extent can Swiss private banks re-invent themselves quickly or sufficiently enough to stay relevant within today’s new world of private banking?
There are different types of Swiss banks. The “real” private banks are privately-held, focusing purely on asset management and wealth planning, rather than being transaction-oriented. As a result, they are better-placed to adapt to the requirements of today.
For example, there is a major shift in the regulatory environment, in turn changing the attractiveness of Switzerland as a financial centre. This ranges from tax requirements to initiatives like the Markets in Financial Instruments Directive (MiFID) in Europe.
So-called “real” private bankers are in a better position to reinvent themselves quickly because they never took the transaction-oriented path and instead focused on where the attention is now shifting – towards proper asset management and wealth protection.
Not being subject to quarterly earnings expectations means it is possible to make long-term investments and take a long-term approach.
What can the other Swiss banks do to remain relevant in a global context?
It is all about performance. Switzerland has had the advantage of political and economic stability over many years, so the Swiss banking industry enjoyed a competitive advantage in gathering assets relative to a lot of firms in other markets.
Since the world is changing quickly, the banks now need to respond in various ways. They have to reduce their costs, perform on their offerings, and maintain their established service levels.
One of the things they do need to do, however, is customise their offerings to the specific needs of clients, especially Asian clients.
The Swiss banks have an advantage over regional Asian banks in terms of the time that the Swiss firms have been investing globally, which makes them culturally inclined to offer effective diversification. Their 200-year or so history of investing has also given these banks a lot of experience in managing through various financial crises.
While “real” private bankers may not do as well during bull markets as other types of transaction-oriented universal banking, they are much more consistent through cycles.
Where has the private banking industry in general fallen short in Asia, including mis-managing client expectations?
Private banks in Asia have seen 10 to 15 years of hyped activities, ranging from product pushing to a lack of transparency on cost. This led to hyped expectations for clients and inappropriate products.
For organisations like ourselves, it is how to manage clients’ assets throughout cycles. The approach must be to protect wealth and add to it. No private bank is going to be able to meet the returns that entrepreneurs can make from their own businesses. So the focus must instead be on diversifying risk away from this.
The reason why a lot of banks have excessive cost-income ratios is because they are heavily dependent on distribution fees from their investment banking arms.
As soon as those products don’t sell anymore, or when interest rates are low, the cost infrastructure becomes too large to handle.
Which models will work in the future?
We will always be a niche player, servicing and offering wealth management products for clients who might want to use universal banks for transactional purposes, but come to us for the safety of our balance sheet and to preserve the part of their wealth that they give to us.
For us, the challenge is to make it clear that our model doesn’t involve conflicts of interest, and therefore ensure that the perception of our service and philosophy isn’t the same as many of the private banks which are part of universal banking groups.
Looking at the evolution of wealth in Asia, 25 years ago when individuals were starting their businesses, they wanted to deal with banks offering deposits and corporate lending. Then, as entrepreneurs wanted to list their businesses, they looked for an investment bank to help them do more sophisticated capital market transactions, for example IPOs.
These individuals are now more aware of the different types of wealth management offerings, have more wealth to protect, and therefore will use banks for different specific reasons.
So how can banks differentiate themselves?
It is about products and the strategy that firms can put together. In Asia, there is a greater need to develop Asian-tilted products.
This is because Asian clients want this to satisfy their home bias. Plus, European clients want more and more exposure in Asia, so the industry needs to offer them solutions that are attractive to them.
What are the opportunities for international players in local markets?
Being successful in private banking depends on knowing your clients’ risk tolerance, needs and aspirations.
Take our recent strategic alliance in Australia with JBWere as an example. We are not in that market so we don’t know these clients as well as a domestic player, and as a result we are not as well equipped to advise them in the same way as a firm like JBWere.
On the flipside, with Australia experiencing so much growth in wealth over the past 20 years, JBWere has been mainly domestically focused.
However, it now needs to provide a global platform to enable clients to diversify internationally, so they need to find a partner where there is no conflict of interest. We satisfy that at two levels – we don’t intend to enter the local market and compete for clients domestically, plus we don’t intend to sell these clients investment banking products. Instead we offer the technology to service the clients and the know-how to offer global wealth management advice.
This creates a win-win. JBWere keeps the ownership of the clients, and we provide the platform. For us, JBWere is our window into the Australian market.
