Reflections on the Past, Present and Future of the Banking Sector (Part 3)
Part 3 – The Future
Before we look at the future of the international private banker, I’d like to go back in time to 14th July 2000. On this date and in the weeks before I made three very irrational financial decisions. Firstly I got married, thereby risking a significant portion of my net worth. I protected this downside by performing the act in Monaco and safe in the knowledge that my net worth wasn’t very high to begin with.
But I made two other choices which were much harder to explain and which, although I was not to know it at the time, were instrumental in helping me write this article. Firstly I offered a colorless and commonly found stone to my wife to commemorate our engagement. I could have chosen a bright red ruby, a glitteringly blue saphire or an emerald as green as an Olympic swimming pool in Rio as more colorful alternatives. Indeed until the middle of the twentieth century I probably would have done so. But in the late 1930s the company De Beers started a marketing campaign which persuaded people that “diamonds are forever” and that, in spite of a global annual production of over twenty tonnes, they are also very rare. Admittedly the density of diamonds makes larger stones rare but much of their value can be attributed to marketing (the four Ps) more than to the four Cs.
My second irrational choice was to buy my wife a rather expensive timekeeping mechanism as a wedding gift. I could have opted for a $50 model with a quartz battery accurate to within a second a day, but I elected to buy a Rolex for a hundred times the price and which loses or gains five to ten minutes per day. Admittedly the Rolex contains some gold but the intrinsic value of this gold in no way justifies the price difference. Some of the difference can also be attributed to the complexity of the timekeeping mechanism but where is the logic in paying more for something which is less efficient? There is only one explanation for such a decision : marketing. When my wife puts on her watch she becomes Cindy Crawford purring down the catwalk at a luxury fashion show. The $50 watch bought at the local gas station just doesn’t have the same effect. Nor does the $50 fake Rolex bought in China or the $500 imitation bought online with a real Swiss mechanism that even imitates the sweeping second hand movement of the original. Similarly a zirconium stone won’t make a lady feel like a million dollars even though most experts might not be able to tell the difference without a magnifying glass or maybe even a diamond tester.
So what does all this have to do with the future of private banking? Well in my opinion the successful private banker of the future will need to be influenced more by De Beers, Rolex and LVMH than by Keynes, Friedman or Greenspan. They will have to learn to market themselves as a “luxury product” in the knowledge that they won’t be able to compete on price, nor probably on competence as we shall see later, and that they will have to position themselves differently.
Over the last few years, compliance and regulatory requirements have increased drastically. They will continue to evolve but at a much slower pace. Banking secrecy has all but disappeared in most markets and is migrating to more opaque jurisdictions who believe that they can benefit from the changing landscape. They might be able to make some money in the short-term but gradually the net of international pressure will be cast over them as well. Soon investors looking to hide their wealth will only be able to do so in countries where the economic and political risk don’t make it worth their while. The only remaining factor which will continue fundamentally to change the future of wealth management, and indeed banking in general, will be technology. And the changes which technology will impose on this business, as on many others, will be so massive that bankers will long to return to the happy days of Basel 111 and FATCA.
Most private bankers I have met recently agree that their profession will be greatly impacted by robo-advisors and algorithms which are able to make investment decisions far more efficiently and less expensively than they are. They accept that the value investors with a research approach will gradually disappear leaving only a few Warren Buffets whose performances are exceptional enough to justify their fees. Institutional sell-side brokers are already feeling this effect very strongly and are being forced into a massive consolidation of their industry to obtain critical size as margins have fallen typically around 70% since the beginning of the century. Clients choose algorithms and ETFs rather than paying for traditional research. Consequently the number of large independent brokers on the institutional side in London can probably be counted on two hands now.
On the private client side, Geneva is perhaps deemed to be the global capital of wealth management. This market is also seeing a decrease in the number of actors but not at all to the same extent for the time being. Private clients are not usually professional investors but it seems logical to believe that they will gradually follow the example of their more sophisticated institutional counterparts and that private bankers are right to worry about the continuing fall of the their investment revenue. This fall will also be compounded by the increased use of online brokers and platforms. However, many private bankers believe that other services they offer will remain unaffected : asset allocation, estate planning, tax advice, complex financing etc.
Estate and tax planning seem to be the most complex of these areas with so many national and international laws, often governed by different interpretations and jurisprudence. But this complexity fades in comparison with the almost infinite permutations of chess or Go and yet, in spite of received wisdom, computer programs have been devised by IBM and Google to beat both Gary Kasparov and Lee Soddle respectively. And both champions agreed that they were beaten by an intelligent and creative adversary, not just a super calculator. As for asset allocation, once a client’s risk profile has been determined big data analytics should be able to do the rest much more competently than any human advisor. Finally, an increasing number of platforms will be developed to match investors with the real estate, yachting or aircraft offering that they’re looking for. Financing, however sophisticated, will be provided by the same platform or a partner company.
