Broad Brush 1 Private Bkg 08 11 18

The Broad Brush Number 1
11 • 2008

A regular analysis of strategic marketing issues in the European investment business

Factories, Homes & Cottages
A new look at the architecture of
Private Banking in Europe

W A
elcome to our first edition of The Broad Brush. In each s the dust eventually settles on the financial landscape,
we will aim briefly to describe a selection of the issues in there will be two businesses less damaged than most:
a one area of the investment landscape across which we roam Private Banking and Wealth Management.
in our varied strategic research assignments.
Asset management groups will seek out these firms more than
We are very grateful to SEI, a leading global provider of ever as potential buyers of their funds. The more resilient large
outsourced asset management, investment processing and financial institutions will seek to acquire them for their ‘sticky’
investment operations assets. And investment bankers requiring fresh challenges
solutions, for making the will set up new boutiques to compete in this market - always
findings in this edition assuming they have grasped that ‘product pushing’ is no longer
possible. SEI’s mission is to help firms in this space excel in the the name of the game here as it was in their old territory.
delivery of advice, investment mangement and other wealth
The first of our four sections focuses on the simple but
management services while growing revenue, allocating capital
important point that the market is not homogenous. Existing
effectively, and managing risk.
classifications give little clue to the underlying patterns. We
This Summer our help was requested by SEI to explore the suggest a new Segmentation into ‘Factories’, ‘Cottages’ and
changing landscape of wealth management in Europe. In order ‘Homes’ (Stately- or Retirement-, take your pick).
to help it position itself for greatest success in these markets,
This segmentation in turn unlocks new insights into the way
SEI asked us to add to its understanding of the strategic trends
that private banks and wealth managers relate to their clients,
and relevant issues in onshore and offshore private banking
how and where they operate, and how they seek to grow.
and wealth management. Some outputs of this project are
These themes are explored in three further sections on
shared with you in the following pages.
Offshore and Onshore, Discretionary and Advisory, and
Please look out for further editions of The Broad Brush on
the Hunt for Scale.
topics such as: Developments in DC Pensions, The Shift from
Please do give us your feedback.
Products to Solutions in Asset Management, and Distribution of
Offshore Life Insurance Products.
Nils Johnson and Magnus Spence

Spence Johnson is a specialist provider of marketing intelligence. Our research products and consulting
15 Abchurch Lane,
assignments support marketing, sales, and strategic planners across the investment business - in asset
London EC4N 7BW UK management, life & pensions and wealth management.

+44 20 7112 2131

www.spencejohnson.com

Factories, Homes and Cottages
A new look at the architecture of Private Banking in Europe Number 1 • 11/08

Summary

Segmentation
Section 1
Page 3 Private banks and wealth management firms are not a homogenous group. There are a wide variety of
business models. But the existing and conventional segment categories do not fully explain the distinct
behaviours which exist.

Research which we have recently carried out for SEI suggests that among the many available indicators,
that there are three key measures which provide the clues – the net worth of clients, the number of
clients, and type of mandate (discretionary/advisory).

Using these we have found coherent patterns. There are three main groups which emerge: Factories,
Cottages and Homes. No doubt further sub-categories can be developed, but these are the main ones.

This categorisation unlocks insights into the way that banks relate to their clients, how and where they
operate, and how they seek to grow. These themes are explored in the following sections.

Offshore and Onshore
Section 2
Page 7 Most banks service both onshore and offshore clients, although most specialise in one direction or the
other. The desire for offshore services is tax and privacy driven – the desire for secrecy is not the same
as desire to avoid tax. The Factories have the highest proportion of offshore clients. Some say offshore
is growing fastest, others the reverse.

Discretionary and Advisory
Section 3
Page 11 If we were to select one single feature which was most important for understanding the behaviour of any
Private bank or wealth management firm, it would be the proportions of its clients’ assets which are
Discretionary and Advisory.

Most banks are a mixture, but most focus on one or the other. Only one of our three segments, Homes,
is focused on discretionary business. Most Factories and Cottages are heavily weighted towards advisory
business.

