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This article was originally published in German in the 13 February 2010 edition of the newspaper Börsen-Zeitung.


Private bankers - winners or losers in the economic crisis?

31 May 2010

We keep hearing that the crisis is over now.
But is it really?

In terms of the standard definition it lasted only a short while anyway. The so-called "turning point" is said to have been reached on the capital markets in March 2009 when the indices started to rise again from their lowest levels: the DAX, for example, actually breached the 6,000 point barrier – a figure which would have been regarded as scarcely credible at the end of the previous year.

 
 

By Jacques de SaussurePartner

Pictet & Cie


 

Today, when we speak of the "crisis", we mean more than the collapse and recovery on the capital markets. We are referring to a massive loss of confidence in the entire banking system. This soon resulted in "losers" on all fronts.

Investors saw their assets shrink, banks went to the wall, lost their independence or at least experienced a significant decline in revenue, and governments had difficulty meeting their commitments, while taxpayers and future generations will have to foot the bill. In the circumstances it seems almost impossible – or even inappropriate – to speak of "winners". Especially since now, at the start of 2010, economists are not completely discounting another economic decline (the so-called "double dip"), while the economic stimulus packages are about to expire and exogenous shocks such as Dubai's difficulties have once again drawn attention to the vulnerability of the financial and capital markets. 

 
This means that private bankers cannot be said to have emerged from the crisis as outright winners, either: not even if they focus on asset management, are independent of outside interference or managed by partners with unlimited liability, have been careful to avoid problematic segments such as the lending business and are not active in investment banking.

Some of them, indeed, have been successful in attracting fairly significant inflows of net new money, as high-net-worth investors sought greater security and trustworthiness and a rather more conservative investment policy. However, that last point may have a sting in its tail.


An international outlook and the ability to confront ever more complex investment challenges in a globalised world: these are the qualities that will separate the wheat from the chaff in the years ahead.

 

This is because returns on the new funds have declined, or at any rate remained extremely low, in the past 18 months – just like returns on total assets. Money market-type investments and bonds dominated, equity quotas within asset allocations shrank to all-time lows, and all the while volumes were declining. Even private bankers whose business was on a secure footing did not escape unscathed.

 

Nonetheless, especially in autumn 2008, it was very helpful to have a strong equity position and a clean balance sheet, as well as to be able to demonstrate stringent risk management. A structure in which ownership and management were in the same hands, resulting in completely independent decision making, also contributed to the ability to meet the differing needs of clients fully and promptly once again. Yet not all private bankers enjoyed these advantageous conditions.

 

It became evident that corporate governance can turn into a problem, especially in times of crisis – and not just for major banks. Independent partnerships or enterprise structures often imply dependence on the decisions and value judgments of a handful of people. The key question is whether compliance – i.e. abiding by and monitoring the applicable rules – is sufficiently professional to avoid big risks and steer the company through times of crisis in a manner that remains "relatively stable" compared with the market.

Compliance is just one of the distinguishing features of private bankers that are thoroughly prepared to withstand storms ahead. After all, competitiveness is founded on more than simply tradition, good conduct and values, however important these may be. Believing otherwise has already condemned many venerable private banking houses to their fate. 

 
An international outlook and the ability to confront ever more complex investment challenges in a globalised world, and to meet them successfully and competitively: these are the qualities that will separate the wheat from the chaff in the years ahead, too.

This requires a targeted international presence with specialist local teams, while building up a critical mass of assets under management and ensuring they are diversified. It also requires the relevant asset management expertise, particularly in complex investment classes such as hedge funds, private equity, emerging markets and high-interest bonds. Sustainability is another topic that must not be forgotten if we are to speak of assuming greater responsibility.

Clients are becoming increasingly international and professional, not least because they often use their own advisers and family offices, so if we seek to be among the long-term winners we must expect to see demand for consultancy, IT services and reporting solutions rise, as well as the corresponding investments. The crisis has not changed anything in this respect.

With few exceptions, the real private bankers have coped with the crisis very well. In the coming months and years, the decisive question will be how far the pressure on earnings has diminished the core strength of individual institutions, and whether they can maintain their business models steadily while also expanding internationally. A niche position may also be a success factor here.

It is clear that clients prefer to contact one trusted person regarding their asset management requirements. Private bankers, who stake their reputation and their personal wealth on the risks borne by their business, should also stand to profit from this in the future. Of course, this crisis, too, will some day be forgotten and other challenges will come to the fore. That is why it is crucial to be thoroughly prepared.