Of course all of this avoids the human factor, the interaction face to face, eyeball to eyeball. “People buy people” I can hear you say. And this is certainly true to a certain extent but might become less true as the new generation of high networth individual comes not from “old money” or “new money” but “millenial money”. Indeed millenial money probably won’t even be money in the sense that baby boomers like myself infer at the moment. It will probably be some electronic currency based on blockchain or another technology which doesn’t even exist yet, guaranteed not by a government and protected by a central bank but rather established on a virtual exchange with a cryptogram. This reminds me of Coutts Bank, the most venerable private bank when I used to live in London. Every time I used to walk in front of their Head Office, I used to admire the doormen in their tails and top hat and the horse-drawn carriages used to convey clients and documents. How disappointed I was when their business model moved from “old money” to “new money” and their bankers started removing their ties and dressing down. Coutts will almost definitely still be there to greet their millenial clients. But how will their bankers dress? How will they communicate with their clients?
As you read this and if you are working in the private banking industry, many of you will be offended because I appear to be stating that your profession doesn’t have much of a future. You’ll be wondering whether to remove me from your Linked In connections and thinking scornfully that private bankers are no more likely to become extinct than headhunters (I agree by the way!). So let me go back to the diamond and the Rolex. Let me go even further back, if I may, to a time when many people lived in small towns and villages unaffected by the vagaries of change and secure in the knowledge that their children and grandchildren would live in the same town or village and continue their family tradition. At this time the pillars of the community were the local notary, teacher, preacher and of course, banker. The continuity of the community and family depended on these people and the banker was known as a “trusted advisor”. They would reassure their clients about all financial matters and manage their deposits and loans to keep life flowing as efficiently as possible. Structured products, derivatives, leverage and other such terms were as alien to their vocabulary as much as microprocessor, e-mail and megabyte. The only hedges were in the country gardens and the only butterflies fluttered amongst the fragrant roses.
I am therefore convinced that the private banker, domestic or international, has a future if they can present themselves as a “trusted advisor” in much the same way as their counterpart fifty years ago. The cliché phrase “value proposition”, which seems to have become fashionable in the private banking industry in the last few years for some reason, needs to be banished from the vocabulary because it has become increasingly irrelevant. In a world where everyone has access to almost all information, there are only two differentiating factors for any “vendor” : 1) the way in which the information is used and 2) the human relationship developed beyond the information. For a private banker these factors are totally interrelated and based above all on the quality of the human relationship. People are always prepared to pay more for a good service or a prestigious product. In order to succeed, therefore, the private banker of the future must be able to develop a strong relationship with his client and market himself as a person of competence, trust and also “prestige”.
In the world of open architecture, every private banker has been able to offer the same products for a long time. Increasingly, however, the products and services offered can be provided less expensively by online technologies. Consequently, the playing field of open architecture has been skewed in favor of less expensive solutions and the private banker has to persuade their client to pay more for the same service. This brings us back to the examples of the diamond and the Rolex. The private banker of the future has to show that he is an integral and indispensable part of the client’s life. This probably involves moving from a transaction to fee based service for transparency purposes and to avoid conflicts of interest. But more importantly this necessitates a transition from “hard” to “soft” skills. From pretending to offer the best investment fund or the most competitive mortgage loan to really understanding the client’s personal as well as financial needs. A well-known family office in London has developed a reputation for advising wealthy families how to “manage” their children to ensure that they don’t fall into the traps of inherited wealth. In addition to classic investment advice, this involves coaching and developing a personal relationship with the families which algrorithms are unable to duplicate.
In a word, the future private banker has to persuade his client that, although he can obtain better investment advice and tax planning solutions on Internet, it’s still worth paying for his services because of trust, empathy and also prestige. In other words, they might not tell the time as well as their online competitors but they care about your family’s financial and emotional needs in a way only a fellow human being can. They might appear a bit colorless compared to certain technological alternatives, but they represent integrity, honesty and, above all, trust. The new private banker should be perceived by the client as a prestigious addition to their collection of luxury products and services together with their Ferrari, Riva and Centurion card. But beyond that they should be considered as the friend to call whenever there is a problem, financial or otherwise. If they can develop this “trust premium” and treat technology as an ally rather than a rival, their survival is assured.