Firms which have predominantly advisory clients reveal quite different economics and drivers to firms
with predominantly discretionary clients. For example discretionary clients are said to be much more
profitable, and many banks have been trying to increase their discretionary books. But very wealthy
clients are seldom discretionary.

Advisory clients offer the advantage of providing a lower ‘market exposure’ risk, which means that in any
market downturn advisory clients are less likely to blame their bank. Which in turn may explain why
advisory bankers in the current climate seem slightly less agitated than their discretionary focused
competitors.

Hunt for Scale
Section 4
Page 16 There is a big hunt for scale going on among Private banks and wealth management firms. In an
environment where growth may no longer come through stock markets, the need to maximise efficiency
is paramount. The industry is clearly being ‘industrialised’. But it is the Homes who need to see the
benefits of scale most, since they seek client volume in a way that Cottages, in particular, do not. One
measure in particular reveals most clearly the variety of attitudes towards scale – the number of
advisers per client.

We are very grateful to SEI
2
for allowing us to publish
these findings


1.1 Segmentation ● Variety

There is an endless variety of business models
There is an endless variety of business models in wealth management. This is not a
homogenous group, it is highly varied. A sample of the variety is shown below. This
prompted us to develop a more meaningful categorisation.

This variety is not a bad thing.
Examples Descriptions given in interviews
Far from it, it shows a lively
landscape. But it does make it
difficult to analyse. As observers We are one of only fourteen ‘real’ private banks
Partnership
in Switzerland – unlimited liability partnerships.
of the industry we must attempt
to compare groups of firms, and
We’re a private bank, but we’re much closer to a
Multi family
this grouping is problematic.
multi-family office style business than we are to
office
a private bank.
One thing we found above all was
that the conventional descriptions
We are part PRIVATE Bank, part INVESTMENT
Private
for grouping firms are not Manager, part Family OFFICE. So we call
Investment
adequate. So for this project we ourselves a PRIVATE INVESTMENT OFFICE.
Office
have developed our own which
more accurately (in our view) We are an integrated broad wealth management
Integrated and
service, becoming trusted advisors to very high
reflect the way firms actually broad
end families
behave.

Our model can be described as customer
Intimate, holistic
intimacy with holistic premium service.

The term private bank is very poorly defined.
Asset
Most private banks, like us, just want to manage
management
assets.
only

Our Swiss model: primarily advisory brokerage,
Swiss model
and very traditional Swiss private banking

We offer what we call integrated wealth
Holistic
management - some people call this holistic
wealth management

We are a global bank serving upper high net
Global lifestyle
worth, international, commercial and lifestyle
clients.

We offer all the Private Banking core services:
Core services
banking, advisory, investment, and credit.

We are not an investment bank, we are not an
Aggregation
asset manager. We are not a distributor. We
are an aggregator.

3
these findings


1.2 Segmentation ● New ways

We suggest new ways of segmenting
By scoring each firm in a sample of 25 banks on ten features, we could scan visually for
similar patterns. Three groups emerge: Factories, Cottages and Homes. Each group has
clear common behaviour.
Scores for each firm interviewed

10
Highest
score 9

8

7

6

5

4

3

2
Lowest
score 1
Net Worth Clients Mandate Domicile AuM Ownership Employees Offices Urgency

Most of the ten features we scored were
not helpful in assessing differences. The 10

1. Factories
chart above appears to show just a 9

jumble of differences. 8
• High number of clients
7

• Usually high in advisory
But by isolating the first three in the 6

chart – the net worth of clients, the 5

• Example UBS
number of clients, and type of mandate 4

(discretionary/advisory) – we can see 3

patterns emerge. 2
10
We suggest there are in fact three 1
9
Net Worth Clients Mandate
groups, Factories, Cottages and Homes,
8
each with the broad characteristics
2. Cottages 7
shown here.
6
High net worth clients
Factories are the larger firms, but include 5

Low number of clients
a variety of models. Cottages align 4

closely to Family and Multi- Family offices 3

Example Lord North Street
in terms of commonly used terms. 2

Homes are mostly smaller, and tend to 1
be more focused on discretionary clients 10

than the other types. We are tempted to 9

call them ‘retirement homes’ because 8

their clients are often more elderly. 3. Stately or Retirement
7

Homes (‘Homes’)
6

5

• Low in advisory
4

3
• Lower net worth clients
2

• Example Rathbones
1

4
these findings


1.3 Segmentation ● Services

Factories tend to offer the broadest range of services
As you might expect Factories distinguish themselves by offering a wide variety of services,
while Cottages and Homes focus on investment.

