Wealthy shrug off market turbulence
It’s the US versus the European model
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.