Do you need your own private banker?

Traditionally the domain of the uber wealthy, private banks are finding ways to provide services to the merely well off as they look to capture the multimillionaires of tomorrow and increase their domestic footprint.

It’s a significant change for the industry, as it tries to adapt the private banking model to the famously idiosyncratic investment habits of those Australians who may not care for access to complex investments or international securities.

The needs and attitudes of these investors are reflected in data that shows fewer than half of Australia’s high-net-worth investors have a private banker.

Depending on your view, that could either indicate a tremendous opportunity or the inability of the industry to deliver what customers really need in a personalised banking and wealth management offering.

But if the institutions have their way and can usher a new generation of customers behind the velvet rope, more Australians will soon be flashing their black no-limit credit cards or casually dropping the names of their private bankers into a conversation.

Exclusivity for sale

The private banking concept – which was founded in Europe, where financial institutions flexed their global muscle and offered access to investments and bank accounts in exotic locations – is coming of age in Australia.

But rather than requiring the tens of millions of dollars you’d need to rouse the interest of a private banker in the northern hemisphere, Australian institutions are accepting customers with significantly lower account balances.

If you have $1.5 million worth of loans or $2 million worth of investable assets, you’ll be welcomed with open arms by any private bank in Australia.

And the number and types of offers are on the increase – particularly within the big four banks, where more customers are being ushered behind the barrier and into the private banking fold at the discretion of a banker.

You may not have millions in the bank but, if you are a young professional with significant future earnings capacity, Commonwealth Private would like your business.

Adrian Hondros, the executive general manager of Commonwealth Private, CBA’s private banking division, says the private bank accepts clients who have annual household income of more than $400,000 or an intention to borrow $2.5 million.

Meanwhile, arch rival Westpac is also doing what it can to bolster the membership ranks of its private bank by rolling out the red carpet for families with at least $1.5 million worth of investable assets, and their superannuation savings can be included in that total.

Banks and financial institutions are also making offerings tiered in a similar way to those of credit card providers. It means they can deliver the look and feel of an exclusive private bank at various net-worth levels, and a larger number of customers can belong to their “exclusive” clubs.

But of course, the more wealth you actually have, the more people in the private banking world will jump to your attention.

At the entry level for clients, a private banker at any given financial institution might have about 100 or so relationships.

But as clients climb to the high-net-worth and the ultra high-net-worth categories – with $10 million or more in investable assets – private bankers maintain fewer than a dozen relationships.

Such private bankers claim to be at a client’s beck and call and that they are available around the clock – 24/7.

Do you need it?

Apart from the new credit card and bragging rights, most of the benefits at the entry level could be delivered by a suburban financial planner, says Andrew MacDonald, the managing director of Mieza Consulting, who consults to companies worldwide, including private and commercial banks.

“When you can get a really good private banker who can take $2 million and invest it wisely, understanding your risk profile, lifestyle objectives and financial goals, that’s when the rubber really hits the road,” MacDonald says.

His research on how private bankers can understand their clients better was published recently in the London Business School Review. He urges customers not to be sold on a private banking service based purely on access to lending and “a few chocolates”.

“Lending is a mug’s game. A commercial banker can lend you money to buy a holiday house in Portsea – so can a private banker,” he says.

At the entry level, all that’s really on offer from a private bank is a few basis points better than the blackboard rate on loans and deposits, MacDonald says.

But for those newly wealthy or for individuals on the path to a big bank balance, CBA’s Hondros says the service a private bank can offer shouldn’t be discounted.

“My experience leading a private bank for the last six years has been that clients genuinely value service. That’s usually the first thing they mention when they talk about having a private banker.

“We try to understand their needs,” Hondros says.

In the global scheme of things, Australia’s is a small and relatively untapped market for private banking, says Alan Shields, the managing director for advisory at RFi, a research house for wealth managers.

Shields says fewer than half of Australia’s 400,000 high-net-worth individuals have a relationship with a private banker.

Most of the country’s wealth, given the nation’s youth, is still in the hands of the first and second generation, whereas wealth in most developed markets is multi-generational, he says.

“To date, private banks have sold themselves on their skill set and their internal depth of knowledge. For global investment banks, it’s their access to overseas investments; for the domestic banks, it’s their billion-dollar balance sheets and preferential pricing.

“The issue has been that a lot of clients don’t see the difference between what the private banks offer and what they can get through their suburban financial planner.

“The biggest thing [private banks] really offer is efficiency and the ability to save time.”

Private banks in Australia

In the top tier, there are eight private banks in Australia and they are split into two categories.

Domestic banks such as Commonwealth Bank, ANZ, Westpac and National Australia Bank have their own private bank offerings.

The other big players are the global investment banks including Deutsche Bank, Macquarie Group, UBS and Credit Suisse.

National Australia Bank is the largest private bank here; the big four banks make the most of their large client bases and stand head and shoulders above the investment banks in terms of sheer size.

