A endless list of problems and only very few answers. That's how a senior private-banking CEO sees his industry's future.

Michel Longhini (pictured below) isn't a known scaremonger. And not one to throw up his hands in despair. The private-banking CEO of Union Bancaire Privée (UBP) is growing his business with verve.

Michel Longhini

In the six years at the helm of the UBP division, he concluded a string of takeovers  and put his bank's name on the Asian map with the acquisition of Coutts private bank.

This year however promises to become one of the bleakest in the history of private banking. Proof of which being the half-year results by Swiss private banks.

The difficulties of the industry have already prompted companies such as Notenstein La Roche and UBS to initiate saving programs. Top shots, including UBS wealth management boss Juerg Zeltner and Yves Mirabaud have aired their disquiet and pessimism.

Longhini is the latest to do so. In an analysis for «Professional Wealth Management», he describes the ills of his industry.

Here's a list:

  • 1. Asset Growth Is a Zero-Sum Game

The strategy to target asset-under-management growth in specific markets and segments is a zero-sum game. The creation of new wealth is limited in an economic environment of stagnation.

The increase of net new money has other reasons: performance of the managed assets, recruitment of new relationship managers with established client books and takeovers.

  • 2. Private Banks Need to Take Higher Risks

With those reasons in mind, a true growth strategy in private banking implies a decline in profitability and the taking of higher risks. Unsatisfactory levels of return on assets, lower margins, expensive recruitment and takeovers weigh on results and capital.

  • 3. Private Banks Lose Market Share to Direct Investments

Private banks are still the main rivals of private banks. But direct investments in real estate, infrastructure or risk capital funds crimp the market share of private banks.

  • 4. Risk-Averse Clients

Investors are so worried about the developments on the markets that they even prefer hoarding cash and pay negative interests. They also put their money into long bonds with almost no return but security.

A new world for private banks: the are able to increase interest income but have to forgo the cash cows of consultancy and portfolio management.

  • 5. Lower Commissions

Risk-averse clients don't trade, and therefore trading income drops. The brokerage business is also affected by an increase in regulation, increased transparency of fees and stricter rules for the sale of products in a bid to protect consumers.

  • 6. Do-It-Yourself Clients

Online brokerage and robo advisers are not helping the traditional private-banking industry either. Longhini says that the most active customers are pulling assets out to go digital.

The Answers

These are the problems according to the UBP manager. His analysis, titled «Private Banking: Adapting for Future Growth» also provides a few answers.

  • 1. Cost Cuts

Private banks have to cut their costs in accordance with their potential to generate growth and profits.

  • 2. Think Laterally

If private banks want to keep their clients assets and even attract new money, they have to extend their strategies outside their traditional habitat and create new offers. Recruitments and acquisitions in long run are too expensive.

Conclusion: the list of solutions is slightly shorter than the one of the challenges, reflecting the harsh realities perfectly.