Wealthy shrug off mar­ket tur­bu­lence

It’s the US ver­sus the Euro­pean model

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thE 2008 WORLD WEALTH RE­PORT – re­leased in Septem­ber this year by Capgem­ini – shows South Africa has far more wealthy peo­ple than pre­vi­ously be­lieved, ex­plain­ing the sharp growth in pri­vate bank­ing and pri­vate client busi­ness in this coun­try.

The con­ven­tional es­ti­mate has been of around 20 000 fam­i­lies as tra­di­tional high net worth pri­vate bank­ing cus­tomers. How­ever, the re­port sug­gests the num­ber of af­flu­ent peo­ple in SA has grown from 48 per 1 000 pop­u­la­tion in 2006 to 55 per 1 000 last year (around 2,2m) – a growth of 13,9%.

In­vest­ment So­lu­tions chief econ­o­mist Chris Hart de­scribes one of the pri­mary fea­tures of SA’s econ­omy as its abil­ity to cre­ate wealth on a sub­stan­tial ba­sis. “And I feel it will con­tinue to do so, though it’s by no means a cer­tainty.”

While the fo­cus is of­ten on the su­per­wealthy, Hart says SA’s econ­omy has been no­table for its abil­ity to cre­ate sub­stan­tial in­creases in wealth through­out all spec­trums of so­ci­ety. Not all those HNWIs are su­per-wealthy and par­tic­i­pants in that mar­ket have been en­gaged in a process of struc­tur­ing them­selves to dif­fer­en­ti­ate their ser­vice of­fer­ing be­tween the “su­per-wealthy” and the “af­flu­ent”.

Even be­fore that re­struc­tur­ing, there evolved in SA two dif­fer­ent mod­els of pri­vate bank­ing: the United States and the Euro­pean mod­els.

The US model con­sists of a sin­gle point of con­tact for the client, in the form of a re­la­tion­ship man­ager who es­tab­lishes his needs and acts as li­ai­son with the var­i­ous spe­cial­ists within the broader or­gan­i­sa­tion. Al­most all pri­vate banks in SA are part of larger re­tail banks, or in­vest­ment banks in the case of In­vestec’s and Rand Mer­chant Bank’s pri­vate bank­ing op­er­a­tions.

The Euro­pean model al­lows the client to deal di­rectly with spe­cial­ists.

Sean Far­rell, head of RMB Pri­vate Bank, which has adopted the Euro­pean model, says the li­a­bil­ity of that struc­ture is that it can, if un­man­aged, re­sult in an in­ef­fi­cient silo ap­proach, though that’s eas­ily pre­vented by adopt­ing a team-based struc­ture, as RMB does. “To achieve that you need to have good qual­ity staff and good re­la­tion­ships with clients,” says Far­rell.

Typ­i­cally, new clients are in­tro­duced to the pri­vate bank by word of mouth and of­ten their first need is for a loan. In that case they just want the best rate, says Far­rell, and aren’t too picky who pro­vides it. There­after, it be­comes a mat­ter of ser­vic­ing them well, in­tro­duc­ing a re­la­tion­ship man­ager and chan­nelling them to the var­i­ous other ser­vices avail­able.

The depth of the per­sonal re­la­tion­ship is built into the pric­ing. Many peo­ple are self­suf­fi­cient enough to be sat­is­fied with deal­ing through a call cen­tre or any other form of elec­tronic bank­ing, such as the In­ter­net. Oth­ers want the per­sonal touch that comes with a re­la­tion­ship man­ager – and for that they pay a pre­mium. Such re­la­tion­ship man­agers are de­signed to take the branch away from the client – for ex­am­ple, if a cheque­book is re­quired they may per­son­ally de­liver it.

Call cen­tre clients ex­pe­ri­ence ser­vice closer to that found in a re­tail branch, but none­the­less will still ex­pe­ri­ence a higher-touch ser­vice that’s proac­tive rather than re­ac­tive.

“What­ever the client needs, the re­la­tion­ship man­ager will or­gan­ise for the spe­cial­ist to con­tact him or her. If he’s on the road and needs a plumber to visit his home we’ll or­gan­ise it and pay him. Through a sin­gle team we can ad­dress all the client’s needs and in that way we avoid the silo ef­fect,” says Far­rell.

While other pri­vate banks have been strug­gling to find the right model, Far­rell says RMB has found a model that works and has been sta­ble since it melded its two pri­vate client busi­nesses – Ori­gin Mer­chant Bank and Ans­bacher – into one. De­spite cur­rent tur­bu­lent times he says in­flows at a level of R350m/ month haven’t slowed.

Al­fred Ra­masedi, MD of Ned­bank Pri­vate Bank, agrees there’s no slow­down. He says only three ar­eas of fi­nan­cial ser­vices are show­ing growth in the cur­rent global eco­nomic slow­down and pri­vate bank­ing is one of them.

The af­flu­ent, it ap­pears, are rel­a­tively im­mune to eco­nomic cy­cles. Ra­masedi at­tributes that, in SA at least, to the dearth of skills and its still ro­bust econ­omy. “The econ­omy won’t slow down be­cause the in­fra­struc­ture spending is more than com­pen­sat­ing for the con­sumer slow­down. On top of that the de­mand for spe­cial­ist skills for that growth at a time of skills short­ages means those with scarce skills are en­joy­ing higher in­comes.”

Com­ing on the back of broad-based

black eco­nomic empowerment – and par­tic­u­larly the skills uplift­ment un­der way – he an­tic­i­pates the trend con­tin­u­ing for some time.

High in­ter­est rates also favour those pri­vate banks that have em­pha­sised ser­vice, says Ra­masedi. “When in­ter­est rates were low we had greater flex­i­bil­ity in our ser­vice of­fer­ing. But with higher rates comes higher bad debts, so com­pet­ing on pric­ing isn’t the way to grow a busi­ness. Build­ing re­la­tion­ships is the way.”

