Playing both sides
Clients in need of lending will inevitably turn to their banks for help
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.