Conscious of geopolitical tensions, wealth managers are 'de-risking' client books and re-aligning relationships to protect themselves from regulatory and reputational hardship.
As we enter the mid-2020s, the idea of how successful wealth managers will interact with their clients is becoming sharper. Key concerns around stability are increasingly interlinked with geopolitics and related issues of reputational risk and branding.
The concept of “de-risking” client books is not new, gathering momentum over the last decade. But it recently hit the headlines when populist politician Nigel Farage was “offloaded” by Coutts, a UK private bank linked with the Royal Family and orientating itself to onboard more clients from minorities, including LGBT customers. This led to the resignation of two of the firm’s leaders, following government pressure.
“In general, de-risking of existing books will be done reactively to sanctions and other international laws and regulations,” says Sharmil Patwa, founder of London-based wealth consultancy Opus Una. “Many of the banks are now thinking hard about reputational risk as it pertains to new clients.”
While many industry insiders privately commended the treatment of Mr Farage, as they found his political views abhorrent, this behaviour can have disastrous consequences for banks, says Mr Patwa, if driven by a commercial or subjective moral rather than clear legal imperative.
“De-risking will accelerate, especially in Switzerland and Singapore, irrespective of new regulatory pressures,” believes Ray Soudah, founder of M&A consultancy MilleniumAssociates. “Private banks and wealth managers are very profitable at present and would prefer less clients than reputational risks.”
This trend appears way short of any peak. “I don’t think de-risking is ever done, especially in times when the situation in some regions around the globe seems to be heading for the worse,” believes Alois Pirker, founder of technology consultancy Pirker Partners in Boston, US.
“First and foremost, recent developments have demonstrated that cross-border wealth management businesses are subject to geopolitics and vulnerable from a commercial vantage point,” says Matthias Schulthess, managing partner at Munich-based recruitment consultancy Schulthess Zimmermann & Jauch, advising banks on diversity of leadership teams. “Among the most discussed industry topics are potential sanctions that would emerge from US -China tensions and how global wealth managers with stakes in both markets would have to respond to it and ultimately which impact this would have on the franchise and licence to operate.”
Geopolitical worries
Geopolitical risk is a critical issue for banks operating cross-border. “The war in Ukraine and resulting salvos of sanctions have been a wake-up call on the importance of such risk, both from a reputational and regulatory standpoint,” comments Shelby du Pasquier, head of banking and finance at Geneva law firm Lenz & Staehelin. “The expected vigorous enforcement of sanctions around the world will leave no one in doubt as to the critical nature of this issue.”
The nature of ‘de-risking’ in practice is, however, quite an ethereal task, he believes, consisting mainly of monitoring activity of clients, not necessarily a sustainable state of affairs for many groups, who will need to change their long-term approach.
“Over time, one could expect this will lead certain global banking groups to rethink their onshoring strategies as regards deemed risky jurisdictions and focus instead to all extent possible on a ‘pure’ cross-border activity or joint ventures with local partners which are easier to adapt and curtail,” says Mr du Pasquier.
This task may be more urgent than global banks care to admit. “There is still too much hypocrisy about how banks are adhering to KYC [know-your-customer requirements] and yet a lot of undesirable clients are still being served,” suggests Gerard Aquilina, partner with family office advisers Cone Marshall and previously a senior leader with the wealth management arms of Barclays and HSBC. “We heard about a clean-up 15 years ago. If banks had done their KYC jobs properly, why are we still hearing about them tightening up their internal compliance?”
UBS-Credit Suisse tie-up
Key to the new reality is the take-over of global wealth management titan Credit Suisse by the industry’s undoubted leader, UBS.
The one-bank structure, linking wealth management to corporate and investment banking services, did not help. “The benefits of a one-brand strategy clearly come at the price of heightened cross-contamination risk,” says Mr Pirker, citing Credit Suisse and Wells Fargo as examples where the wealth management business lines paid a price for “toxic practices” in other parts of the firm.
