Despite the woes plaguing many parts of the financial services industry, private banking is booming. The crisis compounds a personnel challenge faced by wealth management organizations even as they try to shield clients' portfolios from the market carnage. Some "less-than-elegant cost-cutting" has resulted in "a tremendous shortfall due to a lack of hiring, as people didn't anticipate the magnitude of that growth [and] enough candidates didn't present themselves," notes Steve Crosby, senior managing director in PricewaterhouseCoopers' investment banking group.
Tony Guernsey is looking for a few good men and women.
Indeed, for every private banker, fledgling or veteran, that Guernsey, national head of wealth management at Wilmington Trust Co., manages to lure to the firm, he wishes he could find another to hire. “We need to replace the people aged 55 or so who are thinking about retiring, but we’re also in the middle of an incredible boom in our market, meaning that we need more people anyway,” he says.
Guernsey has plenty of company in his quest for private banking talent. With the ranks of millionaire families growing at about 9 percent a year in the U.S. — and far more rapidly in regions like Latin America and the Middle East — wealth advisory firms of all stripes are in a frantic scramble to find enough skilled people to take advantage of that expansion. Guernsey has crunched the numbers, looking at the ranks of advisers today and their average client base, and has come up with an estimate of just how big the personnel gap is. “By 2010, if the trends stay intact, the U.S. will have an additional 1 million high-net-worth clients who will need advice on managing their assets,” he says. “The problem? To serve our existing clients and all of these new people, we need about 50,000 new bankers. And they are nowhere to be found.”
The private banking boom stands out starkly amid the woes of the financial services industry — the credit market mayhem that led to the collapse of Bear Stearns Cos. and has cost, at last count, some 65,000 traders and investment bankers their jobs. But the current crisis only compounds the challenge faced by Guernsey and his peers. As hard as they are working to shield clients’ portfolios from market carnage, they still must overcome the longer-term, and potentially more intractable, talent problem. “Wealth management is one of the few areas that is really growing dramatically,” notes Steve Crosby, senior managing director in PricewaterhouseCoopers’ investment banking group. “There’s a tremendous shortfall out there due to a lack of hiring, as people didn’t anticipate the magnitude of that growth [and] enough candidates didn’t present themselves.”
Many firms, in fact, have given the business of catering to the complex needs of ultra-high-net-worth families — ranging from estate and tax planning to investments and philanthropic activity — short shrift in recent years. One reason: Private banking just doesn’t have the cachet that trading or investment banking does. Also to blame, Crosby says, is “some less-than-elegant cost-cutting” over the past decade or so that pared back or eliminated training programs within private banking businesses.
“We should be reaping the rewards of our hiring in 2000 and 2001, as those recruits become experienced enough to take on more responsibility,” says Guernsey. Instead, “the money we as an industry saved back then by not investing in our training programs is being spent over and over again in this recruiting frenzy, as we rob each other of experienced teams.”
And as the number of millionaire households grows — and as those households become wealthier year after year — more firms are pursuing their business. Such venerable trust companies as Wilmington, U.S. Trust Co. and Bessemer Trust that once dominated the landscape must cope with fierce competition from the likes of Citigroup, HSBC Holdings, JPMorgan Chase & Co. and UBS. Also in the fray are the wealth management divisions of investment banks like Goldman, Sachs & Co., Merrill Lynch & Co. and Morgan Stanley. Over the past several years, still more players have arrived on the scene, including multifamily offices and boutique outfits like New York’s two-year-old Modern Bank, which, according to co-founder and vice chairman Leslie Bains, already has nearly 200 clients with an average net worth of $70 million. Guernsey estimates that amid all this activity, perhaps only 10,000 of the 500,000 brokers and other licensed investment professionals serve the top tier of the market.
Meanwhile, those clients have become more demanding. “The expectations of what they will get from a private bank are much higher than they were five to seven years ago,” says Patrick Campion, CEO for the Americas at HSBC Private Bank. Clients don’t need just investment services; they also want help with complex estate planning, guidance in setting up philanthropic foundations and even assistance with teaching their children and grandchildren how to cope with inheriting millions of dollars. And these needs are increasingly global.
“We have one client here in New York who has a successful business in Hong Kong and wanted to expand to mainland China,” says Campion. The client’s private banker flew out to Hong Kong to interview HSBC investment bankers and determine which of them was best able to help the client move forward with his business plan. “When the private banker is the first person the client turns to for help in most areas of their life, as happens today, you can’t cut corners,” Campion notes.
The demand for top-notch talent is raising the cost of doing business. For starters organizations must offer financial incentives to retain existing teams or attract new ones. “People will pay one to two times the [fees] of a book of business as a signing bonus to attract an experienced adviser with a good client list,” says Robert Elliott, managing director at Bessemer Trust. He quickly adds that Bessemer doesn’t do this. “But if you want someone who has a certain kind of expertise or works in a specific geographical area, then you need to be prepared to woo them.”
Private banking executives agree that no one they would want to hire will budge unless offered at least 20 percent over his or her current compensation package. HSBC’s Campion says that such offers can go as high as 50 percent. Wilmington Trust’s Guernsey ups that ante to 100 percent, adding, “Then you have higher base pay, second-year guaranteed bonuses, forgivable loans, stock options, restricted stock, deferred compensation, generous life insurance packages — all this is standard procedure now.”
