2 The area where professional asset managers and private investors meet
2.2 Investments through private banking
In order of importance to the banking industry as a whole, the now classical big market segments have been corporate, institutional and retail. Regarding goals they are after, corporate and institutional entities have more or less opposite aims.
Corporate clients search for competitively priced funding.
Institutional investors are looking for best value and for creditworthiness.
Retail clients combine both patterns, and are influenced by the synergy of shifting demographics, changes in returns obtained through equities and bonds, as well as technological advances allowing better deals in investments. This produces a much larger investing universe which promotes private banking but also poses significant requirements in:
Human capital, Organization, and Technology.
Technology plays a key role in planning and controlling modern investments, but it is no substitute for commitment to long-term personal relationships and provision
of a full range of products and services specifically designed for the target audience.
A private banking organization typically offers comprehensive wealth management services centered on investment advice through:
The systematic division of the bank’s customer base into marketing segments, and Provision of services able to meet each customer’s individual investment needs.
Because private banking can be a lucrative and steady business, the better-managed credit institutions aim to achieve a noticeably more efficient market presence, with the dual goal of greater market share and further improvement in earnings. The build- ing and sustenance of a private banking unit is a dynamic enterprise in a business environment in full evolution.
Successful personal banking entities use technology to help them focus on customer service excellence, profitability and growth of the investment, while controlling costs and exposure. In many cases, the private banking and corporate banking depart- ment co-operate to exploit the synergy of investments which are appealing to both populations. This, however, can lead to conflicts of interest.
A properly run private banking business would see to it that each individual client receives advice tailored to his or her investment objectives and risk appetite. To for- mulate an independent and consistent investment policy, the private banking adviser draws on research sources within the bank and from third parties. Knowledge arti- facts can be of invaluable assistance in flashing our trends in market conditions and/or changes in client requirements.
Institutions with private banking services see to it that their efforts increasingly reflect the changing profile of savers, as well as the fact that competition is causing them to step up their efforts. Moreover, clients are becoming more sophisticated as they are taking a more active role in managing their wealth. Several credit institutions and brokerages have answered demands for extended availability of services through Internet access.
While the majority of private banking clients is still rather passive with its invest- ment, a growing number of credit institutions’ clients is demanding more advanced products and a broader geographical range of services. This cannot be provided at com- petitive prices without high technology. Personal banking clients are also increasingly focused on asset performance and they are watchful over proper allocation coupled with:
Transparency in wealth management,
Quality and actuality investment information, and Verifiable results of expert advice.
Globalization provided new challenges in terms of investment advice. While a great deal of private wealth is invested in the domestic markets where clients are domi- ciled, particularly in the form of equity and equity-linked products, as capital markets become more globalized the sources of investment spread worldwide. With this comes the requirement of a unique mix of businesses’ intelligence and well-documented investment positions, necessary to maintain customer loyalty.
In their modern incarnation as end-investors, top to medium net worth individuals demand high standards with regard to personal investment advisory and wealth man- agement services – and rightly so. They desire factual and comprehensive financial advice, and they expect specially tailored financial solutions including addressing in an able manner questions regarding:
Risk and return with each type of investments,
Issues beyond financing, which include tax optimization,
The role of personal investments as supplement or substitute to pension(s), and Other investment perspectives such as inheritance law and legal issues.
Some private banking organizations proudly announce to their clients that their global product offering is carefully tailored to meet country-specific tax and legal regulations, over and above its ability to respond to different aspirations of clients in different mar- kets. Where local regulations allow, client advisers who serve clients both domestically and internationally report to a single manager,
Helping to avoid channel conflict, and
Ensuring that private banking clients receive a consistent high-quality service whether they bank at home or abroad.
In addition, several private banking outfits have established expert global teams which concentrate on the requirements of particular client groups, or private spe- cialized services. Examples are a family office for wealthy families, including family foundations; sports and entertainment group focusing on special life-cycle related needs, real estate investment services and trusts; Islamic banking providing products designed to be Shari’a compliant; art investment, numismatic and other special interest groups.
Many credit institutions are now targeting an improvement of their skills in handling private banking clients, extending the range of their handholding. This is under- standable inasmuch as high net worth individuals want to deal with first-class private bankers able to collaborate with them in developing tailored financial strategies, char- acterized not only by a higher return but also by compliance with the client’s risk appetite.
The polyvalence of customer requests sees to it that not only must investment advisers be on call, but also that they should exhibit a comprehensive knowledge of investment matters, including domestic and foreign products. To fulfil such client requirements, a private banking organization must have direct access to traders and third-party providers, as well as to in-house expertise on tax law, estate law and retire- ment planning. It must also assure nearly real-time customized reporting fine-tuned to the individual client’s particular needs, which requires effective interfaces provided by relationship managers who are:
Dependable,
Technically educated, Easy to work with, Sensitive to clients’ needs,
MODE I MODE II
LOW HIGH
LEVEL OF RISK
AMOUNT OF INVESTED CAPITAL
REALLOCATION OF ASSETS, INVOLVING STRUCTURED INSTRUMENT OF POTENTIALLY HIGH RISKS
ORIGINAL ASSET ALLOCATION WITH KNOWN RISK FACTORS
Figure 2.2Risk-oriented distribution of assets under two different options
Readily accessible, and Highly competent.
Other qualities which distinguish one private bank from another include flexibility, a growing worldwide presence and leadership on the information front. This can be assisted through a network able to access the best services and products of the world’s leading investment institutions, and fashioning them into solutions that fit the clients’
distinctive goals.
In an effort to take an integrative view of their clients’ net worth and acquire more of these clients business, some banks provide asset reallocation services, along the lines of the example given in Figure 2.2. They estimate risk and return factors under the client’s current asset allocation, and provide an integrative proposal which, in the bank’s judgment, protects in an able manner the client’s investment interests.
To a substantial extent, this reflects the fact that private clients are discriminating individuals who choose their bank with care.
They expect personal service from first-rate advisers, and Demand solutions that answer all their wealth-related needs.
Private banking clients, however, should be wise enough not to relegate to a third party all the responsibility for managing their wealth. In their effort to protect and build up their assets, high net worth individuals must have round-the-clock access to information concerning markets and industry sectors, and be able to look for clarity in the flood of available information and of investment proposals made to them.
True enough, sometimes private banking clients fall with a trend, as attested by the fact that roughly half the money which is managed by hedge funds comes from high net worth individuals. In other cases, they fail critically to analyze the hidden risks in an investment proposal, by challenging the ‘obvious’. For example, in the two distributions of Figure 2.2 the new allocation plan may involve derivative financial instruments whose toxic waste may be far from being apparent.
In conclusion, if the investor truly aims to achieve a lifetime investment goal, such as securing his or her retirement, providing for children’s education and assuring the financing of a family health plan, then he or she has no alternative than taking an active part in the management of his or her wealth. Answering investment questions with confidence requires a financial strategy, the first step of which is assessing one’s current portfolio to assure it is working to meet established goals. To this are dedicated the three golden rules of investment in sections 2.3 to 2.5.