Services offered

100%

75%

50%

25%

0%
Factory Cottage Home

Investment Trusts Tax advice Banking Lending Custody Other

Comments given in interviews
The chart shows how varied the
factories are, offering their clients
Some Factories This is the key to the success of the big banks
everything from investment to trust
maintain you who have gathered so much more assets in
and tax advice, banking and lending
have to have a recent years. They have easy access to
(credits). wide offering specialists and a credible and wide collection of
offerings.
The smaller Cottages and Homes are
much more focused. As one told us, You have to offer a wide range. If you don’t offer
credits, for example, then others can have a
“generally very wealthy clients don't
hook into your clients. If others have a hook
need input on Trusts and so on - they
into your clients it becomes that much more
are already in place”.
difficult to maintain the client relationship.

But Cottages and Generally very wealthy clients don't need input
Homes generally on Trusts and so on - they are already in place.
avoid trying to If they do, we introduce them to legal experts.
compete with We don't pretend to have specialist legal
lawyers, and knowledge.
don’t want to
provide low Most of our clients, in the wealth profile we’ve
margin services talked about, have accountants and lawyers
like Banking and advising them.
Credits.
Our major value offering is service. Not tax.

We try to give to a soup-to-nuts service. But we
don’t do everything, for example credits.

Clients do not want a bank offering. That is not
what they are interested in.

Banking is not an attractive proposition.
Commodity services like credits, credit cards,
and chequebooks do not make money, but are
nonetheless high risk, because they can ruin
your reputation overnight if you get it wrong.

5
these findings


1.4 Segmentation ● Homes

Homes focus on discretionary, onshore and less wealthy
A key factor distinguishing Homes is that their clients tend to be onshore, discretionary, and
are less wealthy than those of the Factories and Cottages.

Client base by domicile and mandate scores Factory
Homes are clearly much 10
Offshore Home
more focused on onshore
Comments given
Cottage
assets, which in turn tend in interviews
to be more discretionary.
Factories and Cottages
2
We live in a sort of virtual,
R = 0.1222
Offshore domicile

global world. Because
are the reverse. we’re advice led, we ’re
upper high; we ’re upper of
the upper where we ’re
Homes are also much pitching, we ’re
5
international. (F -1)
more focused on less
wealthy clients, as shown
in the lower chart. This is The discretionary side of
the business is the one
again in contrast to that ’s growing. The
demand coming from the
Factories and Cottages 45 to 55 year age bracket
who tend to have much onshore in the UK is a
Onshore
huge area. (F -17)
higher average AuM per 0

client. Very wealthy 0 5 10

Advisory Mandate
client base also tends to
Discretionary Advisory
indicate a high proportion
of Offshore activity.

Client base by domicile and net worth scores
Factory
Offshore 10
Home
Comments given
Cottage
in interviews
2
R = 0.3145
Our client, being the
upper wealth,
Offshore domicile

international, by
definition, they have an
international lifestyle.
These clients tend to be
5
serviced offshore.

