The colour of money
‘There’s been – and will continue to be – an explosion of wealth in SA’
THE EXTRAORDINARY GROWTH in the black middle class, helped by a robust economy and Government’s push for black economic empowerment, has transformed the economic landscape in a few short years. The gap between rich and poor may be wider than ever, as Cosatu insists, but that’s something South Africa holds in common with other developing economies, such as India and Brazil.
Research by the University of SA (Unisa) shows the extent to which black South Africans are narrowing the gap on their white colleagues in the race to accumulate wealth. Blacks, coloureds and Asians account for slightly more than a third of SA’s 25 000 “super-rich” – defined as those earning in excess of R4m/year – but the figure is expected to grow to 42% by 2011.
That’s not to say whites are being edged out in the sprint to accumulate wealth. Empowerment has had the perverse effect of driving many whites into selfemployment, which is fuelling the wealth furnace. “There’s been – and will continue to be – an explosion of wealth in SA,” says Paul Hanley, head of Investec Private Bank. “We’re betting on that for the next three to four years.”
The realignment in the demographics of wealth is reflected in the way SA’s banks tailor their services to the varying needs of the wealthy. In times past the “rich” were treated as a largely
homogeneous group and presumably white. The rich are currently segmented into high-income earners, high net worth and ultra high net worth and – as the Unisa study shows – a growing percentage of those clients are likely to be non-white.
A decade ago private banking was biased towards wealth preservation rather than wealth creation. Clients received investment and financial advice and all the usual private banking services with a high degree of personal interaction. That’s fine for the already wealthy, but what about the entrepreneur and high-income earner still making their way up the wealth ladder? They want to use bank lending to help them achieve their wealth aspirations and they understand investment-banking terms such as structured lending.
In other words, rather than take out a standard “vanilla” loan with regular interest repayments they want a structured loan wrapped with interest rate caps and collars, interest rate holidays and the like. And they want all their personal debt consolidated into one low-interest bearing account.
They want all the convenience of Internet banking and a hot line to a relationship manager for less standard requests. Those clients are more financially savvy than their predecessors and want to be actively involved in creating their wealth.
For that they need gearing, using a combination of junior debt, mezzanine debt (often used to finance acquisitions of assets, where it can be used to prioritise new owners ahead of existing owners in the event of bankruptcy) and perhaps private equity.
Hanley says Investec Private Bank caters to the full spectrum of wealthy clients: from those earning R1m/year or more through to those with investable assets of R25m or more – and everything in between. “Where do we differentiate ourselves? We want to deal with the seriously wealthy individual with discretionary money, not just compulsory savings.
“At that level we can get very creative with the financial solutions we offer by bringing our investment banking skills to bear by way of swaps, derivatives, private equity and the like. We believe we’re the only bank focusing on the R25m space, where there’s less competition. Where a client has around R10m in assets we focus on helping him grow that to R25m or more by offering property finance and acquisition finance alongside the more traditional private banking services.”
RMB, like Investec, has a strong investment banking background servicing the needs of corporate clients but flanks that with a private banking approach to the individual wealth creation needs of its clients.
One area where it seeks to stay one step ahead of the competition is by adopting creative debt solutions for clients. RMB Private Bank is a marriage of Origin, which was first to offer debt consolidation to the SA market, and Ansbacher, the offshore wealth management company acquired several years ago by RMB.
“High net worth individuals tend to be active in the market and want to use the bank’s balance sheet as a cost-effective way of funding their business ventures. We’re particularly strong in structuring debt so that it is cost-effective and efficient from a tax point of view,” says Marius Kilian, of RMB Private Bank
“The challenge for banks going forward is to manage the massive increase in complexity involved in dealing with clients with a global presence,” says Kilian. RMB set up a private advisory division to cater to that global complexity, where clients need advice on how best to structure their affairs across multiple jurisdictions, each with differing tax and legal set-ups.
BoE Private Clients grew assets under management – excluding the effect of market appreciation – by roughly 20% over the past year and expanded the client base by more than 10%. “With growth like that there’s understandably a lot of competition in this space.
But the key differentiator is the quality of advice,” says Vince Boulle, head of BoE Private Clients.
Brand value counts for a lot in the private banking arena and those with an established track record and a reputation of high quality advice and service are reaping the benefits.
BoE Private Clients’ entry threshold is R1m in annual earnings or R5m in investable assets.
Boulle says more traditional clients are happy to have their money managed for them on a discretionary basis, but newer ones are more likely to want to partner the bank in managing their assets and are on the lookout for wealth creation opportunities – such as private equity.
The needs of the empowerment market differ from the old money in that their cash tends to be ploughed back into their businesses, so there’s less demand for investment advice than for legal and tax-based structuring.
“I don’t believe there’s a standard way of approaching that market,” says Boulle. “If the client is an entrepreneur with assets of R100m and is still actively involved in wealth creation his needs will be vastly different to someone
approaching retirement and who wants to preserve what they have already made. The trick is to assess the behaviour and needs of the client and approach each one individually.”
Edwin Schmidt, GM at Absa Private Bank, says the holy grail of private banking is capturing a larger share of clients’ wallets. “Getting a client to open an account with you is easy. Increasing your share of that client’s business is more difficult.
“For that you have to build up a relationship as a trusted adviser and that’s not something that can be done overnight.
“You’ll typically find the average sophisticated client has 12 or 15 relationships with differ- ent advisers, from transactional bankers through to insurance brokers and investment advisers. You need someone to sit on top of those relationships to manage them pro-actively and remove any potential conflicts.”
Private equity is one area where the private banks are becoming active. Traditional private equity involves raising funds from institutional investors to invest in fast growing companies or business ventures.
Now high net worth individuals are being showered with private equity opportunities by their banks, where the returns can exceed those typically available on the stock exchange.
Caters to full spectrum of wealth. Paul Hanley
is the quality of advice.
Strong in structuring debt. Marius