Private Banking's Seven Cardinal Sins

Many private banks have been blinded by a ten-year bull market and left their homework for later. Now it's payback time – how could it happen?

The past weeks haven't been that bad for private banks. To the contrary: business was brisk. The exceptional volatility on financial markets forced wealthy clients to adjust their portfolios; positions that lost heavily went out, new assets bought at historic lows. The result was a surge in transactions that boosted trading income at banks.

Private bankers thus were in a comfortable position while the situation looked all the more gloomy in other fields. But the recent euphoria won't likely last for long. It is pretty clear that many private clients have not only lost money on the exchange – roughly about 20 percent on average – but clients also need their assets to inject into their businesses. The two effects will combine to crimp assets under management in the private banking industry.

Homework: Not Fulfilled

For private banks, whose earnings are mostly a reflection of fees and commissions earned by managing assets for their rich clients, the times will get tougher. Add to that the failure of many wealth managers to make their homework in the long years of the bull market. The failures touched upon questions of digitization, personnel, operating costs in general and the strategic outlook – the unique selling proposition (USP). The issue of how to position the bank in the market, the so-called «raison d’être».

This latter question is a pressing issue exactly for companies that have been in existence for more than two centuries – tradition and history won't suffice in an ever more complex world.

«It is very likely that some of these private banks will be gone within the next two years. By 2022 at the latest, these changes will be seen,» Anna Zakrzewski, banking expert at the consulting firm Boston Consulting Group, recently told finews.com.

Seismic Shift

Not all have recognized the need for strategic reorientation and differentiation. And therefore, quite a few have already had to give up or merge with rivals. There are plenty of signs indicating that the development is about to gather pace – in a world, that is more complicated and that will see seismic shifts. This leads Philipp Rickert, banking expert at the consulting firm KPMG Switzerland, to a radical conclusion: «Economically, Switzerland does not need more than 20 private banks.»

The first effect will be there for all to see when private banks will present their figures for assets under management and net new money in the first half. Private banks have committed seven cardinal sins to be precise. Here they are:

1. Bloated Budgets

The unexpectedly long bull market of the past decade helped many private bank to live in a bubble of dangerous complacency. They hired more and more people, were not overly careful with how they used their cash and paid scant attention to the digital change.

With lower revenues and narrower margins, costs will become unmanageable.

2. Not Digital Enough

Many operative procedures and interactions with clients will remain virtual. This is probably one of the most important insights from the current lockdown. Banks that are using tools they didn't test properly, will lose clients over night.

Clients know what is relevant and what isn't.

3. Too Much Staff

Digitization, which took hold over the past ten years, has always been a great indicator of over-staffing.

Banks that remained impassive will now be forced to cut down even faster – something that is counter-intuitive for the more esteemed private banks.

4. IT Worries

Digitization is little more than a flash expression – in essence, what we are talking about is IT as such. Private banks are no longer mere custodians of assets, but platforms with an array of services to satisfy the clientele and the regulator as well as a complex world. It costs a lot of money to provide such platforms, a fact underestimated by many or not fully taken in.

This goes to explain why many banks' IT infrastructure remains a patchwork that can hardly be renovated to a satisfactory degree.

5. Doing Your Numbers

The sins mentioned so far can be subsumed under one core figure: the cost-income-ratio. The ratio illustrates how much a company has to pay for each franc earned. Banks that are active in the retail business have low CIRs of say 50 percent. Investment banks with their highly paid star bankers are at 90 percent or more. And private banks used to have ratios around 60 percent – but today the number has risen to 80 percent or more.

«In 2007, there was hardly a bank in Switzerland with a cost-income-ratio of over 80 percent. Ten years later, it was almost half of all asset managers. We expect that by the end of 2021, around 86 percent of Swiss private banks will be above this mark,» says BCG specialist Zakrzewski.

Which is unsustainable and should make alarm bells ring.

6. Losing Touch

Wealthy people tend to be a little older – because it took them some time to build their fortune if they didn't inherit their wealth. That's why most clients of private banks are comparatively old. The big earners of tomorrow, however, are typically young. It has never been easier to earn big bucks – think about globalization, entrepreneurship and crypto-assets. Private banks that aim to attract such a clientele needs to adjust to how they approach their clients.

Many have failed to do so and simply don't know how to deal with the clients of tomorrow.

7. Lost Their Focus

So why do we actually need private banks? It tended to suffice to have a beautiful family crest and a reference to a founding year in the 18th or 19th century, waxing lyrically about values and tradition. This will no longer be enough.

Private banks have to do both and: new values are to be found, because, in the new normal of post-COVID-19, old values (trust, quality, reliability) will be fine, but not quite enough…

Exceptions to the Rule

There are exceptions to the rule of course. Lombard Odier for one has developed its own G2 IT platform, opened it for other banks and thus expanded its revenue base.

Maerki Baumann, the Zurich-based private bank, recognized a number of years ago – by sheer chance (in German only) – how important it was to look into the fledgling crypto-asset market and developed an understanding and know-how of this business. Today, the bank is an important address for rich clients – younger ones – seeking to invest some of their money in this new asset class.

«We initially registered several hundred inquiries from investors and entrepreneurs – especially younger ones. This reaction prompted us to think more deeply about the potential of blockchain technology and to develop and implement a crypto strategy,» Maerki Baumann CEO Stephan Zwahlen told finews.com.

There are also those who mainly cater to businesspeople and offer club-deals and private-equity investments. They have little exposure to the stock market, which in itself can be a unique selling proposition. In recent years it also paid off developing a strong focus on real estate – such as Bank Bonhôte, Reichmuth Privatbankiers or Lienhardt and Partner. They all acquired specific know-how and positioned their companies accordingly.