High net worth individuals have clear investment philosophies and deep pockets.
By Alan Warboys
On a sunny Tuesday in January, Ralf Haase sat alongside some of Australia’s richest people at a table inside the Sydney Cricket Ground for the first day of a cricket Test against India. The occasion gave Haase a chance to get to know better those individuals, all valued customers, as they enjoyed a privileged vantage point for what Australians regard as an iconic sporting event.
For his guests this was relaxation. For Haase, it was work. He heads the Commonwealth Private Office at the Commonwealth Bank of Australia (CBA), which looks after its very wealthiest individual clients.
“CBA is a sponsor of Cricket Australia, which is attractive to some clients,” says Haase, who oversees what’s known in the business as UHNWI (Ultra High Net Worth Individuals) – essentially, the world’s wealthiest. The definition varies between organisations, but at the CBA is classified as those with at least A$10 million in investable assets. This is a rarefied group, above the more common HNWIs with their A$1 million to A$10 million to play with. “It was a wonderful event,” Haase says of the Sydney Test match.
Leading banks compete hard for those gilded individuals and families who already have the luxury home and other trappings of unusual wealth. It’s one of the smallest yet most rewarding segments for a bank. These clients are prized because they have become like small institutional investors – they’re even dubbed “instividuals” by some bankers.
“These clients are prized because they have become like small institutional investors – they’re even dubbed ‘instividuals’ by some bankers.”
Private banking has become big business, and just as airlines and credit cards offer rewards programs, each institution offers attractive incentives and services to win and keep this platinum-clad clientele. The attractions range from discount mortgages to sophisticated investment opportunities and, yes, some of the world’s flashiest freebies.
More than 12,000 new UHNW individuals were minted worldwide in the year to June 2014, according to the Wealth-X and UBS World Ultra Wealth Report 2014, which set the bar at US$30 million and above in assets. That has pushed the global population of this dollar aristocracy up 6 per cent from a year earlier to a record 211,275, and seen their combined wealth increase by 7 per cent to US$29.7 trillion, the study says. That’s an amount double the annual GDP for the US.
“The opportunities are quite significant,” says Haase. “In Australia, no one has a lion’s share of the market or has done particularly well in this specific segment.” The UHNWI market in the country is poorly serviced but could be owned by the right bank or wealth management firm, according to the Super Rich Report, an industry analysis produced by CoreData’s Private Bank Intelligence Unit.
It’s the same picture globally, as the world’s top 20 private banks still only account for a small slice of the overall market. That market is shared among dozens of institutions, according to consulting firm Capgemini Global FS, which publishes its own annual wealth report.
Jean Lassignardie, the firm’s chief sales and marketing officer, says that “an encouraging environment of high growth and confidence” is supporting the market. But he also notes that wealth managers’ performance scores are declining. “Opportunities still exist for firms to tailor their offerings to better meet client needs,” he concludes.
Catering to this small but important elite is a busily growing industry in both Asia and Australia, says ANZ’s head of private banking for Australia, Mike Norfolk. Assets under management in Australia alone for HNWIs are about A$1.6 trillion, he says, up A$200 billion on the previous year and representing growth of 14 to 15 per cent.
“Those are pretty attractive numbers in financial services,” Norfolk observes. “You’re talking about some of the most influential people in the country.” Oceania (Australia, New Zealand and the Pacific Islands) showed the highest rate of growth in UHNWI population in 2012, according to the Wealth-X report, although China’s slowdown and the recent declines in the value of the Australian dollar have slowed the pace recently.
Old rich vs new rich
Wooing the rich with exclusive services is not new. Barclays attracted headlines a few years back when it unveiled a “Little Book of Wonders” offering amazing experiences for clients. Many bankers still dismiss the seductions as gimmicks.
If a rival were to offer front-row tickets to the men’s singles final at Wimbledon, CBA’s Haase says that while it may turn the heads of their clients “every now and then”, on its own it’s “a somewhat flawed strategy, which we would not lead with”.
So besides tickets to Wimbledon and private dining with a Michelin three-star chef, how are banks seeking to get ahead at the top of the market?
At the most basic level, private banks are there to grow the client’s wealth. But with returns declining in the wake of the financial crisis, many banks are looking to broader services – going beyond investment advice and management all the way up to advising on philanthropy, estate planning and establishing family trusts.
The Hollywood image of bankers in ostentatious Zurich offices shaking hands with the grandchildren of clients who their own grandfathers were friends with may persist in Europe, but industry practices are changing dramatically.
“High net worth individuals in industrialised countries tend to be older and more conservative investors.”
Switzerland has been damaged by a series of investigations into its banking practices in recent years, from market manipulation to tax evasion.
“The Swiss private banking model has been torn apart, especially from an economics point of view, with many looking for different avenues to grow in the changing private banking landscape,” says ANZ’s Norfolk.
CBA’s Haase, who used to look after the private wealth management business for Goldman Sachs in Germany, says the market he found on coming to Asia and Australia is still at a different stage.
