With the global economic recovery from the 2008 financial crisis stalled, wealth managers and high net worth individuals are wary of yet another credit crunch — and they would rather not make the same mistakes twice. Executive recently sat down with local and global players in the private banking industry to discuss the worldwide shift in wealth management industry dynamics and the changes in the client-private banker relationship post-2008, the unique challenges that relationship managers face in the Middle East and North Africa region, as well as the assessment and management of clients’ risk appetites in the region as a younger, more diversified generation of investors has emerged.
1 What mistakes did wealth managers, private bankers and clients make prior to the financial crisis in 2008? What lessons have they learned, if any?
Jean Riachi, chairman at FFA Private Bank: The [last] three years… were only the outcome of a decade of poor financial market performances. Unfortunately, for everybody the last decade was a lost decade due to many reasons. First, valuations in the market were very high, and second, there was no growth engine in the major economies to boost earnings enough to justify the level of capital gains and growth in the prices of stocks in global markets that we witnessed in the 1990s and in the 1980s. And still, in everybody’s mind, a good performance is a double-digit performance, and private bankers have struggled to achieve such performances sometimes by taking excessive risk, and very often by taking risks that were not obvious. So in a way it is the people’s expectations of high returns on their portfolios that have pushed banks, private banks and investment bankers to try to be creative in terms of their product offerings. And this, of course, ended up with a disaster in 2008. Today I wouldn’t say that everybody has learned the lessons.
Georges Abboud, head of private banking at BlomInvest Bank: The main lesson was on transparency on the kinds of instruments that customers were buying. People did not understand where they were putting their money. After 2008 they wanted to know exactly where they were investing. So we have to go into detail about every fund we want to invest into, each structured product — you need to know the underlying assets that are behind the product and this takes a lot of time to explain to the clients. They want to know everything.
Reto Bartel, senior representative at UBS AG Representative Office Beirut: The recent financial crisis shook proponents of the classical investment approach out of their comfort zone. Investors perhaps believed they were in control, but in reality they were at the mercy of the markets. Credit markets failed to function and equity investors saw portfolio values decline to an extent previously deemed impossible. What went wrong? Was it just the market or did investors not fully appreciate the downside of their investment strategy? We think it was probably a mixture of both.
Raed el-Khoury, managing partner at Cedrus Invest Bank: I don’t think they learned a lot. [As for] lessons, mainly they have to really look into the risk. What are they selling to their clients? What are the embedded risks in every product? The profile of the bankers at that time before the crisis was focused on selling products. They didn’t look at the context of the client as a whole. There was wrong selling in many instances in the sense that bankers did not explain to the client the risks embedded in the product.
Selim Chami, director of investment banking group at BSEC: The bankers don’t care about learning; they want to make money. If a client comes and says I have this subprime securitization transaction I’m working on, and I have this much tranching, and I’m Goldman Sachs or Lehman Brothers and I have 100 transactions queued in line, and I need you to give me a rating as soon as possible, they will negotiate the fees and the ratings and they will push for something that they’re expecting. Unconsciously, a manager at a rating agency has all this reasoning. They go to higher management and say there are some things that are not looking too good, and there’s something that they didn’t really look into, for example the impact of the economic outlook, but they consider themselves to have done their job. You have a mass of people thinking like this. They start thinking about fees and budgets and that half-a-million-dollar bonus at the end of the year.
2 How has the client-private banker relationship changed after 2008, if at all?
Reto Bartel, senior representative at UBS AG Representative Office Beirut: The last decades witnessed the development of new economic theories on investor behavior which UBS uses in order to enlighten clients about the “do’s” and “don’ts” of investing. The behavioral view appeals to private investors since it captures familiar patterns of behavior we experience when dealing with real-life investment decisions. We also note that our clients have become more sophisticated, on average, not least due to the rapid increase of available information on economic developments and financial markets, as well as views and recommendations on market developments. An increasing number of clients like to talk about specific topics or are looking for a sparring partner willing to challenge their own investment theses.
