Banking on the rich

Coutts, private bankers to the royal family and the landed aristocracy, might still epitomise private banking in the UK more than any similar institution, but UK private banking faces some big challenges. Competition for private clients' money is greater than ever and is coming from every conceivable corner of the financial services industry.

The management of wealthy clients' money has never been such good business. Last year might not have been such a good one for the rich, but many grew so fat on the bull markets of the previous 10 years that one bad stock market year is not likely to have affected the vast wealth of the high net worth individuals (HNWIs).

Just how wealthy the rich are in the UK was revealed by The Sunday Times Rich List 2000. Last year the survey showed that the collective wealth of the top 1,000 in the UK reached almost £146bn, a rise of more than £31bn on 1999's list, or 27 per cent. This was the biggest surge since the survey started 12 years ago.

And the very rich are not the only ones to have seen their wealth grow rapidly. Many people have now entered what bankers call the “mass affluent market”, which loosely defined means having investable assets of more than £50,000 but less than £500,000.

With the proliferation of the very rich and the mass affluent, it is hardly surprising that the number of financial institutions trying to cater for this surge has expanded. Competition is coming from every conceivable direction – providing the private client with a vast array of choice.

The UK's rich traditionally stashed their money with Coutts, Barclays Private Bank, Barings, Schroders and a handful of other UK private banks with rarefied names. Only those looking for full-service offshore financial management might look at Swiss alternatives.

But the 1990s unleashed a number of forces that began to change the cosy relationship between most of the country's rich and their bankers – not least at the biggest name of them all, Coutts, which had a disastrous decade. The demise of Barings in 1995 further added to the turmoil in the private banking sector in the UK.

Disillusioned with the management of their money and little impressed with the fee structures of the private banks, a small but rising number of wealthy clients began to take their money elsewhere. Some chose to open accounts at full-service US private banks with branches in the UK, such as Citibank Private Bank and Chase Manhattan. These banks and others from across the Atlantic started to market their services in the UK more aggressively from the mid-1990s onwards.

The US banks benefited from access to the large investment banking and asset management parts of their bank. They were also attracting better qualified and trained relationship managers because of the high salaries they offered compared to their UK counterparts.

They have been joined by JP Morgan (now part of Chase Manhattan), Goldman Sachs, Morgan Stanley, Merrill Lynch and most recently Riggs & Co, all of which have redoubled their efforts in the UK's private client market during the past few years. These names are likely to increasingly dominate the UK private client market in the years ahead.

The phenomenon of online retail brokerages, which began to hit the UK in late 1997, also changed the landscape for private banks and wealth managers. The launch of online services from north US retail brokers such as Charles Schwab, E*Trade and TD Waterhouse, and their UK counterparts such as Barclays Stockbrokers, saw the beginning of an investment revolution. Self-directed investment strategies were increasingly being followed by a growing number of the UK's rich, helped by the expansion of online brokerages.

E*Trade and Charles Schwab have been very successful in the US at attracting funds from HNWIs and they and their compatriots are targeting growth from similar clients in the UK and the rest of Europe. Increasingly, the successful German online brokerages such as Comdirect and DAB are chasing the UK's wealthy investors as well.

The internet has also allowed Continental private banks to target the UK's rich. Credit Suisse First Boston, one of the biggest names in private banking, has used the internet to develop an impressive strategy for its private clients. The Swiss bank believes that this strategy can take business away from the private banks that fail to see the potential of the internet and the management of wealthy clients' investments.

Deutsche Bank Private Bank is in the process of unveiling an impressive internet offering for clients in the UK. UBS and Pictet, the latter traditionally associated with the ultra-high net worth market, are also in the process of beefing up their internet offerings for wealthy investors in the UK and the rest of Europe.

All these developments have sharpened the competitive instincts of some of the traditional names in UK private banking. Coutts, fresh from its recent sale to the Royal Bank of Scotland through the latter's NatWest purchase, appointed a new chief executive, Andrew Fisher, last May. Among other reforms, the bank has outsourced its fund management processes to third parties in an effort to improve performance.

Schroders established a new private bank late last year and is gearing up for expansion in the UK and the Continent. It has recently hired senior relationship managers with substantial knowledge of technology issues – a growing area that relationship managers must know about if they are to satisfy an ever-demanding client base.

Segmentation of private client services from the retail and private banks began to expand last year and is set for even greater growth in the years ahead. Mass affluent strategies have been launched by the Royal Bank of Scotland with NatWest Private Banking. Even some of the former building societies are getting in on the act, with Halifax saying it will target mass affluent clients through premium services.

But so far the most impressive mass affluent offering has come from HSBC and Merrill Lynch. The two have joined up in an alliance to target the mass affluent globally and are involved in a phased introduction of their services to customers in the UK. Others have either followed, such as Credit Suisse, or plan to in the future, such as Chase Manhattan/JP Morgan.

The exponential-like growth in the private client financial services market has been a boon to lawyers operating in these areas. Private client departments of the major UK commercial lawyers have swelled and work in the area has been plentiful. Future deregulation and alliances will ensure that lawyers (and accountants) will raise their advisory role to private clients.

Due to their trusted relationships with many HNWIs, lawyers are in a prime position to exploit this relationship further. It will be interesting to see how the banks respond to this potential challenge. n