“There, we would have a relationship with families down to the third or sometimes even fourth generation. You’d see differences between those that created the wealth and those that inherited it. What the inheritors predominantly were concerned with is: ‘Is the money still there?’ Here in Australia, you’re still dealing mostly with first-generation wealth. They are more knowledgeable and interested in understanding the details of the wealth management processes.”
High net worth individuals in industrialised countries tend to be older and more conservative investors, according to a report by Urban Bacher of Germany’s Hochschule Pforzheim University and Kai Stober of Credit Suisse. Their counterparts in emerging markets have created their wealth themselves, the two concluded, so they strive for further growth and are greater risk takers.
Australia’s established rich certainly fit the conservative mould, keeping most of their assets in cash, domestic shares and property, according to Jason Murray, general manager for NSW for National Australia Bank (NAB) Private Wealth. Only in the past five years have clients begun to invest more in international property, US equities and fixed income.
Still, Australian UHNWIs remain an attractive market for banks. “It’s good business for us,” Murray says. “It’s simply cheaper to administer one $10 million mortgage than 20 [individual] $500,000 mortgages. Some of our clients are like small institutional clients in terms of their needs and complexity, which in turn requires a higher calibre banker.”
NAB has a 40 per cent market share in private banking, with its 18,000 clients in Australia making it the market leader, Murray says. It also has another 18,000 clients in Asia – mostly in Hong Kong, Singapore and Japan. It was one of the first Australian banks to develop private banking in earnest a couple of decades ago, although a number of family offices have been on its books for 50 years.
Serving the modern wealthy client means private banks need a mixture of talent, skills and experience, says Murray. Sophisticated modern investors need advice on a range of services and modern investment options and private bankers need varied in-house expertise as well as connections out in the field.
“We like to see managers as custodians of the relationship between the bank and a family that goes on for generations,” Murray says.
It’s important for banks to move with trends in investment options for their ultra-wealthy clients. One emerging trend is to offer private clients fixed-income products that previously would only have been offered to institutional investors – such as corporate bonds.
Another trend is the emergence of more “family offices” to look after wealth for family dynasties as well as estate and succession planning. Set up as a private company, a family office manages the assets and investments of a single family or several wealthy families, says Jane Watts, general manager for BT Private Wealth, part of the Westpac group.
“Some are appointing their own ‘personal CFOs’ while others are utilising existing family offices or simply outsourcing some functions like investment management to professionals,” says Watts. BT Financial Group’s Private Wealth division incorporates Westpac Private Bank, St George Private and Bank of Melbourne Private.
“Many HNW individuals have clear personal investment philosophies and like to be hands-on with their finances. That’s a challenge to many entrenched advice models.”
But the two most notable trends are the rise of the self-directed HNWI and the speed of adoption of mobile technology, says Watts. Many HNW individuals have clear personal investment philosophies and like to be hands-on with their finances. That’s a challenge to many entrenched advice models, which typically cater for clients who want to delegate control of their financial decisions to others. BT Private Wealth has expanded its offering of investment services for these self-directed investors to include “direct investments in bonds, Australian equities, commercial property, best-in-class offshore funds and tailor-made structured investments”, Watts says.
This trend toward investors taking greater control has been facilitated by Watts’ second big trend – the explosion of mobile technology. “HNW clients can now conduct their banking anywhere, anytime and the expectation is that they can manage their investments the same way,” she says. This trend has probably been most clearly seen across Asian markets, where client demand for these types of online services have been greatest.
An Asian future
For Australia’s big four banks, the future of private banking is in Asia or in Asian clients moving Down Under. With a GDP equal to Texas, there’s a limit to how much the Australian market can grow, even though the country still punches above its weight, says ANZ’s Norfolk.
In Asia, a region where Australian banks compete with Asian and European banks for the fastest-growing market in the world, entrepreneurs are building rather than preserving their wealth, he says. “They have different demands, and banks need to focus on things such as their children and education, teaching them to understand their responsibilities, in light of the intergenerational transfer of wealth.”
“The growth is happening in the East,” says Norfolk. “Since the financial crises we have seen an irrevocable shift.”
Perks for private clients
You already have enough money to buy pretty much anything you want. So what do private banks offer to win your loyalty?
HSBC private banking clients can benefit from the bank’s global sponsorship to get close-up views of premier sporting events such as Wimbledon and world golf championships, as well as the Chelsea Flower Show and the Pavillon des Arts et du Design in Paris.
Clients at Westpac’s BT are invited to exclusive local events, ranging from intimate boardroom lunches with the bank’ chief investment director to larger events such as its Runway for Success fashion show in Sydney.
DBS Private Bank offers “Asia Treasures” privileges including bonus air miles, discounted limousine services worldwide, its own lounge at Changi International airport, invitation-only investor education events, and visits to “exotic lifestyle soirees”.
Citigold account holders at Citibank Hong Kong get fee waivers, as well as access to the Hong Kong Jockey Club’s Citigold VIP box in the racing-mad city. And many services that ordinary customers must pay for are provided free, such as international bank transfers.
This article is from the March 2015 issue of INTHEBLACK.