A series of ostensibly successful private banks are selling their wealth management businesses. Why?

The consolidating of private banks, a topic for at least the past decade, is heating up yet again with this week's acquisition of Pâris Bertrand by Switzerland's Rothschild. The deal marks a new wave in the prevailing merger and acquisition trend in the lucrative business.

The last 18 months have seen wealth managers including Bank am Bellevue, Landolt, GS Bank, Banca Arner, or Banque Profil de Gestion, and now Pâris Bertrand sell up – all institutes which had ostensibly done many things right to survive a tectonic shift in their industry.

No Longer Equipped To Survive

All maintained a solid book of Swiss clientele, were largely free of legacy assets which can hobble wealth managers for years, and had despite pursuing a genuine wealth management approach, were apparently no longer equipped to survive in their current form.

In the past, smaller players like these have typically sold up because a combination of four factors: the end of banking secrecy, far more stringent rules for catering to clients from lucrative emerging markets, the complexity of super-wealthy clients with more than $30 million, and an inability to carve out a consistent niche with unique, value-added products.

Undeclared, Illicit Money

The first two points explain themselves: harboring undeclared money is no longer an option in today's more transparent world of data exchanges between countries; the hunt for clients in newer markets like Russia or South America is full of risks that can result in more problems than potential (PDVSA is a text-book case of how one country can take a major toll).

The business of dealing with the world's ultra-wealthy, or those with more than $30 million in assets, is proving a delicate matter: most of this clientele still prefer havens like Switzerland, but their financial needs are highly complex and demand a high level of expertise and resources which a smaller player generally cannot afford.

The super-rich also typically are attached to gatekeepers or advisers whose primary job is to ensure their clients aren't being overcharged on commissions and fees – these clients aren't always as lucrative as they appear at first glance.

Capital Markets And Credit

Smaller and mid-sized institutes don't maintain the balance sheet often required to entice larger clients with capital market financing or loans, nor do they possess a modern technology platform to offer these clients first-rate solutions.

The factors in combination have upped the ante for scores of private banks in recent years, begging the question of what the fundamental value of a traditional wealth manager is.

Clash Of Old, New Worlds

Investment management – long the key pillar – falls away because clients are far better informed and don't need banks to broker transactions. The emergence of digital players that can buy and sell securities at a fraction of the price of a private bank is an illustration of this.

The more complex financial products offered by private banks have proven less innovative, and hesitant to get it on newer developments like cryptocurrency or private market investments that are increasingly popular with the wealthy. Part of the problem is demographic: traditional private banks are heavy on clientele over 60 and don't represent a viable alternative for the next generation of heirs.

Lack Of «User Experience»

Many private banks lack a distinguishing characteristic to attract new clients, or the «user experience» that consumer goods like Apple, Starbucks, or On sneakers convey to set them apart.

Paris Bertrand, founded in 2009 and with a new minority investor just two years ago, is emblematic of the type of private bank which no longer survives. The onslaught of digitization as well as the unexpected challenges due to the pandemic will continue to extract a toll on the industry.