There are subtle yet important differences in how private bankers are remunerated, and the methods dictate the types of advice a client should expect to receive.

Private bankers within UBS, for example, are remunerated based on commissions, while private bankers at all the other institutions are remunerated through combinations of salary and bonus, where the bonus is based on targets.

UBS announced recently it intended to exit private wealth management in Australia and would spin off its unit, which contains its private bank, as Crestone Private Wealth.

Crestone will probably be similar to other investment firms that have ties to investment banks, such as Baillieu Holst (part-owned by Credit Suisse) and Ord Minnett (part-owned by JPMorgan).

The salary plus bonus method of remuneration means private bankers are clearly aligned with a broader group and it takes the transactional component out of the advice offering, says Chris Selby, head of Deutsche Bank’s Australian private wealth management business.

Commission payments to private bankers are a relic of the old brokerage model and are fast disappearing from Australian private banks. Watchers of the industry will say the salary and bonus structure aligns the adviser better with the client and the organisation more broadly because remuneration is not simply determined by the size and frequency of transactions that are made.

The downside of a phasing out of commissions is that talented private bankers could decide to move on to find big pay elsewhere in investment firms.

Onlookers say the abandonment of the broker model of remuneration through commissions at private banks is due to increasing compliance demands. Commissions are paid to the individual adviser, not the broader entity, but that company is responsible for meeting the onerous regulation requirements.

So although some lament the brain drain from private banking, others believe bankers will be more attuned to clients’ needs.

The big four v the rest

Commenting on the differences between private bank offerings at the big four banks and those at the global investment firms, Selby says the investment bank approach suits clients seeking more sophisticated investment opportunities.

“With the domestic offerings you might have to go through a wrap platform to access global products directly, whereas we will have custodial relationships with a lot of the investment firms the domestic [banks] don’t have,” Selby says.

The custodial relationships these firms have globally means they have formed a relationship with the originator. Usually the firm will have a “house view” based on its own “kicking the tyres” process and will use that view to advise clients to invest both at the wholesale and at the private bank level.

Selby believes what the banks lack in global investment reach, they make up in service and client retention.

“The strength [of the big four’s private banking] is really in their local expertise and in nurturing the client relationship. Leaving aside the deposits and mortgages, the banks are going to be more customer-focused, while we are more research-focused,” he says.

Shane Galligan, Credit Suisse’s managing director for ultra high-net-worth clients in Australia, says as the financial crisis has become more distant, investor appetite for sophisticated investments has grown.

“You need to have global reach and direct access to investments without going through an intermediary – where you end up with fees and trailing commissions – to have a complete private banking offering,” he says.

Indeed, Mieza’s MacDonald says private bank clients within global investment firms will probably end up with structured products containing global securities and fixed-income debt, while clients of domestic private banks will end up with off-the-shelf investment products.

The former products are usually better suited to clients with a sophisticated understanding of financial markets.

On the other hand, clients of local banks are able to benefit from their extensive domestic experience and reach, which can suit the average investor who tends to be a lot more interested in local and international equity opportunities.

And there are plenty of examples of domestic banks accessing deals for clients based on access to the wholesale originator. Christine Yates, the global head of NAB Private, points to the exclusive rights for clients to invest in MLC Private Equity Co Investment fund – 70 clients of the private bank took up the offer for terms of up to eight years.

The most important evolution of the private banking offering within the large banks is their willingness to listen to what the client wants, instead of retrofitting an existing solution, says Jane Watts, the general manager of private wealth at BT Financial Group. Her clients include those of Westpac Private Bank, St.George Private Clients, and Bank of Melbourne Private.

“We provide services very much on the clients’ own terms, whether they want no advice, limited advice or full service,” she says.

Watts says more than 50 per cent of the clients under Westpac’s private bank banner have never used a financial planner.

“We have a strong proposition to cater for people who are self-directed, particularly on the wealth side of the equation. They want insight, expertise and opportunity but they don’t necessarily need a financial plan,” she says.

Multi-generational wealth

The biggest challenge the private banks have on their plate now is to capture multi-generational wealth, as the assets of a family expand to include those of a younger generation or inheritances are planned or passed on.

Multi-family offices such as the Myer Family Co and Melbourne’s Mutual Trust are competing directly with the domestic banks and global investment firms for relationships with Australia’s richest families.

NAB Private has recently created a specialised family business and intergenerational wealth unit to serve the needs of the increasing number of business owners who face retirement and are seeking a succession plan.

Private banks – especially those within the big four – have built a strong offering around service and lending. But whether they are able to retain their wealthiest clients because of the success of their investment solutions remains to be seen.

“I think the [service-focused] intent is right,” MacDonald says.

“If you are going to put across a proposition which is a superior offering, you need to be able to back it up with the entire customer experience, from the email you send right through to the face-to-face.

“Whether it actually gives most clients anything special is debatable.