The New Era Is In Private Wealth And The Power Of The Unburnt Class

This post was written a week ago for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading…

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There is a reason to be nosy when a good friend tells you that he is considering converting his RFMC licence into a full CMS (Capital Markets) one because it is a big deal indeed for the latter is what we would connote with hedge funds while the former is in the boutique category.

“What is his motivation ? What about the costs and capital ?”, I bleated over Samy’s delicious briyani (without the fish heads) and delicious cold beer. For the capital requirements to be able to run the works would be S$ million, if I am not mistaken.

What I managed to gather is that his potential client wants to be a big kahuna and no small time licence will be good enough even if the lesser licence will do just fine for a family office.

The new banking landscape

Restructuring at the world’s biggest lenders has left them with investment banks that are far smaller and have very little in common with each other. Private banking and wealth management have replaced investment banking divisions as the big profit centres in some global banks, while others are repositioning themselves as domestic lenders. http://www.ft.com/cms/s/0/95b6f974-4b86-11e5-9b5d-89a026fda5c9.html#ixzz3jv20vsHK

This is a topic close to our hearts and a trend I think we should not be ignoring whether from whatever hat we don, as a customer or a banker or a trader or a hedge fund or an analyst or the all important regulator. The private wealth segment which has simply exploded in recent years or, perhaps, which has always been there but now re-categorised and monetised as a numerical accomplishment for banks to parade as a boast point to shareholders and investors.

Since the Lehman collapse and the bad taste that trading and investment banking has left in social perception, the trend has been a shift to wealth management. It has been a major focus for financial centres like Singapore and Hong Kong in recent years both wooing the family offices, ultra high net worth individuals and the hedge funds.

Singapore has been nipping at the heels of Switzerland and Hong Kong on this front and has been ranked 6th in the world for 2014 after showing impressive growth between 2009-2013. http://www.straitstimes.com/business/banking/singapore-overtaken-by-hong-kong-in-ranking-of-largest-wealth-management-centres

Assets Under Management 2008-2014

  1. Switzerland USD 2.0 trillion +14%
  2. UK USD 1.7 trillion +13%
  3. United States USD 1.4 trillion +28%
  4. Panana & Carribean USD 0.9 trillion -47%
  5. Hong Kong USD 0.64 trillion +147%
  6. Singapore USD 0.5 trillion +25%

 

On the home front, Singapore is seeing an explosion in the “mass affluent segment” with previously ordinary bank accounts now targeted by the wealth management business. This segment is generally recognised as accounts holding between $100k to $ 2 mio and local banks have seen their incomes from wealth management triple since 2010. http://www.channelnewsasia.com/news/business/singapore/wealth-managers-in/1842432.html

And how true it is.

A couple of weeks back, during my inaugural bond market seminar, I posed a question to the audience asking if they had started investing in bonds only after 2010 and the answer was unanimous. 2010 was the magic year, the year after the post-Lehman turmoil year of 2009.

2010 was a significant year for me, as well, from a personal point of view, when I had a major difference in opinion for a bond issue that was being launched. I had opposed the pricing of the bond as too tight and of poor value for investors. My opinion was dismissed, the bond launched and sold out within a day, to my surprise and the surprise of several other market professionals.

It was one of my first encounters with the power of the private banks and what a discovery that was, watching the private bank segment grow from strength to strength over the years and the magic of the PB rebate which was the main selling point of that fateful bond back in 2010. 0.75 cents hard commission to sell does the trick when no amount of slippery persuasion would work on a fund manager.

The Wealth Management Fad

Wealth management is new fad for all bank CEOs who want to keep their jobs and we have seen enough attrition in the past few months to know that. Barclays, Deutsche, Standard Chartered, Credit Suisse and more.

Shareholders demand it, noting that with Credit Suisse’s new CEO Thiam, “Pundits and analysts reckon Mr. Thiam will bolster Credit Suisse’s capital, and shrink its relatively expensive investment bank to focus more on wealth management. That kind of program would mirror changes in recent years at UBS AG, which has earned Credit Suisse’s Zurich-based rival plaudits and a stronger share price performance.”

Branches are closing, investment banking units shuttered, trading desks shrunk down as banks hire more private bank relationship managers, better and more pleasingly termed now as wealth managers. Yes, the retail business is now being shifted on-line around the world with the UK losing 40% of bank branches back in 2013  and Europe cutting 5,500 branches in 2012.

Cost of Capital

This is all due to the new regulations, particularly the Dodd Frank Act, that increases the cost of doing business in trading and investment banking. Additional capital surcharges for the TBTF (too big to fail) banks have forced banks to rethink the way they used to do business and their bottom lines that is evident in this chart of banks’ investment bank earnings.

 

A New Era For Banking And The Power Of Private Wealth

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