How the private banking industry is changing

July 7, 2009 | Comments Off on How the private banking industry is changing

For most investors and financial professionals, 2009 is a year to remember. The collapse of Lehman brothers, the conviction of Michael Madoff, the massive layoff within the industry and the dramatic drop in equity value make 2009 a year to remember, for all the wrong reasons.

Two Harvard Business School professors, Michael Porter and Jan Rivkin, wrote an excellent note on industry transformation. This groundbreaking piece of note first published in 2002 touched on the triggers of industry transformation, 3 factors were identified in the process: Technological advancement, Changing customer needs and Changes in regulations. If we look closely we will see that all these forces are reshaping the private banking industries right now.

Changes in regulation
The bailouts / TARP funds offered by the US government require banks to be more prudent and transparent. In the next 5 to 10 years, I foresee that governments will play a bigger role in regulating private banking and the financial industry in general. The massive losses some private banking clients suffered during the 08 financial tsunami will trigger a series of lawsuits that result in  stricter rules on how private bankers can do business. This will post important impact on the profit margin (more money goes to compliance and KYC) and client acquisition rate (customers are more concerned about the conflict of interest).

Changes in customer taste
“Old money” in Europe often focus on wealth preservation. Their investment goal tend to be preserving family wealth over time instead of meeting aggressive targets. Clients in other parts of the world may have a slightly different investment preference.

There is significant growth in the BRIC area. For the past 20 years, the emerging markets in Asia, Russia and Latin America produced many “new money” clients who are first or second generation high net worth individuals. These clients have different risk preference and expectations. Some of these clients are more interested in using complex derivative products such as options, futures or interest rate swaps, in order to earn a higher potential return. Instead of just investing in bonds and equity,  they may want to put their money in real estate or antiques. Banks that can offer a wide selection of products will ultimately outperform those that can only offer basic asset classes.

Changes in technology
With the advancement in e-trading capabilities, many savvy investors can place stock orders at home. While some of them still prefer to work with private bankers and have them to place orders, some are already seeing private bankers as redundant middlemen. Compared to placing orders directly online, calling a private banker to place orders is more expensive. (Clients have to pay annual account management fees plus transaction fees for each trade). While private banking services will continue to reinvent itself and remain relevant, online trading will inevitably take some of the PB clients away.


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