Leading wealth managers discuss key questions
With the global economic recovery from the 2008 financial crisis stalled, wealth managers and high net worth individuals are wary of yet another credit crunch -- and they would rather not make the same mistakes twice. Executive recently sat down with local and global players in the private banking industry to discuss the worldwide shift in wealth management industry dynamics and the changes in the client-private banker relationship post-2008, the unique challenges that relationship managers face in the Middle East and North Africa region, as well as the assessment and management of clients' risk appetites in the region as a younger, more diversified generation of investors has emerged.
What mistakes did wealth managers, private bankers and clients make prior to the financial crisis in 2008? What lessons have they learned, if any?
Bertrand de Margerie, head of Middle East at Credit Agricole Suisse: My impression is that at the time of the crisis there was a general underestimation of the level of risk in the various portfolios of people or in the various products that investment banks were designing or private banks were selling. Products were taken individually and not... with an overall view of the portfolio. First of all, because some risks were not really obvious in certain products. Secondly, because there has been correlation between asset classes that were deemed [wrongly] to be uncorrelated. Like hedge funds, for example, [were] the kind of investment that is supposed to be exempt from the problems on the stock market. Some clients that were conservative have invested in hedge funds because they believed that they had very little risk in them. Turned out they took a dip as well.
Stephen Richard Evans, head of Standard Chartered Private Bank for Europe, Middle East, Africa and the Americas: In private banking we're not on the sell-side, we're on the buy side. We assist clients in buying things that are suitable for themselves. We shouldn't be selling products, we should be assisting clients in buying products based on their particular appetite for risk, the time horizon involved and then any investment idea should be explained to them so that the client has a... line of sight into the product so that [they] are transparent. Now to get to that stage obviously you need to know the client very well. You also need to be in regular contact with the client because circumstances change. So especially during the crisis, one of the other lessons was [that] some private bankers hid under the table because they didn't know how to face the client as a result of the corrections in the market at the time. I also think that it's created a great deal of cynicism among clients in choosing their bankers, and I don't think that's a bad thing at all.
James Fleming, global head of Middle East at RBS Coutts: I guess the major implication of that question is that private bankers clearly got everything wrong. I don't think that is the case at all. So in our experience, and looking across our industry, I would say as relationship-driven people ourselves, it is the quality and the strength of the relationships that we had with our clients that helped us navigate our way and their way through the financial crisis. By contrast, [for] those who are in more product-promotional areas of wealth management [it] would have [been] difficult, because a lot of those products of course did not perform. Many of them collapsed, many of them had counterparties who went into bankruptcy and therefore the clients lost money. Those types of relationships would have suffered quite considerably, and those private bankers will have hopefully learned the lessons.
Ashraf Mazahreh, head of private banking at National Bank of Abu Dhabi: In the turbulent market conditions of 2008 and 2009, Ultra High Net Worth (UHNW) clients became very disillusioned with large, listed universal banks and traditional wealth managers. Clients felt they were victims of largely indiscriminate product pushing by the banks with little regard being placed on the suitability of the investments sold, rather than actually receiving advice that was suitable and in their best interest. This was one of the crucial lessons that private bankers have learnt after the financial crisis of 2008, i.e. they became more focused on understanding the true wants and needs of the client. Their main aim should remain to build client wealth through a well diversified investment portfolio, not to push for products. This is what separates a trusted private banker from the product salesman. The other important lesson is that before the financial crisis client portfolios were built with the assumption of the "world's best investment ideas", and mainly based on market performance without proper assessment, sometimes, on the correlated global risk and the macroeconomic growth indicators.
Jean Riachi, chairman at FFA Private Bank: The [last] three years... were only the outcome of a decade of poor financial market performances. Unfortunately, for everybody the last decade was a lost decade due to many reasons. First, valuations in the market were very high, and second, there was no growth engine in the major economies to boost earnings enough to justify the level of capital gains and growth in the prices of stocks in global markets that we witnessed in the 1990s and in the 1980s. And still, in everybody's mind, a good performance is a double-digit performance, and private bankers have struggled to achieve such performances sometimes by taking excessive risk, and very often by taking risks that were not obvious. So in a way it is the people's expectations of high returns on their portfolios that have pushed banks, private banks and investment bankers to try to be creative in terms of their product offerings. And this, of course, ended up with a disaster in 2008. Today I wouldn't say that everybody has learned the lessons.