“UBS, on the other hand, has clearly demonstrated the power of a strong unified brand across business lines and has done so for 25 years now,” he says. “In the case of UBS, all its businesses are working in concert, with wealth management being the centerpiece. As such, it would be prudent for firms to consider the potential risks of each business line when creating a one brand strategy and possibly brand outliers differently.”
While some see the merger as a bank-specific event, other commentators point to the beginning of an industry trend. “Recent evidence suggests the biggest banks are swallowing up their weaker brethren who fall into distress,” says Kim Cornwall, a former senior banker with Société Générale, now training the next generation of relationship managers. “UBS ‘rescued’ Credit Suisse, JP Morgan similarly swallowed SVB and others, and in so doing has considerably broadened its deposit base at little or no cost,” says Mr Cornwall, believing in inevitability of further consolidation. “This is the concept of the survival of the fittest and too big to fail all rolled into one. What has happened to moral hazard?”
An increasingly sceptical client base, many of whom have had fingers burned in today’s and previous crises, could be re-aligning some of their relationships as a result of the corporate changes.
“The Credit Suisse debacle is a lesson that private clients should focus on pure players, as opposed to groups that combine corporate and commercial banking activities,” says Mr du Pasquier of Lenz & Staehelin. “Although those activities, if properly managed and controlled, should be innocuous and indeed beneficial for their clients, recent history shows that global banks are accident prone in that area.”
Small could be beautiful
The changed landscape which the merger now heralds has led to availability of many experienced relationship managers in the market, who will be wary about which parent group they now gravitate towards.
“This offers a great opportunity for smaller shops to prosper: small and lean, small and beautiful, small and efficient,” suggests Nicole Curti, CEO of wealth management consultancy Capital Y in Geneva, and former partner with Stanhope Capital, who also worked at Lombard Odier. “The industry will see more and more independent wealth managers looking after private clients who are fed- up with speaking to machines or ever-turning staff.”
Not enough is being done around branding services adequately, she believes. “Today, what is relevant is more technology in the service, but remaining a human business. We need to find the right balance and the branding that goes with it.”
This branding must encompass both performance and impact, in order to resonate with a younger cohort of entrepreneurs. “Next gen clients are interested in a longer-lasting impact their wealth can have for the planet. There is a clear trend there,” she says.
What is clear is that taking brand-led positions on key issues is only positive if the firm puts the words in its advertisements into action. “Firms have to walk the walk,” says Mr Pirker. “Nothing is worse than empty marketing rhetoric.”
Coutts has been applauded by many for the remoulding of its image, despite the controversy which this led to. “Banks are concerned about the brand, versus which clients they represent and how the brand is perceived,” says Simeon Fowler, founder of Fowler Fox & Co financial industry head-hunters in Hong Kong. “Coutts have completely changed their image digitally and the website reflects a younger, trendier feel. Other banks are also jumping on the eco- friendly and social responsibility band-waggon, focusing on not just making money above all costs, but the way in which they do this.”
ESG backlash
The wealth management community is, however, split about effectiveness of branding around environmental, social and governance [ESG] values.
The concept of ESG, suggest Cara Williams, senior partner and sustainability leader at Mercer consultancy, has been mis-branded as “save the world with investments”.
“This is a misinterpretation of ESG at its core, which is just good corporate management, taking advantage of tax incentives, regulations, shareholder and consumer interest,” she says. “There is a great opportunity for banks to focus on ensuring a solid bench of impact investments for the ultra-high net worth investor. But for the mass affluent and high net worth segment, focusing on a wide array of investment strategies that incorporate financial and non-financial metrics will be the key to success and not risking misguiding clients.”
Other industry voices go even further. “The ESG fashion has gotten out of hand and in most cases is brand damaging and all about self-praise,” suggests Mr Soudah of MileniumAssociates. “A low-key approach is more suited to the current euphoria.”