There are very few truly
global clients. Below
about £10m. most
client ’s needs are for
Onshore domestic onshore
services.
0
0 5 10

Client Net Worth

Lower Higher

6
these findings


2.1 Offshore and onshore ● Tax driven

The desire for offshore services is tax and privacy driven
The days of tax avoidance are (most say) now gone – offshore is now mostly used by those
seeking tax efficiency and privacy

Companies are increasingly using offshore
By moving assets
Offshore clients are often said to
centers' as a way of owning their businesses
offshore, clients
be highly international, and in
through what are called ‘tax blockers’. This is
can delay tax,
need of international financial
based on the principal that tax authorities never
and achieve
services. This includes tax saving
go up the whole chain
other legal tax
advice and services like Trusts.
related
Offshore activities are nowadays particularly
advantages.
While most insist that regulatory relevant, for those who want to be or who can
and anti-terrorist pressures have successfully be taxed on a remittance basis.
signalled the end of tax avoidance This means that they are taxed eventually when
they bring the assets onshore, but in the
in most European offshore
meantime are able to postpone any tax.
locations, some beg to differ and
argue that “offshore is still used to
a large extent for hiding money”.
In my view, offshore is still used to a large
Tax avoidance
extent for hiding money. I have seen estimates
may not have
which suggest that half of the money in
disappeared
Switzerland has never been declared to a tax
completely
authority anywhere.

Offshore clients are internationally mobile;
Offshore clients
working away from their home country or have
are often said to
business interests in several countries.
be highly
international,
Our client, being the upper wealth &
and in need of
international, by definition, they have an
international
international lifestyle so they tend to be serviced
financial services
offshore. Clients come to us because, through
us they can access the world. We live in a sort
of virtual, global world. It’s on and offshore
both.

For the offshore clients, if you’re a Kazakh or a
Another
Russian or a Peruvian for instance, and you’ve
frequently
put your money in Zurich, you’ve normally done
mentioned need
it for a reason, and secrecy is part of that
was secrecy
reason. It’s not necessarily about tax, but in
some cases it’s about not wanting people or your
government to know, because they might shoot
you.

There are several other reasons, apart from plain
fraud, why assets are moved offshore. General
secrecy is definitely a factor. So also is secrecy
from one’s own relatives.

There are still clients from less developed
countries with high tax regimes who use offshore
assets as ‘run to the airport’ money - a safety
factor.

7
these findings


2.2 Offshore and onshore ● Secrecy

Desire for secrecy is not the same as desire to avoid tax
Many in the industry now talk about the need for privacy or secrecy as a key driver of
offshore business. They can quote many examples of how an individual might want secrecy
whilst still not trying to avoid tax. We captured three short case studies:

Case Study A Case Study B Case Study C
Why German clients like Switzerland Four legal reasons why assets are Why some people want money to be
moved offshore secret
There are several reasons why German
clients like to use Swiss private banks. There are several other reasons, apart If you’re a Kazakh or a Russian or a
from plain fraud, why assets are moved Peruvian for instance, and you’ve put
They aren’t looking to hide their
offshore. your money in Zurich, you’ve normally
assets, and are quite willing to be
done it for a reason, and secrecy is part
completely open and transparent, and to 1. General secrecy from authorities is
of that reason.
pay all taxes. This also applies to clients definitely a factor.
from the Emirates. It’s not necessarily about tax, but in
2. So also is secrecy from one’s own
some cases it’s about not wanting people
What they are looking to achieve is to relatives. In many cases, it is easier for
or your government to know, because
spread their assets by geography, so in a family to keep its assets offshore to
they might shoot you.
many cases they will have some of their avoid disputes between family members.
assets in Switzerland, and some They are cultural reasons: local crime
3. Inheritance tax avoidance is another
elsewhere. and local fiscal corruption. We have
major factor.
clients who don’t want statements mailed
They are also looking to spread their risk 4. I have heard of people living in less to them because they don’t want the
by currency, and Switzerland is a natural secure countries who keep their assets postman to see it. They’re worried the
home for some of their assets. offshore to avoid kidnapping risks, which kids will get kidnapped.
Switzerland also has a stable are prevalent, for example, in South
So it can be very simple.
government, which is appealing to people America.
from Germany who have memories of Most UK clients are less worried about
very unstable governments in the past. secrecy - leaving tax aside, there are less
people who are going to abuse it. By and
Another factor is that many wealthy
large the risks of being got at by your
Germans and other Europeans are
government or your local warlord or
coming to live in Switzerland. A lot of
whatever are limited in most parts of
Formula One drivers now live around
London!
Lake Geneva, for example.
Another factor is that they like the fact
that Swiss bankers are more international
and better educated.

