Demanding clients strip gloss off private banks

More private bank clients are expressing dissatisfaction with the services and investment performance achieved by their advisers, according to senior asset managers – even accusing their banks of mis-selling investment products.

This growing discontent comes at a time when private banks are struggling to strike a balance between retaining their most profitable customers while keeping a lid on their administrative costs and maintaining their margins.

The banks are suffering in recent monthsas many clients have responded to the credit crunch by buying fewer investment products, and by shifting their assets into cash – reducing the banks’ profits.

“To our minds, what has happened in the rapid expansion in private banking and wealth management is a commoditisation and dilution of service and product proposition, and therefore value, to investors,” said James Chu, managing director and chief investment officer at Blue Sky Asset Management, a provider of structured products.

Advisers report that investors are now far more sceptical of less transparent offerings such as high-margin structured products which provide pay-offs based on the performance of an underlying index or basket of assets.

Sales of these investment offerings took a hit after their counterparty risk was exposed following the collapse of Lehman Brothers and the troubles at American International Group (AIG).

“After Lehman Brothers collapsed, we saw the volumes of these products slow,” said Ryan Rogowski, head of Harewood Solutions, the structured product division of BNP Paribas.

“And while people are now starting to look to invest again, they are paying strict attention to counterparty risk and demanding that products be backed by AA-plus medium-term notes and further collateral.” says Ryan Rogowski, head of Harewood Solutions, the structured product division of BNP Paribas.

Investors in bonds backed by the troubled insurer American International GroupAIG, which was recently rescued by the US government, are also threatening legal action.

Banks such as Coutts, Barclays, Lloyds TSB and HSBC have been accused of inappropriately advising hundreds of investors to buy into AIG’s Premier Access Bond Enhanced fund, which was alleged to be a low-risk instant-access deposit-style investment.

This particular bond was popular with wealthy investors in the UK, and financial advisers estimate that about two-thirds of the fund, which was last valued at £2.8bn,, was sold through UK private banking operations.

AIG’s Investors Action Group has hired the law firm Field Fisher Waterhouse to defend its interests. It has also set up a website (www.aigvictims.org) to organise its protest efforts.

“We will fight AIG and the banks for our members until they receive all their money back. Many of them are now suffering as all their cash was in the fund,” the AIG investor’s group wrote in a recent posting.

A report released earlier this year by Deloitte, the consulting firm Deloitte ants, claimed that there has been a “breakdown in trust” between clients and their financial advisers. The authors of the report said that clients increasinglyviewed their relationship managers as “product pushers”. “Clients are often unsure if they are receiving objective advice or best-in-class products,” the study said. Some wealthier clients are even moving to appoint managers to supervise their financial advisers, according toaccording to the study’s authors.

Falling portfolio values are eroding asset-based fees and as a result, private banks’ revenues and therefore forcing managers to consider alternative methods of conducting business.

Boutique firms are said to be coming into favour at the high end of the market and chartered financial planners at the low-end as more investors shy away from investing with the private banking divisions of larger banks which have seen their balance sheets eroded in recent months.

“Certified financial planners and fee-based advisers have evolved their business propositions to deliver a ‘service and solutions’ driven approach that is far more client-centric and research-led than that of their seemingly ‘over-revered and over-rewarded’ private banking competitors,” claimed Christopher Taylor, chief executive officer of Blue Sky.