Play­ing both sides

Clients in need of lend­ing will in­evitably turn to their banks for help

Finweek English Edition - - Private banking -

IS THERE A PO­TEN­TIAL CON­FLICT OF in­ter­est where a private bank is both a money lender and an in­vest­ment ad­viser?

Ci­tadel CEO Keith Betty be­lieves there is, un­der cer­tain cir­cum­stances. “Banks are mak­ing about 350 ba­sis points mar­gin on lend­ing. That’s the dif­fer­ence be­tween their cost of funds and the rate at which they on-lend. So where you have a private bank that lends you money and then man­ages that money for you in one of its in­vest­ment prod­ucts, it’s ef­fec­tively play­ing both sides of the bal­ance sheet and in­evitably raises a po­ten­tial con­flict of in­ter­est.”

The banks ar­gue that the po­ten­tial con­flict is more the­o­ret­i­cal than real. Clients in need of lend­ing will in­evitably turn to their banks for help, while in­vest­ment man­agers are bound by strict man­dates and codes of gov­er­nance. Any de­vi­a­tion from th­ese stric­tures ex­poses the banks to le­gal claims.

Where it gets a lit­tle more fuzzy is when the client is lent money to in­vest in the mar­ket, un­der the man­age­ment of the bank’s in­vest­ment arm. In this case the bank earns in­ter­est on the loan and man­age­ment fees on the port­fo­lio side. They may find it dif­fi­cult to re­sist the temp­ta­tion to shower credit on clients with a view to re­cy­cling this money into the stock mar­ket. To avoid any po­ten­tial con­flict of in­ter­est, Ci­tadel fo­cuses ex­clu­sively on the as­set side of clients’ bal­ance sheet. Betty says to­tal as­sets un­der man­age­ment now ex­ceed R12,5bn, with new in­flows of about R130m a month – mostly from word of mouth and top­ups from ex­ist­ing clients. Last year it hedged the SA eq­uity por­tion of clients’ port­fo­lios against a pos­si­ble drop in mar­ket val­ues, and has main­tained this in­sur­ance pol­icy us­ing de­riv­a­tives as the lo­cal mar­ket con­tin­ued to break new highs in early 2007.

“We ap­pro­pri­ately di­ver­sify clients’ funds be­tween lo­cal and off­shore mar­kets and as­set classes, based on their in­di­vid­ual needs. At this level, what clients do not want is to ex­pe­ri­ence any ma­jor shocks to the bal­ance sheet, such as hap­pened in 1998 and 1987. On the one hand we want to as­sist clients in grow­ing their port­fo­lios, but on the other we do not want to ex­pose the funds to un­due risk.”

Ci­tadel is an ex­tra­or­di­nary suc­cess story in an in­creas­ingly crowded wealth man­age­ment mar­ket. It has grown as­sets un­der man­age­ment to R12,5bn from about R8bn just over three years ago. “This is an af­fir­ma­tion of the fact that clients are ac­tively seek­ing pre­mium wealth man­age­ment ser­vices,” says Betty.

The first step in such a process is to get a deep un­der­stand­ing of the fam­ily’s cur­rent fi­nan­cial po­si­tion and goals and then work out a be­spoke so­lu­tion.

Fol­low-up meet­ings are held be­tween two and four times a year, backed up by reg­u­lar re­port-backs. In to­tal, Betty says clients are con­tacted 30 to 40 times a year, whether through face-to-face meet­ings, re­port-backs or news­let­ters.

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