Georges Abboud, head of private banking at BlomInvest Bank: The main lesson was on transparency on the kinds of instruments that customers were buying. People did not understand where they were putting their money. After 2008 they wanted to know exactly where they were investing. So we have to go into detail about every fund we want to invest into, each structured product -- you need to know the underlying assets that are behind the product and this takes a lot of time to explain to the clients. They want to know everything.
Reto Bartel, senior representative at UBS AG Representative Office Beirut: The recent financial crisis shook proponents of the classical investment approach out of their comfort zone. Investors perhaps believed they were in control, but in reality they were at the mercy of the markets. Credit markets failed to function and equity investors saw portfolio values decline to an extent previously deemed impossible. What went wrong? Was it just the market or did investors not fully appreciate the downside of their investment strategy? We think it was probably a mixture of both.
Raed el-Khoury, managing partner at Cedrus Invest Bank: I don't think they learned a lot. [As for] lessons, mainly they have to really look into the risk. What are they selling to their clients? What are the embedded risks in every product? The profile of the bankers at that time before the crisis was focused on selling products. They didn't look at the context of the client as a whole. There was wrong selling in many instances in the sense that bankers did not explain to the client the risks embedded in the product.
Selim Chami, director of investment banking group at BSEC: The bankers don't care about learning; they want to make money. If a client comes and says I have this subprime securitization transaction I'm working on, and I have this much tranching, and I'm Goldman Sachs or Lehman Brothers and I have 100 transactions queued in line, and I need you to give me a rating as soon as possible, they will negotiate the fees and the ratings and they will push for something that they're expecting. Unconsciously, a manager at a rating agency has all this reasoning. They go to higher management and say there are some things that are not looking too good, and there's something that they didn't really look into, for example the impact of the economic outlook, but they consider themselves to have done their job. You have a mass of people thinking like this. They start thinking about fees and budgets and that half-a-million-dollar bonus at the end of the year.
How has the client-private banker relationship changed after 2008, if at all?
Reto Bartel, senior representative at UBS AG Representative Office Beirut: The last decades witnessed the development of new economic theories on investor behavior which UBS uses in order to enlighten clients about the "do's" and "don'ts" of investing. The behavioral view appeals to private investors since it captures familiar patterns of behavior we experience when dealing with real-life investment decisions. We also note that our clients have become more sophisticated, on average, not least due to the rapid increase of available information on economic developments and financial markets, as well as views and recommendations on market developments. An increasing number of clients like to talk about specific topics or are looking for a sparring partner willing to challenge their own investment theses.
Heiner Weber, head of Geneva branch at Falcon Private Bank: If the private banker has learnt his lessons from the past financial crisis, and the client has not, the dialogue would be very difficult and the results would not be as good. So private banking is really a teamwork between client and banker.
Nael Raad, managing director at Al Ahli Investment Group: In these types of markets you have to be much more transparent and much closer to your clients, monitoring their investments and attending to their needs. But you have to be closer in these volatile markets because trust is very important, especially nowadays, especially after the 2008 crash. It became more about the relationship. The client wants to know about the banker and the banker nowadays wants to tell him more about the product and tell him more about the risks involved. It's a mutual thing.
How have the recent global economic events and sociopolitical changes in the Arab world affected investor behavior and risk appetite in the region?
Eddie Abramo, chief executive officer at Société General Private Banking Middle East: You know, when you have a high level of volatility as we have today on the markets, driven by rumors more than fundamentals, of course, yes, we can see some changes for more security and quality. Due to our strength in structured products, we are able to answer our clients' needs in term of security and quality of the issuer.
Chris Allen, managing partner Middle East at RBS Coutts bank: We've spoken to the investing clients, and we visited their risk profile and risk appetite as a result of the volatilities we've seen in the market. And interestingly, we haven't seen a huge shift away from the previous sort of investment strategy, and I think that's probably because we got them pretty well defined, through the relationships; we knew where they were on the risk chart, if you like. So I think, yes, there is much more conservative bias towards new investments, and looking for a degree of capital protection in many cases. But I think the way that we define the relationships with the clients helps us to really understand risk profile. And most of the clients who are working with private banks have a short, medium and long-term objective for different aspects of their assets.
