Chasing wealth managers is a risky business

Zurich is a sober and orderly city, so a fierce altercation near the Swiss National Bank between a banker to the world’s billionaires and a private detective who was trailing him is worthy of John Le Carré. It is all the more lurid that Credit Suisse ordered surveillance of Iqbal Khan after he left abruptly for its rival UBS.

Credit Suisse was worried that Mr Khan, who led an expansion of wealth management there, could take valuable clients and colleagues with him. Cut to Germany, where Deutsche Bank is hoping to recruit several hundred “relationship managers” — financial advisers to the wealthy — to compete with Switzerland’s private banks.

Whenever banks get overexcited about a profitable and expanding area of finance and embark on an expensive talent war, it usually leads to trouble down the road. So it is a fair bet that there will be fallout from this battle over wealth management, the activity that includes private banking.

The stampede is understandable. Swiss private banks went through tough times after the 2008 financial crisis and a US crackdown on offshore tax evasion that led to banks including UBS being fined hundreds of millions and having to loosen traditional bank secrecy rules. But they never lost their grip on a business that many rivals envy.

Traditional retail banking has been less profitable in the era of low interest rates and digital insurgency. Investment banking has been squeezed by regulations and caused a lot of trouble at European banks, notably Deutsche. When boards of global banks gather for strategy days, it can get gloomy.

Wealth management feels like a profitable one-way bet, by comparison. It does not require much capital to advise clients on how to conserve and invest their wealth, and the returns on equity are high. The rise of billionaire entrepreneurs and the super-rich, particularly in China and the rest of Asia, keeps the market growing.

This makes private bankers, particularly relationship managers with clients they have served for years, desirable. It is hard for an institution without a long history in private banking to expand without hiring them from other banks — the rule of thumb at one Swiss bank is that one manager can advise clients with a total of $1bn in assets.

Hence the unruly scene on the streets of Zurich and the poaching of bankers that is occurring around the world. Boris Collardi, who led the expansion of Julius Baer as chief executive, is now heading a hiring drive at Pictet, including the appointment of Tee Fong-Seng as head of wealth management in Asia.

But as banks offer millions to lure private bankers with desirable clients, they should consider a few things.

First, a relationship manager may not bring clients with them. The personal touch helps: private banks advise clients not only on investments but on sensitive matters such as family succession and trusts. But the expertise (and credit rating) of the bank also counts: “Assets are sticky and they take time to transfer. Sometimes they do not come at all,” one Swiss banker says.

The danger is that the hiring war will prove an expensive zero-sum game in which costs grow faster than revenues. McKinsey & Co, the consultancy, this week sounded a warning that profits fell by 8 per cent at private banks in western Europe last year, as rising costs squeezed their margins.

Second, private banking to the emerging class of ultra-wealthy in Asia is not free of risk. Under Mr Khan, Credit Suisse targeted Asia entrepreneurs with assets of about $500m, whose wealth tends to be tied up in their own companies, and who often want to borrow against these assets to buy houses in Mayfair or large yachts.

So far, banks that lend to wealthy clients have made money — one banker estimates that loan default rates have only been about 0.1 per cent. But those loans have yet to be tested in a global recession, with falling asset valuations. Only then will we discover how profitable the business really is.

Third, despite rivalry among private banks, their ultimate competitors are the clients themselves. Wealth managers pitch themselves as trusted advisers but the ultra-rich with more than $100m are different from you and me — many employ their own investment advisers and lawyers in family offices.

There are now more than 10,000 single family offices, according to the consultancy EY, and the number is rising as more of the merely rich band together in multifamily offices. When it happens, private bankers are often excluded from the inner circle, where the most profitable decisions are made, and must pitch for smaller bits of business.

It is not a mystery that the richer someone is, the harder the bargain he or she tends to strike. The days of millionaires depositing money with Swiss banks and only occasionally visiting Lake Geneva to catch up with their bankers are in the past. Billionaires do not hand over cash lightly.

Wealth management is still an attractive business, given the alternatives. But before they start following bankers around the streets of Zurich and Singapore, banks should realise what they are rushing into. In finance, one-way bets are rarely what they seem.

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Copyright The Financial Times Limited 2019