Those examining the wreckage of the banking industry for new models for the future may find some ideas in private banking.

At least two things are clear about the future of banking. First, the activities of any banking group must be confined within the ability of the directors to understand the businesses for which they are responsible. Second, all banking businesses should be predicated on delivering a range of services that add value to identifiable customer segments, through meeting their needs.

Obvious though these principles may sound, they have been overlooked in recent years, hence their application will drive substantial change.

Private banking is one of the few areas of financial services where the business is, at least in principle, clearly focused on serving the needs of an identified segment. It may be that most private banks have fallen short of the ideal and have themselves been bitten by the bonus-led sales culture, but at least they have a solid concept on which to build.

It is only 15 years since private banking began to emerge as a business line but nearly every major bank in the world has now established a private banking subsidiary. Their initial purpose was twofold:
● To provide a quality personal banking service for wealthy clients to escape from falling service standards in retail banks.
● To tap into potential revenue streams from wealth management.

In too many cases, as a result of short-term revenue targets, the emphasis has been excessively focused on selling investment products, as opposed to delivering the broader aspects of a full private banking service. Consequently most private banks are suffering badly from the current crisis, as their revenue is eroded by falling portfolio values, a loss of clients to independent wealth managers and increasing suspicion of the complex products that have delivered such good margins. The reason for their narrow focus, covering only a fraction of the needs of many clients, is that private banks have been constrained from competing with other divisions in their own groups. In theory, the broader banking and investment banking needs of their clients are well served by other arms of their group, but the reality is that the style and approach are rarely consistent with a relationship-based culture. Indeed many private banks came under intense pressure to be the distribution arm for the products of their group investment bank and their credibility as “trusted advisors” has suffered deeply. This is why UBS has been forced to restructure, giving the private bank much greater autonomy.

The UBS decision is likely to signal a much more fundamental change, with increasing recognition that a business line must be defined as much by the client and service approach, as it is by the need for economies of scale in product manufacture. Private banks will thus bring “in house” much of the business they have previously been referring to colleagues in other divisions.

For instance, investment banking as a sector is going to be dismantled and redefined. The parts of investment banking relevant to private clients will be redesigned as client-led services within the private bank, rather than “products” invented by an investment bank to be sold by the private banking sales force.

Equally, there are aspects of commercial and retail banking, especially lending, which can more effectively be built within the private bank, bringing not only better service for the client, but much greater profitability for the private bank.

Private banks will also enjoy far greater freedom to design and run their businesses to meet the needs of their clients as opposed to serving the internal politics of their parent group.

Private banks will thus become flagships for the development of customer-led businesses. The credibility and sustainability of their financial performance will easily be cross-checked against their market share and general standing in the sector, relative to competitors. Those making profits out of proportion to their market presence will inevitably invite questions about the risks they are running.

Private banks will, however, continue to be challenged by independent wealth managers, who will have a better claim on the much prized “trusted adviser” role. Many of these wealth managers are more demonstrably “independent”, as well as being more distanced from the incompetence at the heart of the banking system that has dented the credibility of anyone who calls themselves a banker.

Michael Maslinski is a director of Maslinski & Co, consultants to the wealth management sector

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