Bertrand de Margerie, head of Middle East at Credit Agricole Suisse: If I look at our customer base, I would say that even before the crisis, generally speaking, the profile of the portfolios tends to be conservative. We have some more aggressive investors, people that are more leveraged, highly leveraged sometimes. I didn't see any big move in terms of looking for secure type of investments because the profile of our investors is already conservative. On the same topic, we did not see any significant outflow of funds out of the region into our bank.
Ashraf Mazahreh, head of private banking at National Bank of Abu Dhabi: Risks for wealthy Middle Eastern individuals do not differ much from any other wealthy individual around the globe. However, certain elements recently rose from various factors, i.e. geo-politics, highly leveraged clients, sanctions imposed on countries where wealthy Middle Eastern individuals may have business transactions and a scarcity of liquidity in an area they are involved in. Besides, some of their asset values declined both overseas and in [their] own country. Therefore, applying a strict compliance measurement remains a key element for success while conducting private banking activities.
What are your investment recommendations for regional clients, ranging from extremely conservative to all-the-way speculative?
Heiner Weber, head of the Geneva branch at Falcon Private Bank: When you look at conservative [approaches] and aggressive [approaches] you have kind of two parts: one is the volatility or the downside risk an investor can tolerate or can take, whatever it is. One could say I could tolerate 5 percent or 10 percent on my assets, while an aggressive investor could tolerate as much as 30 percent in one year. That's one parameter. But the second parameter is also the time horizon. If you have a very aggressive investor but with a very short time horizon, it's not very advisable for him to buy into equities or into real estate, which might have a short term volatility, whereas if you have a conservative investor who, for example, has a trust that he wants to keep for his children and his grandchildren so that his grandchildren can be the beneficiary, such an investor, even if conservative, would go into much more volatile investments because [in] the long run he will have a risk-adjusted performance, which is much better than if you will not go into investments with higher volatility.
Ashraf Mazahreh, head of private banking at National Bank of Abu Dhabi: For people who are wealthy and whose main objective is to stay so, we see little point in holding cash in potentially weak banks just for an extra 100 [basis points] of interest. We would advocate "return of capital rather than return on capital" by holding cash with strong banks backed by asset-rich governments. We also continue to see attractions in Middle Eastern bonds.
For our more aggressive clients we see lots of opportunities. There is no doubt that equities will continue to be volatile but corporates have rebuilt their balance sheets, cash generation is very strong and insiders are buying in record numbers. Investors will probably have to accept lower returns than previously but in a low interest rate environment the real returns from equities over the next decade will probably be quite decent.
Gulf-based equities look very good value and the UAE and Qatar may be given a boost later in the year if they are upgraded to emerging market status by MSCI. For investors who aren't outright bullish, we see attractions in structured reverse convertibles which will allow them to convert the current high volatility into high yield income. As long as the client is happy to receive the stock at a substantial discount if it falls further, this looks like a very compelling trade.
We are also becoming more optimistic about prospects for Dubai-based real estate after its long fall. It is now possible to lock into a yield of 8 percent to 10 percent from a good quality building with a strong tenant and long lease. Although we do not forecast a swift resumption of capital growth, for long term investors we see attractions.
Gold's status as a safe haven asset is being shaken by some who claim it is being overly speculated, and anticipate a burst of the gold bubble. Would you agree?
Tamer Rashad, head of Middle East wealth management at Bank of America, Merrill Lynch: From a wealth management standpoint, we actually are among the few banks in the industry that offer gold bullion or actual gold precious metal to our private banking and wealth management clients. So a client who would like to hedge or allocate part of his assets and portfolio into gold, they don't only have the option to purchase sort of exchange-traded funds of gold or gold mining companies, they also have the option to purchase physical gold, and they can do that with us. Or if they have gold they could store it with us in our Geneva secure location. The other part of this question is, do we see our existing clients buying gold? There's some activity [as] part of an overall diversification strategy, but for the HNW and UHNWI I don't think we're really seeing a rush per say. I think that's an exaggeration.