Heiner Weber, head of Geneva branch at Falcon Private Bank: If the private banker has learnt his lessons from the past financial crisis, and the client has not, the dialogue would be very difficult and the results would not be as good. So private banking is really a teamwork between client and banker.
Nael Raad, managing director at Al Ahli Investment Group: In these types of markets you have to be much more transparent and much closer to your clients, monitoring their investments and attending to their needs. But you have to be closer in these volatile markets because trust is very important, especially nowadays, especially after the 2008 crash. It became more about the relationship. The client wants to know about the banker and the banker nowadays wants to tell him more about the product and tell him more about the risks involved. It’s a mutual thing.
3 Many of those in the wealth management industry are talking of a shift from universal big banks to smaller investment boutiques and family offices. To what extent is that statement true?
Daniel Diemers, principal at Booz and Company: Overall, the Gulf region is an attractive market for private bankers, and the region’s quick recovery from the financial crisis — especially compared to some Western markets — increases its allure. Not surprisingly, we expect competition to heat up over the next few years as local and regional players upgrade offerings and the global players — the incumbent private banking powerhouses — reassert themselves to defend and pursue market share. Banks need to find the right strategic positioning and stake their claim quickly. In this highly competitive environment, smaller banks will surely find their niche, as they have in the past. But we don’t see any major shift in the fundamental economics of the wealth management business model that would favor smaller players over the bigger ones.
Jean Riachi, chairman at FFA Private Bank: I believe that when you are smaller, you can take better care of your clients. I understand that most of the private banks, the global ones, have problems in terms of their profitability and they’re trying to cut their cost. I can tell you that we are not doing this because we will sacrifice part of our profitability to invest in people. But maybe this is a stand that you can have when you are a small private bank. But for sure the industry in general needs some kind of reengineering, and expectations should be lowered at the level of the banks’ profitability, at the level of the clients and the profits and the performances of the portfolios.
Georges Abboud, head of private banking at BlomInvest Bank: It is true that a lot of family offices opened after 2008 and even before. There are lots of reasons; one of them is regulations. They are so tough that the bankers cannot do whatever they used to do before. When you have your own family offices it is easier to go around some of the regulations. The drawback is that when you have a small firm — an investment company — the bank has to make money to live, to make profits, so you have to invest a lot of your clients’ money, which creates a conflict of interest there.
4 Private bankers in the Middle East have many critics. Some say they still lack the expertise and talent that is needed to do proper wealth management. What is your take on such criticism?
Jean Riachi, chairman at FFA Private Bank: I would say that it’s a question of organizational structure. For example, in our bank, a private banker takes care only of the relationship with the client, but he’s backed by a team of asset managers, capital market specialists and real estate specialists, which means that he never manages an account on his own. Actually, he’s never allowed to manage an account. And when people come and want to give us a discretionary portfolio to be managed, the private banker will not be involved in managing it at all. Now, when it is an account managed on an advisory basis, private bankers are not the ones who decide what kind of strategies or products they are going to push. And here there are two things that are important in my view in the organizational structure: first, you have to be independent, which means that you need to not have products that you need to push; and second, of course, everybody here is pushed to explain to the clients and convince them that diversification is very important.
Raed el-Khoury, managing partner at Cedrus Invest Bank: Private bankers used to be relationship managers rather than investment advisors [and] product sellers. They would get ideas from the banks they work with and then they would go and sell them blindly to the clients. Bankers need to be investment advisors to their clients. And clients are asking [for] more and more of that, and they’re differentiating between private bankers. Our approach is, we need to introduce more — and I’m not saying that it’s not there — to the Lebanese market the concept of wealth management, whereby we would look at the profile of the client, the whole spectrum of what is needed from our clients and investors. Our private bankers would be knowledgeable bankers, not just people who go socializing and sell products. They would be able to look at the risk profile of the client, detect the risks involved in each product they would be selling, and have their opinion in what they want and do not want to propose to their clients, because, after all, this is the added value of the bankers.
