Other areas may be struggling, but private banking and wealth management are coming of age, says Matthew Adamson of Finance Professionals City.
Private banks have existed for centuries. However, only since the turn of the millennium has the full potential of this booming market even begun to be realised.
The rapid growth of existing businesses and the continual flow of new entrants have led to the industry shedding its traditional image as the preserve of the landed gentry and those with dynastic wealth. In an increasingly affluent society, one in which new millionaires seem to be created on a daily basis (particularly at bonus time!), there are demands from an increasingly diverse range of clients to make their money work harder.
Reflecting this, analysts have recently recognised private banking as the fastest growing sector in the financial services market.
Is growth sustainable?
With the markets hitting turbulent times of late, however, and investment banks and hedge funds suffering in particular, questions have been raised as to whether this historic growth is sustainable? Despite scaremongers pointing to recent examples of job cuts, I would actually suggest that these have been isolated incidents and that the short answer is 'yes'. This confidence can be attributed to a number of factors.
1) It is still universally recognised that, whilst developments in private banking over the last decade have made firms far more efficient at attracting individuals' wealth, little over half of the estimated 49,731bn held by affluent (ultra-high net worth) individuals worldwide is currently being invested. This creates huge continued scope for growth.
2) Whilst there is a general uncertainty around the economy and key indicators such as consumer spending are currently being hit, these conditions actually encourage investment. Far better to save money than fritter it away in times of uncertainty.
3) The private banking markets are very different from the investment banking markets. As the banks are investing on behalf of other individuals rather than with their own money, they face far stricter regulations. This means that investors have not been exposed to the recent turbulence related to subprime mortgages.
Robust inflows of new money
The clearest indications of these points is that in both the third and fourth quarters last year, despite the near panic surrounding the credit crisis, levels of both new money inflows and assets under management remained robust.
This summary alone is however perhaps slightly naïve. It must be remembered that the private banking/wealth management market in its current form is a relatively immature business area. All the prerequisites for dramatic growth do exist and the industry will certainly continue to expand.
That expansion will require renewed attention to talent. Historically, the lack of suitable relationship managers has been a significant constraint on the sector's ability to grow, but the last 12 months have seen significant lateral hiring of suitable candidates from other areas of the banking markets. These much-needed new heads will need time to bed in and get up to speed - the current market seems a very suitable time to for this to happen.
Private banks also have the potential to increase their operational efficiency. Costcutting, streamlining and offshoring have been key buzz words in investment banking for as long as we care to remember, but private banks are only just really taking account of the possibilities in this area.
Same strategy, different tactics
This shift in focus has led Raoul Weil, chief executive at the world's largest wealth manager, UBS, to comment that in 2008, "The strategy remains the same, though the tactics may differ."
Figures recently released by Schroders reinforce Weil's opinion, indicating a 54% rise in pre-tax profits from its private banking segment. Closer analysis of these figures shows that net income rose by 11%, hence larger profit increases are a result of initiatives such as the transfer of the organisation's back-office operations to Zurich during 2007. This enabled the business both to improve its client reporting and reduce costs.
While market conditions are tough, the industry is using this period to create a platform for sustainable growth. In this light, rather than simply coming of age, private banking and wealth management can be seen as an exemplary model for other industries that have perhaps grown too quickly.
Matthew Adamson is a consultant in the
private banking and wealth management division at recruitment specialist Finance Professionals City.