Stephen Richard Evans, head of Standard Chartered Private Bank for Europe, Middle East, Africa and the Americas: There are many schools of thought on that. Clearly gold is a commodity that has traditionally been a hedge against inflation. There is a tremendous amount of interest in it as a consumer commodity as well, especially in places like in India and in China. There is lively demand for that commodity still, with limited supply, and obviously in uncertain times gold tends to do well. We remain positive on gold because of the supply and demand characteristics.
Bertrand de Margerie, head of Middle East at Credit Agricole Suisse: Gold is a safe haven for conservative investors, yet [it] is seen as being speculative because the volatility is very high. If you are asking what we should recommend for our conservative investors, and what should we recommend to our far more aggressive investors, I would probably say that gold is good for both of them, maybe not in the same proportion. But yes, we do believe that there is room for a rise in the price of gold still, so I think that should be something that conservative investors should have in their portfolios to a certain proportion, but you have to be ready for big volatility.
Many of those in the wealth management industry are talking of a shift from universal big banks to smaller investment boutiques and family offices. To what extent is that statement true?
Daniel Diemers, principal at Booz and Company: Overall, the Gulf region is an attractive market for private bankers, and the region's quick recovery from the financial crisis -- especially compared to some Western markets -- increases its allure. Not surprisingly, we expect competition to heat up over the next few years as local and regional players upgrade offerings and the global players -- the incumbent private banking powerhouses -- reassert themselves to defend and pursue market share. Banks need to find the right strategic positioning and stake their claim quickly. In this highly competitive environment, smaller banks will surely find their niche, as they have in the past. But we don't see any major shift in the fundamental economics of the wealth management business model that would favor smaller players over the bigger ones.
Jean Riachi, chairman at FFA Private Bank: I believe that when you are smaller, you can take better care of your clients. I understand that most of the private banks, the global ones, have problems in terms of their profitability and they're trying to cut their cost. I can tell you that we are not doing this because we will sacrifice part of our profitability to invest in people. But maybe this is a stand that you can have when you are a small private bank. But for sure the industry in general needs some kind of reengineering, and expectations should be lowered at the level of the banks' profitability, at the level of the clients and the profits and the performances of the portfolios.
Georges Abboud, head of private banking at BlomInvest Bank: It is true that a lot of family offices opened after 2008 and even before. There are lots of reasons; one of them is regulations. They are so tough that the bankers cannot do whatever they used to do before. When you have your own family offices it is easier to go around some of the regulations. The drawback is that when you have a small firm -- an investment company -- the bank has to make money to live, to make profits, so you have to invest a lot of your clients' money, which creates a conflict of interest there.
Private bankers in the Middle East have many critics. Some say they still lack the expertise and talent that is needed to do proper wealth management. What is your take on such criticism?
Jean Riachi, chairman at FFA Private Bank: I would say that it's a question of organizational structure. For example, in our bank, a private banker takes care only of the relationship with the client, but he's backed by a team of asset managers, capital market specialists and real estate specialists, which means that he never manages an account on his own. Actually, he's never allowed to manage an account. And when people come and want to give us a discretionary portfolio to be managed, the private banker will not be involved in managing it at all. Now, when it is an account managed on an advisory basis, private bankers are not the ones who decide what kind of strategies or products they are going to push. And here there are two things that are important in my view in the organizational structure: first, you have to be independent, which means that you need to not have products that you need to push; and second, of course, everybody here is pushed to explain to the clients and convince them that diversification is very important.
Raed el-Khoury, managing partner at Cedrus Invest Bank: Private bankers used to be relationship managers rather than investment advisors [and] product sellers. They would get ideas from the banks they work with and then they would go and sell them blindly to the clients. Bankers need to be investment advisors to their clients. And clients are asking [for] more and more of that, and they're differentiating between private bankers. Our approach is, we need to introduce more -- and I'm not saying that it's not there -- to the Lebanese market the concept of wealth management, whereby we would look at the profile of the client, the whole spectrum of what is needed from our clients and investors. Our private bankers would be knowledgeable bankers, not just people who go socializing and sell products. They would be able to look at the risk profile of the client, detect the risks involved in each product they would be selling, and have their opinion in what they want and do not want to propose to their clients, because, after all, this is the added value of the bankers.