8
these findings


2.3 Offshore and onshore ● Factories

The Factories have highest proportion of offshore clients
Factories we spoke to have the highest proportion of offshore business. The Cottages are
also very offshore focused.

Factory
Client base by domicile of firms interviewed
Home
Cottage
10
High offshore

5

High onshore
0

Factories tend to have clients who are wealthier, and more in need of the of offshore tax saving services, or have
the need for privacy. Clients of Homes are happy to keep their assets onshore. As one Home firm CEO told us,
“There are very few truly global clients. Below about £10m most client’s needs are for domestic onshore services.”

9
these findings


2.4 Offshore and onshore ● Growth

Some say offshore is growing fastest, others the reverse
There are quite different views on the growth of offshore. Even the major consultants
cannot agree. Many see it growing still, both in Europe and in the new centres such as
Singapore and Dubai, while others suggest that the real growth story is onshore.


Offshore is growing - people and capital are both becoming more international. The mega wealthy are mostly
Grow offshore. The advantages of tax avoidance are diminishing.
more
McKinsey was saying eighteen months ago that onshore wealth management was going to grow at a faster
than rate than offshore wealth management and is now saying that he was wrong, and it is going to be even. My
onshore guess is that the next prediction is going to show that offshore is growing faster than on, because of the
economic situation.

To be honest, we thought that the offshore business was dying. About two years ago, we were considering
closing our [UK Channel Islands location] office. There was no growth and our view that the loss of offshore
tax benefits would continue to be eroded.
Offshore

The new business coming from domiciled British is nearly all onshore. We’re getting more and more onshore
as time goes by

In a number of countries, the second and third generation want more use of their money and not to hide it
and this in turn drives the need for onshore business

Germans, who use Swiss private banks extensively, aren’t looking to hide their assets, and are quite willing to
be completely open and transparent, and to pay all taxes

I do believe that the trend is for more money to go onshore than offshore. Frankfurt is a very big booking
centre for us for Germans who don’t want to hide anything.

Grow The new business coming from domiciled British is nearly all onshore. We’re getting more and more onshore
as time goes by.
less
than In the meantime you’d be well advised to spend the profits building onshore businesses, and in our case we
onshore will do that.

10
these findings


3.1 Discretionary and Advisory ● Differences

Discretionary and Advisory are quite different businesses
If a bank has mostly advisory clients it is a quite different business to one which has mostly
discretionary clients. For example, its client loyalty, cost base and regulatory risks are all
quite different.

Private banking consists of a range of services. You see them described in different ways by different
commentators. One approach is to see four main offerings: Investment, Banking, Lending, and Wealth Structuring,
as shown in our schematic below.

We have done this so that we can show our definition of the word advisory, as being a sub-set of the investment
offering, and not a reference to wider advice on other matters such as tax. Discretionary means that the bank
decides where to invest, advisory that the client does this. There is a middle ground, which is explored more over
the page, where both do it.

The reason for making this distinction clear is that it is a vital driver of a banks client approach, and its economics.
As we summarise below, if a bank has mostly advisory clients it is a quite different business to one which has mostly
discretionary clients. For example, its client loyalty, cost base and regulatory risks are all quite different.

Private Banking Advice and Services

Investment Banking Lending ‘Wealth Structuring’

Discretionary mandates Current accounts Loans (credits) Company formation
Advisory mandates Deposit accounts Credit Cards Foundation formation
Execution only mandates Payments Trust administration
Custody mandates Cheque books Tax advice
Cash management Retirement/estate planning
Philanthropic planning
Definitions of investment mandates Life assurance
etc
Client/bank
Bank Client
decide together
decides decides

Advisory
Discretionary
‘Active’ Execution
advisory only

Client Interaction Lower Higher
Discretionary and
Client Stickiness Higher Lower
advisory appear to be
Regulatory risk Lower Higher
different businesses
Market related risk Higher Lower altogether
Profitability Higher Lower

11
these findings


3.2 Discretionary and Advisory ● Middle ground

Discretionary and Advisory are not black and white terms
There is a middle ground, where clients and bank both contribute to investment decisions.
This middle ground is populated with examples of hybrids. Part of the reason for this is that
banks are trying to gradually shift their clients into a discretionary mandate.

