Which is the model for the future, the private bank or independent asset manager? This was the subject of a Breakfast Briefing held recently in Zurich and sponsored by Advent.

The first speaker at the panel, Sebastian Dovey, managing partner of Scorpio Partnership, noted that this subject has attracted significant interest wherever it has been debated. Dovey noted the commonality between the two models, especially within the context of private banks that are small divisions of larger universal banks.

Dovey estimates there are about 20 IAMs for each private bank in Switzerland but banker movement from a bank to IAM has slowed recently due to the current economic uncertainty.

IAMs tend to have better client relationships, but normally lack capacity to create economies of scale. They do have freedom to set their own asset allocation, but they need to demonstrate that this is rigorous and not simply that of an “uncontrolled private banker”, Dovey said.

Private banks are currently running on a cost income ratio of 71 per cent, which is historically high and current targets remain high. Are IAMs more cost/ effective? This is uncertain when all the costs are taken into account and Dovey would recommend that more research is undertaken in this area.

IAMs are limited in geographical scope, being mostly limited to one jurisdiction, which is an area where private banks have an advantage. Independence only has value, however, if it adds value to clients. Research suggests that, in the end, clients do not care that much about the status of their relationship manager so long as they have a trusted advisor who delivers added value.

Obvious benefits

Another panellist at the event, Martin Straub, managing partner of Envisage Wealth Management, has been an IAM for some years now. He listed the obvious benefits of being an IAM – independence, working for yourself, being master of your own fate.

In his view, the value of the IAM model is “maintenance of stability in management of relationships”. A private banking client will have their relationship manager change every three years on average. This works against trust and development of relationships. IAMs are more client focused and maintain relationships first and foremost.

IAMs in Switzerland are limited in size because of a lack of managerial skills. IAMs in Switzerland seem to operate as a sort of outsourced relationship management service for the private banks who keep the business and assets, but allow the relationship to be handled externally.

As to the future, Straub said transparency will be the main issue with the raft of retrocessions and commissions that flow between banks, fund managers and IAMs being declared to regulators and also to clients. Kickbacks probably account for one third to one half of the income of a typical IAM. In future, IAMs will have to move more to a model of payment for value added with greater transparency. Another future trend will be mergers between IAMs to cover the costs of compliance, especially in the face of the sorts of regulation that are coming out of the US, for example.

Interaction with clients 

Meanwhile, David Woolley, senior client partner at RBS Coutts, talked about the interaction between a good private bank and its clients. Clients want good relationships with high quality people who are both intelligent and empathetic. Good relationship managers have personal care and concern for clients and their families.

They need to make the bank work for the client which, in his opinion, is easier if the relationship manager is within the bank. The message here was that the size and resources available to the private banker are more suited to the needs of clients as opposed to those available to an IAM, Woolley said.

Woolley believes in the importance of niche brands with a history. Clients “buy into an exclusive club” when they start a relationship with a private bank, he said. The resources of that club are important. Size matters.

“Why deal with your bank through a third party when you can deal with it directly?” Woolley said. He believes that dealing with someone on the inside of the organisation is more effective and efficient. Yet, for all his arguments, he notes that IAMs are actually UHNWI clients of private banks. “We can work together.” he concluded.

Ger Van Nijkerken, regional director of Advent Software, said the market needs and can support both the private banks and the IAMs. “There is room for both models,” he says.

His focus, unsurprisingly, was on the automation options for banks and IAMs and he noted the mess of legacy systems that cause all sorts of problems in many market participants. He discussed the risks of inadequate systems - operational, financial and reputational. If a market participant has effective systems in place there is more opportunity to deal with the relationship side of the business. Systems are also important for transparency both to clients and regulators. This is important for both banks and IAMs.

Ian Woodhouse, director at PricewaterhouseCoopers, was the final speaker in the presentation segment of the meeting. PwC currently focuses on sales efficiency, cost effectiveness and regulation when dealing with wealth managers. He posed the question “What does tomorrow’s leading private bank look like? What does tomorrow’s leading IAM look like?”

Woodhouse cited the low interest rate environment and the lack of trading commission due to fear. The reduction in bank secrecy within Switzerland has probably cost 10 basis points in fees and the current interest environment probably currently costs banks another 10 bps – but that will return in time when rates rise again. This reduction in income has combined with increased regulatory costs to create a difficult environment for everyone.

“The first advantage of a private bank is the diversity of products and services that it can offer a client,” Woodhouse said. International exposure and size of institution are also advantages as is the capacity to invest in technology. On the other side of the coin there are issues with respect to client service, length of tenure of relationship managers and data security in the light of recent highly publicised data thefts. A focus on in house products can also be a problem.

IAMs, on the other hand, have better client communication and longer client relationship management cycles. They can find it easy to attract staff and their focus on a core business is a strength. They are, however, lacking in management skills and capital and may be vulnerable to departures of key individuals, Woodhouse said.

PwC see the way forward for both models as being a more focused business model whereby private banks provide custody and asset management services to the IAMs whilst delegating the costs of compliance and regulation. This gives banks assets and reduces their risk while providing IAMs with a well capitalised custodian that they can promote for the peace of mind of their clients. This could be a win-win solution for the clients as well as the banks and IAMs. The future has more networked business with greater transparency at all levels. The traditional Swiss business model is going to change. Success will come from those who adapt.

In the hands of clients

As for the question as to whether private banks or IAMs have the better model – both have advantages and it should be up to the clients to decide, the meeting heard.

A question was raised as to the ability of banks to act in the best interest of their clients if bankers are incentivised to sell in-house products. RBS Coutts’ Woolley said this depends on the quality of the bank’s products and the management strategy of the institution. There is also a move to open architecture and Woodhouse noted that some banks are also looking to price in house products in a more attractive manner. Sales side discipline is of greater importance and, if banks and IAMs do not work to increase transparency (with fund front end loads, for example) the regulator will get involved and require this.    

Straub reminded those present that we are in a services industry and that the product push mentality has to go. This will happen with greater adaption of open architecture and increased transparency which will give clients more power to choose. This implies a chance in traditional business models.

A question was raised about the number of IAMs and private banks and whether this is sustainable. Is the competition destructive? Woolley said it suits clients for banks and IAMs to sit together and co-operate in the best interest of the client.

Dovey suggested that there is a lot more business out there. He hopes that players will seek new business rather than fighting over those currently banked. In general, the panel reinforced the concept of added value and customer service rather than focusing on return on assets and product push. It is important to change adviser behaviour which will take time, but there is currently a significant economic impetus which should provide some momentum.

Is there a beginning of an awakening that the traditional Swiss model is no longer viable? There is some acceptance of this, but the tradition itself is long engrained and there remains significant resistance in many institutions. Dovey suggested that a future fee structure will be of some 50 basis points for advice and extra fees based on performance or service provided. But those who adapt to a service based model early, charging for advice, and even results, rather than products are those most likely to thrive.