How much would you intervene to manage a client's risk appetite, especially when it is in excess?
Georges Abboud, head of private banking at BlomInvest Bank: You have to differentiate between the very sophisticated client who has been trading for a long time and has made money and lost money and gone through it for the past 20 years. He knows the cycles; you cannot stop him. But some people, they hear something on the news about how some companies' shares are at their lowest level ever and they come and ask to put $500,000 into it and also ask for a loan of another $500,000 to invest in it. I'm not doing my job if I don't stop this massacre.
Nada Safa, executive manager at Audi Saradar Private Bank: You have people as part of their portfolio, who like to speculate on currencies all day long. As a private banker you have to know how to calm the game. This is a speculator at the end of the day but you don't want him to cross the line because he will lose money. It's your job to be a therapist at the same time and understand his profile. This takes maturity and experience. And with time bankers know how to choose their clients. Some private bankers don't want to deal with speculative accounts, they want big wealthy customers, dormant clients. You have exotic private bankers who have different portfolios, different client profiles. This is tough but if you have enough experience you can follow that. But at the end of the day it is your job to temper, to keep your client balanced.
Stephen Evans, head of Standard Chartered Private Bank for Europe, Middle East Africa and the Americas: I have to tell you that one of the most important qualities of a private banker is the ability to stand up and say no to a client, [to tell them] 'I don't think this is right for you'. And interestingly, in my experience, clients who have experienced that speak very highly of the banker, because they respect him. This is a testament to a good banker.
What factors play into a client's propensity to take risk?
Georges Abboud, head of private banking at BlomInvest Bank: It is very important to think first about preserving your capital. And then you look at the needs of the client. If you have someone retired, he is not working anymore. He can't afford to lose anything. So you will look for something in which he cannot lose. If someone has a stream of income and has money to play with then you can take some risk into equities or hedge funds.
Khalid Zeidan, head of MedSecurities Investment: The Lebanese love that [risky trading] because it moves quickly and it is very highly leveraged so he picks up the phone and he brags to his friend, "I bought this and I sold that and I made $3,000, $5,000 and $10,000, and I did that yesterday", and then in one night he loses $100,000. He goes back to his wife and says "sorry honey, you're not going to get that car."
Nada Safa, executive manager at Audi Saradar Private Bank: The females I manage don't like to take risk. You would be surprised to know there are many women in the market who manage their own wealth, especially in Saudi Arabia. They are very smart, they know what they want and they have their own wealth to manage. There is a whole niche market for this in the region and it is growing. There are more women working in private banking because... in the region women feel more comfortable building this relationship with another woman. But they don't like risk and they are good investors. They go into funds, real estate and especially gold.
Mohammed al-Hamidi, managing director at AM Financials: Usually, the second generation will spend the money, not make the money. So definitely the second generation, usually when they come from high net worth families, they are more educated. What I know is that usually a younger person would take more risk, especially when the older person made the money. So that's why some second generation high net worth individuals will take the money and make multiples of it and some will lose it.
Heiner Weber, head of Geneva branch at Falcon Private Bank: Many of the sons went through financial studies so they are all aware of the latest academic news on investment and they often have a more academic approach to investment. That's for sure. Second, they are often more active because young people's time horizons are shorter and they are extremely well connected via the Internet.
Nael Raad, managing director at Al Ahli Investment Group: The younger generation is looking more into investments: they're more educated. They want to know exactly what it's all about; they have the background, the education. I find that the older generation worked more on the gut feeling but the younger generation is more methodical, definitely. But at the same time it's not all one stereotype.
Raed el-Khoury, managing partner at Cedrus Invest Bank: It's normal to involve the heirs in the investment process, especially as they will be in charge of the future wealth. It can be more dynamic because of the younger spirit. So we see it as an opportunity to become more dynamic in the investment decision-making process. But here comes our role to really stress our conservative approach. Definitely, they're knowledgeable, exposed, educated and open-minded but at the same time they lack maturity. And this, they will acquire and they're definitely on the right track but they need help, they need guidance. Somebody that understands their concerns, their parents' concerns, and can bridge the gap.
© Executive 2011
