Executive caught Rudy Sayegh at a bad time. “There’s blood on the street,” joked HSBC Lebanon’s managing director as he walked into his office. Sayegh had just wrapped up a 40-minute conference call with one of the bank’s ultra high net worth clients, and the urgency of the conversation was not without reason. Following weeks of volatility, the United States financial markets had hit another low that day, August 18, with the Dow Jones index down 4 percent, the S&P 500 down 4.6 percent and NASDAQ down 6.6 percent. Sayegh’s client was, naturally, worried.
For wealth managers and private and investment bankers, both globally and in the Middle East and North Africa (MENA), their client portfolios’ high levels of exposure to US and European equity and debt markets is, unanimously, a great deal of concern. And while Merrill Lynch and Capgemini’s 2011 World Wealth Report posted more than healthy growth rates for the worldwide High Net Worth (HNW) population and its overall wealth, which respectively rose 8.3 percent and 9.7 percent respectively in 2010 year-on-year and surpassed levels prior to the 2008 financial crisis, it also revealed early warning signs of an uneven economic recovery path, as the 3.9 percent global economic growth of 2010 was driven primarily by emerging markets in Asia-Pacific and Latin America.
A little introspection
Daniel Diemers, principal at Booz and Company, says the situation in both the US and Eurozone sets an all-too-familiar scene for the global wealth management industry. “Again, most relationship managers in the region are facing the same dilemma: Rapidly sliding markets where clients want to shift portfolios to lower margin assets under high time pressure, while product providers, chief investment officers and chief economists struggle to provide clear guidance and issue recommendations that leave the front office one step ahead of the client and the market,” he said. But what could soften the blow, he added, is that global private banks have pursued market share much less aggressively since 2008, have focused on revamping their business andrevenue models and have redefined the roles of their higher management andinvestment support teams.
And as many would assure, wealth managers’ conservative and cautious strategies throughout the last three years have trickled down to their private bankers and relationship managers, who seem to have learned lessons on the risk and reward perception of high margin products, the suitability of those products for investor needs and, most importantly, the value of a good client risk profile assessment.
“The last decades witnessed the development of new economic theories on investor behavior. The consequences of introducing behavioral aspects to how investors make investment decisions are far-reaching, but essentially we believe that they help our clients to become more disciplined investors,” said Reto Bartel, senior representative at UBS AG in Beirut. According to Bartel, UBS had introduced a risk monitor framework after the 2008 financial crisis, and as a result advised its clients to sell Greek sovereign bonds in early 2010 when their yields were still below 6 percent.
“The fundamental lesson of the financial crisis, as far as the private bankers are concerned, had to do with putting the client first. Unfortunately, a lot of people were either not qualified or not properly trained to determine what information was relevant, or they decided to look at products rather than people,” said Stephen Evans head of private banking in the western hemisphere at Standard Chartered bank. The 2011 World Wealth Report shows that private bankers have redeemed themselves in the past three years, as 98 percent of clients surveyed had regained their trust in their financial advisors by 2010, while a large percentage of them felt less confident about financial markets as a whole, as well as their regulatory bodies and institutions.
Stuck with ‘em
For Selim Chami, director of investment banking at BSEC, high net worth individuals (HNWIs) do not have much of a choice to let go of their private bankers. “At first you would basically get frustrated. You would hold a grudge against your private bankers [and] blame it on them. But again, who do you have [to] better run your money?” he said. UBS’s Bartel explained that clients are aware that wide swaths of the developed world are overly indebted and face rising healthcare costs, aging societies, as well as a scarcity of resources, which calls for a reallocation of investments — one that a do-it-yourself approach could not possibly achieve.
Whether the clients choose big banks or smaller investment boutiques to reallocate those investments, however, has been a matter of debate over the last three years. While some experts advocate the big and established names in the wealth management industry, others are promoting multi-family offices and small-to-medium sized financial institutions that have increasingly gained favor with Ultra High Net Worth Individuals (UHNWIs) and HNWIs since 2008. A recent report by Scorpio Partnership states that, although the global top-10 banks still controlled two thirds of the high net worth managed assets worldwide in 2010, “the wealth management industry still has the aura of a boutique service within the financial services community.” Their research shows that while the top-20 banks in the world managed 77 percent of the high net worth market in 2010, there are approximately $10 trillion of high net worth assets left over to potentially be managed by banks — an opportunity as much it is a challenge, as big banks face declines in efficiency, a rise incost-to-income ratios and a continuous struggle to maintain and increase profitability.