5 How much would you intervene to manage a client’s risk appetite, especially when it is in excess?
Georges Abboud, head of private banking at BlomInvest Bank: You have to differentiate between the very sophisticated client who has been trading for a long time and has made money and lost money and gone through it for the past 20 years. He knows the cycles; you cannot stop him. But some people, they hear something on the news about how some companies’ shares are at their lowest level ever and they come and ask to put $500,000 into it and also ask for a loan of another $500,000 to invest in it. I’m not doing my job if I don’t stop this massacre.
Nada Safa, executive manager at Audi Saradar Private Bank: You have people as part of their portfolio, who like to speculate on currencies all day long. As a private banker you have to know how to calm the game. This is a speculator at the end of the day but you don’t want him to cross the line because he will lose money. It’s your job to be a therapist at the same time and understand his profile. This takes maturity and experience. And with time bankers know how to choose their clients. Some private bankers don’t want to deal with speculative accounts, they want big wealthy customers, dormant clients. You have exotic private bankers who have different portfolios, different client profiles. This is tough but if you have enough experience you can follow that. But at the end of the day it is your job to temper, to keep your client balanced.
Stephen Evans, head of Standard Chartered Private Bank for Europe, Middle East Africa and the Americas: I have to tell you that one of the most important qualities of a private banker is the ability to stand up and say no to a client, [to tell them] ‘I don’t think this is right for you’. And interestingly, in my experience, clients who have experienced that speak very highly of the banker, because they respect him. This is a testament to a good banker.
6 What factors play into a client’s propensity to take risk?
Georges Abboud, head of private banking at BlomInvest Bank: It is very important to think first about preserving your capital. And then you look at the needs of the client. If you have someone retired, he is not working anymore. He can’t afford to lose anything. So you will look for something in which he cannot lose. If someone has a stream of income and has money to play with then you can take some risk into equities or hedge funds.
Khalid Zeidan, head of MedSecurities Investment: The Lebanese love that [risky trading] because it moves quickly and it is very highly leveraged so he picks up the phone and he brags to his friend, “I bought this and I sold that and I made $3,000, $5,000 and $10,000, and I did that yesterday”, and then in one night he loses $100,000. He goes back to his wife and says “sorry honey, you’re not going to get that car.”
Nada Safa, executive manager at Audi Saradar Private Bank: The females I manage don’t like to take risk. You would be surprised to know there are many women in the market who manage their own wealth, especially in Saudi Arabia. They are very smart, they know what they want and they have their own wealth to manage. There is a whole niche market for this in the region and it is growing. There are more women working in private banking because… in the region women feel more comfortable building this relationship with another woman. But they don’t like risk and they are good investors. They go into funds, real estate and especially gold.
Mohammed al-Hamidi, managing director at AM Financials: Usually, the second generation will spend the money, not make the money. So definitely the second generation, usually when they come from high net worth families, they are more educated. What I know is that usually a younger person would take more risk, especially when the older person made the money. So that’s why some second generation high net worth individuals will take the money and make multiples of it and some will lose it.
Heiner Weber, head of Geneva branch at Falcon Private Bank: Many of the sons went through financial studies so they are all aware of the latest academic news on investment and they often have a more academic approach to investment. That’s for sure. Second, they are often more active because young people’s time horizons are shorter and they are extremely well connected via the Internet.
Nael Raad, managing director at Al Ahli Investment Group: The younger generation is looking more into investments: they’re more educated. They want to know exactly what it’s all about; they have the background, the education. I find that the older generation worked more on the gut feeling but the younger generation is more methodical, definitely. But at the same time it’s not all one stereotype.
Raed el-Khoury, managing partner at Cedrus Invest Bank: It’s normal to involve the heirs in the investment process, especially as they will be in charge of the future wealth. It can be more dynamic because of the younger spirit. So we see it as an opportunity to become more dynamic in the investment decision-making process. But here comes our role to really stress our conservative approach. Definitely, they’re knowledgeable, exposed, educated and open-minded but at the same time they lack maturity. And this, they will acquire and they’re definitely on the right track but they need help, they need guidance. Somebody that understands their concerns, their parents’ concerns, and can bridge the gap.
