Private Banks Forced To Learn New Tricks

by Carla Johnson, Investors Offshore.com

19 June 2001

The move towards performance driven wealth management is opening up fresh demand for alternative investments such as hedge funds, according to several recent surveys. Experts say that wealth management services in the UK are having to become more investment led in order to keep up with the demands of an increasingly sophisticated customer base, and that traditional private banking for the wealthy is giving way to performance driven portfolio management services.

'In the past, it was enough for private banks to show that their portfolio management performance was creditable in comparison with the competition,' explains Michael Malinski, director of the London based wealth management consultancy Malinski Lawrence. 'Clients are no longer impressed by this. They want absolute return strategies which tell them what growth they can aspire to and the probabilities of achieving it.'

Although private banks have traditionally steered away from riskier investments, viewing themselves more as custodians of wealth as opposed to growers, increased competition and a more savvy audience has meant that they have been forced to innovate in order to differentiate themselves from their (often more accessible) peers. The use of external investment managers is seen by the 'wired wealthy' as a strong plus point, and in particular, discretionary access to alternative investment funds that may be closed to the general public may help to close the deal. A recent study by Scorpio Partnership shows that private banks in Europe and the UK are rising to the challenge, however, with more than 84% offering alternative investments to their clients, and all hoping to offer more in the future.

Another key issue for wealthy clients is fee structures, and here the news is not so good. Although in a survey conducted last year by Arthur Anderson, 45% of high net worth investors globally said that they would prefer to pay fees related to the performance of their portfolio rather than its size, only 55% of UK asset management firms, and a mere 22% of their US counterparts offer performance related fees as an option.

In the UK alone, there are estimated to be more than four million individuals with 'investable assets' of over £50,000, and the mass affluent are one of the fastest growing groups on an international level. It seems that in order to attract their attention (and ultimately their money) banks and wealth managers are going to have to continue to innovate, collaborating more with alternative investment firms, enhancing their capabilities across the risk spectrum, and, on an international level, playing to regional variations and strengths.

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