Big money gets personal

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Confidentiality, discretion and service have always been the hallmarks of private banking. Clients were often second- or third-generation families. Ownership of family concerns was passed on and the bank played the role of trustee and executor. Wealth preservation was paramount.

Many of these qualities remain at the heart of the private banking model. What has changed is that up to 80 per cent of new clients at private banks represent first-generation wealth and they often possess a high level of financial sophistication. The clients – usually needing net assets of $10m to qualify – are likely to value wealth enhancement.

Given these differences, some of the questions people should ask when choosing a private banker – and also ask themselves – have changed. Many, though, remain the same.

Most private bankers agree that potential clients should conduct “beauty pageants” when choosing an adviser.

“You’re trying to develop a relationship with an organisation that philosophically understands your needs,” says John Straus, head of private wealth management at UBS in the US, where the average net worth of clients is $40m-$50m. “In 95 per cent of our new relationships, clients have been out and spoken to other advisers.”

“Scouting and due diligence is a good thing,” says Robert Elliott, senior managing director at Bessemer Trust, a privately owned wealth management firm founded in 1907 by Henry Phipps, a partner of Andrew Carnegie in the Carnegie Steel Company. But he warns that people who see 10 providers can arrive at Bessemer’s offices looking thoroughly confused.

Many banks benefit from referrals by existing clients. It is a screening tool that one wealthy client – who asked not to be identified – thinks is invaluable. He was dissatisfied with his first private banker but the second came on a recommendation – and now he is happy. Interestingly, both bankers work at the same institution.

“Going into this, you have to ask yourself: ‘Do you want an ideas person or an honest broker?’,” he says. “If you’re there on a per-trade basis, all you’ll get is a lot of trading ideas, not all well thought out.”

Bankers add that you should look for a good listener. Discretion, too, is important. “There’s a reason it’s called private: it’s one of the most cherished elements of the relationship,” says John Duffy, head of private banking in the north-east for JPMorgan.

Today many new clients of private banks are the chief executives of publicly listed companies. More, though, are entrepreneurs who have experienced a “liquidity event”, usually from selling their company or a large stake in it.

John Thiel, head of private banking and wealth management at Merrill Lynch, says new clients should not feel rushed towards investment decisions.

Merrill’s approach, he says, is first to ask several questions, including: How was the wealth created? What is the client’s current situation, both financial and personal? What does the client want to accomplish with that money?

Christopher Wolfe, chief investment officer at Merrill’s private bank, says: “Understanding all the elements can take several weeks. And some people can wait several months before making these decisions. For many people it’s an emotionally charged question: should I sell my stock?”

Another charged question is whether to select a big bank or a smaller wealth manager.

“The big banks know when a chief executive is having a liquidity event. And of course I would like to have the inside track that Goldman [Sachs] or Morgan Stanley has. But I’m happier with the way we operate,” says Chip Wilson, client services director at Glenmede Trust Company, a Philadelphia-based wealth advisory set up by the four children of Joseph Pew, founder of Sun Oil Company.

Mr Wilson emphasises the collegiality of Glenmede, a culture he does not believe you find at bigger banks. He also stresses a fee structure that begins at 1 per cent of assets under management a year and slides according to the sum of money managed. The fee structure, he says, means Glenmede is not a conflicted wealth adviser where bankers are under pressure to sell in-house product.

Like Glenmede, Bessemer is one of the few remaining independent wealth advisers. It uses a similar fee structure and offers services that range from tax and estate planning to philanthropic advice and family education.

The firm prides itself on what Mr Elliott calls “stability of people, stability of purpose” – it loses fewer than 1.5 per cent of its clients each year and those are primarily due to death. Bessemer has a client-to-manager ratio of about 40:1, a figure Mr Elliott says is much lower than at many bigger banks. He advises people choosing private banks to avoid those that are “transaction-oriented”.

The private banking units of big banks market themselves as boutiques offering personal service akin to that of their smaller peers, but advocate the advantages scale can bring, along with an ability to customise a client’s portfolio across a broad range of financial products.

They argue that the increasingly complex nature of the private banking model means that a team approach is best. At JPMorgan, where clients have net assets of at least $25m, each one is supported by a private banker and six area specialists on whom he can call.

The fee basis that the bigger banks use is different, with many opting for an à la carte approach.

“If you are charging 1 per cent for a conservative portfolio, that may be too much money,” says Tucker York, head of private banking at Goldman Sachs, and a 20-year veteran of the industry.

Mr York says one advantage Goldman brings to its clients is the ability to assemble managers across markets.

“We will talk to you about Goldman Sachs managers,” he says. “People like investing alongside Goldman Sachs partners. If I look at our hedge funds and private equity, we manage about as much internally as we do externally. You’ll generally get a lower fee from us for internal managers.”

When Mr York started in the business, clients were interested in talking about particular stocks. Today, he says, the discussion tends to focus on asset allocation and risk-adjusted and after-tax performance.

The inclusion of hedge funds and private equity in a portfolio means well-heeled private banking clients – until recently, at least – have had opportunities to outperform the market not available to ordinary investors.

But one difficulty many bankers face is the client with overblown expectations. “Managing client expectations can be challenging, particularly entrepreneurs who have seen excessive growth,” Merrill’s Mr Wolfe says.

Not infrequently, banks will turn away people whose risk profile does not match what the bank considers prudent.

While financial performance certainly matters to clients, many seek a holistic approach to managing their financial affairs. In private banking, after all, estate planning is not considered an after-death experience. Philanthropy, too, is now a core competence.

But paramount still is the personal connection.

Today private bankers frequently sit across the table from someone 35 years old, with $100m in the bank and seeking validation. Merrill’s Mr Thiel, who spent six years in Silicon Valley, regularly faced clients who asked: “What am I going to do now?”

In many cases, then, helping a client construct a philanthropic foundation, turn an avocation into something more or map a life plan becomes part of the private banker’s job.

“The business of the relationship is financial rigour but then its head and heart,” says Mr Duffy of JPMorgan, which was voted best US private bank in a recent Euromoney survey.

He says the bank likes to get to know clients as well as the clients will allow. “We are an integral part of our clients’ lives, and at different points in their lives that can mean expanding their horizons. We may even connect clients we think share a common interest. We’ve also helped sick clients find the best medical specialists in the country.”

JPMorgan’s storied history means that many of its bankers are skilled inter-generational diplomats. But its first-generation clients – about three-quarters of its new client base – will eventually face similar concerns as the bank’s long-established clients.

To address these needs, JPMorgan runs courses for clients’ adult children. One is a five-day seminar on the principles of investing. Another focuses on, among other things, succession planning and family governance. Merrill Lynch runs similar programmes, including a financial boot camp for spouses.

“Different generations have different ideas about money, and understanding family dynamics and teaching children how to deal with their fathers” is an essential mission, Mr Duffy says.

Once thought peripheral, these are important services that someone choosing a private bank should look for, Mr Duffy says.

The private client agrees. “You should trust someone, be sure that there’s no churning of your account, and find someone who understands your underlying rationale,” he says.

“You want someone with a brain, who’s been around the block. And they should be good at adjudicating disputes – to know why your brother deserves more than your sister. The best private bankers will insert themselves into the bowels of the family.”

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