In the Case Studies below we make the point that the terms Discretionary and Advisory are not ‘hard’ - many firms
offer semi-advisory and semi-discretionary services.

This is partly because some clients like to work this way. For example many very wealthy clients will resist handing
over complete control in a discretionary mandate, but seek active input in the form of investment ideas from their
adviser.

A significant factor here is the desire for many banks to try to build their discretionary and shrink their advisory
books, to increase their profitability. Hybrid investment solutions are often ways for a bank to help transition
clients from right to left on the spectrum shown below.

Advisory
Discretionary

Case Study B Case Study C
Case Study A
Two semi-discretionary solutions for clients
Different types of Clients who are untrusting,
who won’t delegate
discretionary clients but needing advice

Clients are less and less willing to delegate. We
A discretionary client who wants We have discretionary and real
have two ideas on that.
to know precisely why he advisory clients, and then
decided to make this investment clients who are the ‘middle
The first is ‘partial delegation.’ We can
decision at that moment and way’.
manage certain parts of the portfolio that the
wants to hold direct equities and
client is not able to deal with by himself, for
wants to hold cash, he wants to Real advisory clients use us for
example alternative investment. To select five
hold something else, invest in execution only.*
hedge funds is not that easy for a client. And the
commodities and so on, is
client takes care of the rest of his portfolio.
completely different thing to ‘Middle way’ clients do not
somebody who's happy with trust discretionary managers
The second is ‘semi-delegation’ - not
the templated model. but they need advice because
discretionary, not advisory, but between. they do not have the
Instead of signing a discretionary mandate that
At Church House, a private bank sophistication to make their
lasts for ever, the client could sign the mandate
in Yeovil, they have three unit own decisions. There are a lot
for one month, and one month later he can
trusts. Their managers are, like this. We cannot do
decide to sign again. This has the advantage for
basically, relationship managers. anything without the advisory
the client that he won’t get his banker calling
Depending on what you want, clients’ approval, so we spend
every day. Also it solves the problem you get
you get a combination of those a lot of time talking to them
when a client tells you that he is aggressive, and
three unit trusts. That is a and gaining that approval, to
then the market goes down, and then he wants
template, and that's the scale. enable them to make
to change his approach – not so easy with a investments.
discretionary mandate.

12
these findings


3.3 Discretionary and Advisory ● Unpredictable

Mandate type is vital, but is often overlooked. Why?
We have argued that the distinction between Discretionary and Advisory client mandates is a
key factor in determining the character of a bank. But amazingly this distinction is not often
made by industry observers, possibly because the measure is difficult to get or to predict.

The distinction
Mandate type vs AuM
between advisory and
discretionary is a vital
Other evidence *
Evidence from this project
clue to the nature of
100% 10
any Private Bank, but Advisory
it is very difficult
measure to obtain.
Possibly as a result
many industry studies
Mandate

ignore it – a big R2 = 0.0901
5
mistake in our view. R2 = 0.2341

Nor is this measure
easy to predict from
the outside. For
100%
example, as our two
Discretionary
charts show, it is not 0
0 5 10
£0 £20 £40
correlated either to AuM
£m Aum
size of AuM, nor to the
average net worth of Mandate type vs Net Worth of Clients
clients.
Other evidence *
Evidence from this project
100% 10
Advisory
Mandate

2
5 R = 0.0142

R2 = 0.0014

100%
Discretionary
0
£0 £3 £6
0 5 10

Net Worth £m Minimum Assets

* Top ten UK private client wealth managers. Source: Landsbanki Securities estimates. Private Client Wealth Management report, October 2007.