“Big names, big banks have big kitchens that tailor-make investment products and then dump them onto a sales team that has targets to meet. That’s why we’ve been able to snap [up] lots of clients from them since 2008,” said Nael Raad, managing director at Al-Ahli Investment Group, adding that for the last three or four years, clients have been migrating from big banks to small-and-medium-sized ones.
“Definitely, we’re going into family offices, and that’s been for five or six years where they will take care of the investments of UHNW families. When you have your own investment institution then you can be an unbiased investor,” said Mohammed al-Hamidi, managing director at AMFinancials, adding that UHNWIs, who usually deal with more than one bank and banker, benefit from having their investment portfolios under one umbrella of a family office that saves a great deal on the cost of investment.
But Hamidi also realizes that local institutions in the MENA region, while a force to be reckoned with, face many challenges. “I think the biggest challenge for local and regional private banks is the distribution, expertise and depth of their capital,” he said, adding that the lack of talent in the MENA region, a problem that both local and global banks seem to suffer from, starts at the banks’ higher management level. “When we’re talking about the chief executive officers and the chief investment officers — all these big guys — usually if they’re really good, they’re not going to be in the region,” he said.
If the lack of technical expertise begins at the top of the hierarchy, BSEC’s Chami is sure that it does not get better at the bottom. “Private bankers in the Middle East — I don’t think they do much. They are more brokers than anything else. They take orders and execute for the clients,” he said. Georges Abboud, head of private banking at BlomInvest Bank, said that Lebanese investors in particular are mostly traders by nature, which does not allow much room for long-term wealth management. “But we are educating the bankers and the clients to move from a trading mentality to a more diversified, long-term strategy. This will take time. And at the same time you need to provide products and services to meet needs,” he said.
Structured products, which have been controversial for their complex payout terms and embedded risks that even bankers fail to understand at times, are largely off-limits to Lebanese private bankers because Banque du Liban (BDL), Lebanon’s central bank, has a tight rein on the development of banking products. “We need [central bank] approval for any product and that takes time, mainly because they want to control activities in this area, but also because sometimes they needto build in-house expertise to understand and do the right due-diligence on[the products],” Abboud said, before adding that such measures are essential to promote a safe environment, as Lebanese private bankers generally still lack the sophistication to develop sound structured products.
Chami said bankers and brokers are one and the same thing in Lebanon because of limitations to both their job description and qualifications. “In Lebanon, you will hear private bankers say they can’t give their opinion on many things. You have those who put in a little more effort and give their recommendations. But I’m not sure that these people know enough about the markets,” he said, adding that modest trading volumes and a small client base in Lebanon push financial institutions toward economies of scale in hiring bankers who know a bit about all asset classes, but not enough about one in particular, which automatically results in a reduction in the quality of information and advisory services. “Normally speaking, if you look at developed economies you have specialization because they can afford it,” Chami added.
For Khaled Zeidan, general manager of securities and structured products at MedSecurities Investment, Lebanon’s small economies of scale do not allow for a legitimate private banking market in-country. “I think there is a future for asset management in Lebanon. In that aspect there is scale. For example, if I wanted to set up a Saudi Fund, or a MENA fixed income fund, then the cost of operating something like this is minimal. But for private banking, in the absence of scale, a few billion dollars of assets do not justify an operation,” he said, noting that global banks, on a standalone basis, often have assets under management equivalent to the whole Lebanese banking sector’s assets. “One should understand one’s limits,” said Zeidan, “I can’t do what Pictet [& Cie] can do.”
Weaning the clients
Another impediment to the development of the private banking industry in Lebanon is the mentality of clients themselves. “The majority of Lebanese, they like to trade. They are short-term speculators because in Lebanon we live in an environment of short-term vision because of the security situation,” said Hamidi. “So if you compare the activity of portfolio management, which is the main service of private bankers, and the activity of brokerage you see the [latter] in Lebanon is much bigger.” He added that Middle Eastern clients prefer not to concern themselves with industries outside of their core sphere of expertise, due either to a lack of time or blind faith in their bankers. “We present to clients for 15 minutes and they only hear the last two words: 10 percent or 5 percent or 12 percent [return],” said Hamidi.
This pushes bankers, said Chami, to only sell products that might appear to bear little risk and still yield high returns, a common yet unrealistic demand from clients in the region.
Regardless of these challenges, Raed Khoury, managing partner at Lebanon’s newest specialized private bank, Cedrus Invest, says there shuffling of wealth in the region, being driven by high oil prices, is a major opportunity for MENA private banking, even though building a platform for such an industry remains a challenge, especially in Lebanon. “Our approach is, we need to introduce more and more… to the Lebanese market the concept of wealth management, whereby we would look at the profile of the client, at their needs and at their family needs, [at] structuring [their] wealth — the whole spectrum.”