That takes a toll on the bottom line. “If you break your salary scales, how can you maintain your margins?” asks Chip Wilson, director of client services at Glenmede Trust in Philadelphia.
Annual surveys by McKinsey & Co. routinely place those pretax profit margins as high as 35 percent, and firms such as HSBC and Credit Suisse have generated margins in excess of 40 percent on private banking revenues. It is a business that glitters with promise as other departments reel from the credit crunch.
Some financial institutions have gone so far as to buy a private banking institution outright, as did Bank of America Corp. — then the most active and generous recruiter of wealth managers — when it purchased U.S. Trust from Charles Schwab Corp. in 2007. Alas, the transaction triggered an unprecedented raid on U.S. Trust personnel; though there is no definitive information on how many bankers and their teams left for rival institutions, some insiders place the figure as high as 35 percent.
The feeding frenzy is more dramatic overseas, where the growth in wealthy households is so rapid and recent that private banks have not had the chance to develop talent in-house. The stakes are so high that in 2006 the Singapore private banking division of Citigroup sued a former branch manager who had defected to UBS, claiming that he stole proprietary data and, in violation of his contract, recruited former colleagues to join him at UBS within months of his departure. In the Middle East private bankers have been offered double their current salaries to bolt to rivals, says Ileana van der Linde, New York–based principal in the wealth management practice at consulting firm Capgemini, which publishes an annual report on the global wealth management industry. The talent chase has grown so intense that it will be a focus of this year’s report, scheduled for publication this month. “The result is a bad scene for everyone, potentially,” van der Linde observes. “The financial institutions face tremendous costs just to keep up, and the customers — particularly the neglected bottom, the people who aren’t as wealthy and get less and less attention each year — can feel disgruntled.”
Even when financial institutions don’t win bidding wars to attract or retain talent, their bottom lines can take a hit. When a group of private bankers left U.S. Trust to join the wealth management arm of a large global bank, then–U.S. Trust CEO Peter Scaturro offered to waive fees for the bankers’ clients if they stuck with the firm for a year and gave it a chance to prove it could still deliver the goods with a new team of advisers. They agreed, and U.S. Trust retained nearly all the clients. Scaturro, who joined the firm in 2005 from Citigroup and, in spring 2007, after BofA’s buyout of U.S. Trust, moved to Goldman Sachs, where he heads the wealth management practice, declined to comment for this article.
But poaching from rivals is only a short-term solution, private banking honchos admit. “It’s a zero-sum game; you’re only
rearranging the deck chairs on the cruise ship when you need to be bringing new ones on deck,” argues Glenmede’s Wilson. He’s only slightly more bullish on a solution frequently touted by investment banks and money-center banks: the team-based approach to wealth management. “Teams mean you can deliver the wider array of specialized advice clients want more readily, but it doesn’t address the need to develop younger, talented relationship managers,” Wilson says.
Bruce Holley, senior partner at Boston Consulting Group, has studied the way these teams function and says that they aren’t living up to their potential. “People aren’t really constructing the teams well,” he says. “They don’t coach them on how to work together to deliver a broader wealth offering to the client.”
Technology can give private bankers access to more product and client information, but industry veterans say that alone isn’t the answer, either. The wealth management business fosters bonds of an inherently personal and emotional nature between advisers and clients. Someone working with, say, 50 ultrawealthy families can’t easily boost that client list to 75 families, even with the best technology and a bigger team. “This isn’t a scalable business,” says van der Linde. “There is a big risk here that clients will become disaffected.”
It is becoming standard practice to offer different levels of service depending on the quantity of assets under management — a process known as tiering. Increasingly, only the wealthiest clients’ portfolios are managed by the too-few veteran private bankers. Someone with a few million dollars in assets, who a decade ago might have been handled by one of those advisers, may get less personal attention. To Daniel Sontag, head of the North Americas advisory division at Merrill Lynch, this is simply a practical response to market realities. “It’s better for the client, who will be better served in the proper channel,” he says. “And the adviser gets additional capacity by transferring those smaller relationships to different channels.”
The risk is that someone who once got personal service from a private banker will resent having to call an 800 number instead. “When that client expresses dissatisfaction at a cocktail party, they don’t say how much money they have with the firm,” notes HSBC’s Campion. “I understand the economics of this approach, but you have to balance that with the recognition that the largest relationship isn’t always your most profitable.” Moreover, today’s small relationship may become tomorrow’s ultra-affluent one, should that individual receive an inheritance or sell a business. “Clients will go where they feel taken care of, so institutions that find creative ways to address this talent shortfall now may be the bigger winners down the road,” says van der Linde.
Financial institutions are beginning to revive, rethink and relaunch their in-house training programs to generate a pipeline of talented junior bankers. But managers like Campion and Guernsey can’t expect relief for as long as five to ten years, because it takes time to transform even skilled money managers into the trusted advisers that private banks require. “We have to find ways to cultivate [talent] internally,” says Campion. “Yes, it’s hard to identify the people with private banking in their DNA.” But however difficult and prolonged that quest may be, and however painful the intervening years, private bankers agree it is the only viable long-term solution. “We see today the consequences of not getting this right” in the past, notes Campion. “Now the stakes are higher.”