13
these findings


3.4 Discretionary and Advisory ● Growth

There is no consensus on growth of discretionary
For every respondent who told us they thought their discretionary client base was growing
the fastest, we were told by someone else that it was their advisory clients who are growing
most.

Many Factories would like to have We much prefer discretionary clients who are easier to manage.
more discretionary business Advisory relationships are much more difficult to hold onto.

They find advisory work to be Advisory are the clients who take up most of our time, and who
Grow demanding and less profitable cost us the most.

Discretionary firms agree – they No one wants the headache of dealing with advisory clients. Most
prefer discretionary mandates of us want discretionary clients.

The Discretionary firms see Discretionary is only about a third of the market today, and
continued growth in this business probably growing.
Discretionary

Some Factories think the opposite – Some of the smarter banks (like EFG) actually try to avoid
discretionary is risky and discretionary altogether - recognising that there are quite big risks
unattractive, and is shrinking for the bank when markets turn down.

We saw no evidence of a shift taking The proportion of our AuM in discretionary is going down. Clients
place from advisory to discretionary are less and less willing to delegate. We don’t aim to develop
– if anything the opposite discretionary portfolio management as a priority.

Some Cottage firms agree – they I think there’s a little less demand for discretionary investment
think most new money is Advisory today, the new money wants to be a bit more hands on.
Shrink Some Cottages have seen benefits in We needed a more diversified business mix, so we started to build
actively growing their advisory side a transaction based book.

Now some Discretionary firms are I think we should build an advisory desk. A lot of people have a
thinking the same way very transactional attitude to their money.

Many Factories would like to have more discretionary business. They find advisory work to be demanding and less
profitable. But despite the desire of many firms for this to happen, we saw no evidence of a shift taking place from
advisory to discretionary. If anything the opposite was more prominent. For example, some Factories say that
discretionary is risky and unattractive, particularly in the current market conditions, and is shrinking.

After all advisory business offers the advantage of providing a lower ‘market exposure’ risk, which means that in any
market downturn advisory clients are less likely to blame their bank. Which in turn may explain why advisory
bankers in the current climate seem slightly less agitated than their discretionary focused competitors.

14
these findings


3.5 Discretionary and Advisory ● UK differences

Discretionary may be particularly high in the UK
Why is it that UK banks seem to be so much more reliant on discretionary business than
those in Switzerland? Rather backing up our point that not enough analysis is being done on
the discretionary/advisory distinction, no one seems to know the answer to this question.
Swiss
Sample by location of HQ
10
Advisory
UK
Other

5

Discr.
0

Within our sample a high proportion of the UK firms had low exposure to advisory, high to discretionary, unlike
other nationalities.

No one seems able to tell us why
It is possible In Switzerland we are primarily advisory but
discretionary business is apparently
that the UK is here in London we are 100% discretionary.
so much higher among UK Private
quite unique in
Banks than Swiss ones.
being heavy in We have looked at taking our UK-style model to
discretionary Europe, but the actual culture of the type of
Some say that this is because UK
business investment we do is not as prevalent as it is
money is ‘lazy’, although others here.
disagree, vehemently, on this point.
UK onshore discretionary money is often old,
Our sample included many Homes in ‘lazy’ money – unique to the UK.
the UK, but few in Switzerland, and
The US clients tend to want more advisory
this may have distorted the measure.
services. Whereas I think the UK guys, they’re
Discretionary may be abundant
all time deprived, and don’t seem as interested.
among smaller Home-type banks
focused on onshore clients in
Switzerland, and elsewhere,
especially in Germany. Others If anything, UK money is more sophisticated, on
disagree. They average. Plenty of quite financially aggressive,
say UK far from lazy, entrepreneurs use discretionary
discretionary for a portion of their assets - because they're
assets are not time poor and/or want their money managed in
‘lazy’. It is also a customised or specialist discretionary
likely that mandates.
discretionary is
also in The average for discretionary assets in
abundance in Switzerland is about 50% in the firms I know.
other countries,
we just haven’t I do believe that the trend is for more money to
seen it in this go onshore than offshore. Frankfurt is a very
project big booking centre for us for Germans who don’t
want to hide anything. There is more and more
onshore business from Germany. UBS has done
very well there.