In the early days of pri­vate bank­ing in SA wealth man­age­ment wasn’t of­fered as part of banks’ ser­vice. In fact, banks in gen­eral weren’t in that space, ex­cept those or­gan­i­sa­tions that couldn’t of­fer tra­di­tional trans­ac­tional bank­ing. BoE Pri­vate Clients, In­vestec Pri­vate Bank, Ci­tadel Pri­vate Client Wealth­care and oth­ers fo­cused on that area.

The rea­son for that was the su­per-rich aren’t par­tic­u­larly con­cerned about bank­ing or a re­ceiv­ing a gold credit card: their chief con­cerns re­volve around wealth man­age­ment, says Ra­masedi. “True wealth man­age­ment is for those who have so much money they tend to lose track of it un­less they’re helped. They don’t come to you for bank­ing prod­ucts,” he says.

For that rea­son all the pri­vate banks are dif­fer­en­ti­at­ing the two mar­kets – HNWIs and the af­flu­ent – ei­ther through com­pletely au­ton­o­mous or­gan­i­sa­tions or within a ho­moge­nous brand, such as RMB Pri­vate Bank, even though it has FNB Pri­vate Clients in the same group.

Ned­bank Pri­vate Bank has BoE Pri­vate Clients in the same sta­ble, while both Absa and Stan­dard Bank pri­vate banks have two dif­fer­ent ser­vice or­gan­i­sa­tions at­tack­ing the two seg­ments.

One weak­ness of the US model, says Ra­masedi, is that it fo­cuses ob­ses­sively on the prof­itabil­ity of in­di­vid­ual clients, con­cen­trat- ing its re­sources ac­cord­ing to profit. “But prof­itabil­ity is a long-term is­sue. The un­prof­itable client of to­day may be very prof­itable in the fu­ture. So we di­rect our re­sources ac­cord­ing to ten­ure and us­age. We al­lo­cate our most ex­pe­ri­enced re­la­tion­ship man­agers to clients that use the most of our ser­vices and have been with us the long­est. That way, clients grav­i­tate to more ex­pe­ri­enced re­la­tion­ship man­agers over time.

“Our point of ref­er­ence is that a client deals with one per­son, who sum­marises the client’s needs and puts him in con­tact with the rel­e­vant spe­cial­ist. In some cases they’re in­sourced, and in oth­ers out­sourced,” Ra­masedi says.

Each pri­vate bank has teams of “hun­ters” that scour the mar­ket for po­ten­tial new clients. A favourite method is to ap­proach pro­fes­sional or­gan­i­sa­tions, such as the SA In­sti­tute of Char­tered Ac­coun­tants, the var­i­ous law so­ci­eties, en­gi­neer­ing or med­i­cal as­so­ci­a­tions and tie in pro­fes­sion­als at an early stage. Their needs are mostly debt-based: they’re young pro­fes­sion­als buy­ing their first new car, a new home or es­tab­lish­ing a fam­ily.

But the pri­vate banks are now go­ing even ear­lier, says Ra­masedi, to uni­ver­si­ties. “We run spe­cific pro­grammes among the four pro­fes­sional fac­ul­ties at uni­ver­si­ties with the in­ten­tion of plant­ing the seed, es­pe­cially among those in their fourth year.”

Ned­bank Pri­vate Bank of­fers un­der­grad­u­ates prize­money to de­velop a busi­ness plan to map out their ca­reer and that hooks them into open­ing an ac­count.

Tony Bar­rett, head of wealth man­age­ment at BJM Pri­vate Client Ser­vices, says as the pri­vate bank­ing op­er­a­tions of SA’s Big Four re­tail banks have moved down the wealth pyra­mid in that fash­ion, the pri­vate client busi­nesses have moved up – rais­ing their en­try level.

“Wealthy clients like to deal with a wealth man­age­ment busi­ness, be­cause it is more dis­creet, and ‘more Swiss pri­vate bank­ing-like’,” Bar­rett says. “To the re­tail pri­vate bank­ing op­er­a­tions it’s be­come a num­ber game as op­posed to be­ing a true pri­vate bank. Over re­cent years th­ese re­tail pri­vate banks have made most of their money from lend­ing and tended to pay lip ser­vice to the as­set man­age­ment side.”

With in­creas­ing reg­u­la­tion of SA’s bank­ing and fi­nan­cial ser­vices in­dus­tries it’s be­come al­most im­pos­si­ble for both lend­ing and as­set man­age­ment ad­vice to come from a sin­gle source, says Bar­rett.

Ci­tadel Pri­vate Client Wealth­care has also gone against the trend by be­com­ing more se­lec­tive in its client seg­men­ta­tion and tar­get­ing. It’s pruned its client base by ad­vis­ing those with in­suf­fi­cient as­sets to war­rant a full ser­vice of­fer­ing to rather pay off their debts or ap­proach the di­rect desk of one of SA’s best as­set man­agers and se­lect a bal­anced fund as an al­ter­na­tive.

Ci­tadel CEO Neil Brown says: “We’re con­sciously mov­ing up the wealth tri­an­gle. Our av­er­age new client in­flow has in­creased to more than R8m over the past cou­ple of years and that en­ables us to im­prove our value propo­si­tion to clients, be­cause they have enough money to be ser­viced prop­erly.”

50 Avoid­ing the silo ef­fect. Sean Far­rell

The econ­omy has the abil­ity to cre­ate wealth on a sub­stan­tial ba­sis across all spec­trums of so­ci­ety. Chris hart

There is no slow down. Al­fred Ra­masedi

Grow­ing wealth in SA ex­plains the sharp growth in pri­vate bank­ing.

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