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these findings


4.1 Hunt for Scale ● Nirvana

There is a big hunt for scale going on
Scale is the nirvana of private banking – virtually everyone wants to achieve more of it in
some sense.
People are in short supply and are
You’re looking for scale. Most of all, for
Across all types,
very expensive, and yet they are the
processing and administration in offshore
there is an urge
basis of all service. This conundrum
centres, you want to get access to a broad range
to pump more
is being wrestled with in different
of people, at cheaper rates, while preserving the
volume through
ways by all the firms we spoke to. As
client privacy aspect of it.
their models.
one large firm told us: “What we have Shortage of
to do is reduce the people cost and Everyone is looking to achieve scale.
people is
replace this with systems costs.” sometimes the
(see Case Study, below) Scale is the toughest thing to do in this
bottleneck.
business, from what I can gather so far.
Sometimes it is
just shortage of
Of course the very ‘high touch’
London is full of six to ten billion private client
volume.
Cottage firms dealing with small
asset managers, and they’re not big enough.
numbers of very wealthy clients are
not trying to industrialise themselves,
With a few more people, we can multiply our
but even they crave greater assets under management by ten times before
efficiency. we reaches our capacity constraints. But
keeping relationship managers is a big challenge
- if you get too big you can’t keep the
relationship managers.

If we do grow more, we must do this with
But new
technology and without also growing relationship
technology and
managers. We must be more scalable. This is a
systems are also
big issue for us.
seen as the way
to make
progress.

Case Study
Three reasons why systems must be consistent around the world.
Firstly for branding purposes so that the same delivery of reports and description of products is available to clients who are increasingly
international. The second reason is control. We need to see what the relationship managers are doing. They must tow the line, we want to
own the client. And finally, the third reason for consistency is that there must be a consistency between what the relationship managers do,
because one bad apple can spoil the brand for everybody.
The key is how to balance the need for personal service to clients with the need for achieving a consistent global offering. For Bank xxx
industrialisation of private banking means ‘mass customisation’. This is the single biggest issue for the industry. What we have to do is
reduce the people cost and replace this with systems costs.

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these findings


4.2 Hunt for Scale ● Homes

Homes are most obsessed with scale
We were told about the drive for scale in virtually all the interviews we conducted. The
industry is clearly being ‘industrialised’. But it is the Homes who need to see the benefits of
most, since they seek client volume in a way that Cottages, in particular, do not.

Number of clients per Relationship Manager
1
400

3-400 100 7
<100 50 1

We have twenty
I think a private
If we had one I am amazed at how
We once had 10
Well, each RM
clients, and we
banker will never
hundred clients many clients some
clients per
probably looks
have a team of
be effective if
per relationship private banks have
manager, now its
after about £40-
twenty people
they are serving
manager, we per relationship
100, and clients
£50m, and that’s
to do this.
more than fifty
would be very manager. In our
still get great
probably three to
clients at any
happy, and in teams of two
service. Maybe
four hundred
time. Obviously
fact we are relationship
in future we can
clients, but it
technology helps,
nowhere near managers we are
achieve 200 with
varies.
but it can only
that yet but we aiming to have one
technology.
help so far.
are working on it billion under
In some Banking management spread
models you across just twenty
could have 300 clients.
clients per
relationship
manager, but in
others you would
be limited to 20.

Among Homes the trend is clearly to try to Among some Factories and Cottages with very HNW
increase this number to 100 and above clients, there is less concern with this number

Homes gave us evidence that they are focused on using technology to try to increase the number of clients per
relationship manager, without reducing service levels. Some talked to us about having as many as 300 to 400
clients per relationship manager. Some factories would love to achieve this, but many others are less concerned
with measuring scale this way, and say they cannot conceive of having more than 20 or 50 clients per relationship
manager before it would harm their service.

17
these findings


15 Abchurch Lane London EC4N 7BW UK

Telephone +44 (0) 20 7112 2131

www.spencejohnson.com

nils@spencejohnson.com

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