The haunting

More than two years since the meltdown in the value of their assets, high net worth individuals (HNWIs) remain haunted by the trauma of the global financial crisis and approach investment markets with great caution.

Despite the lifting of gloom since 2008, asserts Marcel Kreis in an interview with The Asset, a substantial amount of client assets are parked in cash, instead of long-term securities. “We have not seen a broad-based streak of clients going after cash investments beyond six to nine months,” the Credit Suisse managing director and head of private banking for the Asia-Pacific points out. Kreis has more than 20 years’ experience in the field of private banking in Asia. He joined Credit Suisse in 2007 from UBS, and since 1990 has been based in Singapore.

Neither has there been much of a pickup in the volume of institutional money flowing back into discretionary portfolios with a long-term investment horizon. “The flow has not recovered from where it was before the financial crisis and insecurity among investors is prevalent.” With bond prices vulnerable due to the fluctuating fortunes of several European sovereigns and with cash rates at zero – which translates into a negative return once inflation is factored in – investors are starved of investment alternatives.

A more transparent future

The repercussions of the global financial crisis will continue to reverberate across the region and is reshaping the way the industry and its army of relationship managers work, according to Kreis. “As a result of the crisis, investment advisers have been subjected to much more intense scrutiny, sparked by the grave losses incurred by clients as a result of Lehman Brothers’ bankruptcy and share accumulators’ large exposure at the height of the financial crisis – to mention only a few of the events that have rocked the industry since 2007.”

“Given the impact on a host of private individuals, the debate became politicized and there was pressure on regulators to take a closer look at the advisory industry in the financial service sector. This has resulted in new guidelines and rules on how products are marketed and sold.” More transparency was demanded from the industry, Kreis adds, including disclosures in some cases on how much was being charged for services. “What has been made clear is that much of the burden of responsibility for advice has shifted to the advisers themselves and the institution that they represent.”

Banks have been forced to initiate processes that are regularly audited internally and externally, explains Kreis. Regulators, he points out, now require extensive audit trail to establish whether the bank has fully and accurately assessed a client’s risk profile and the suitability of an investment. Much attention has been brought to asking questions to ascertain that clients are aware of the risk they take when sinking their money into an investment product pushed by their banker.

“A lot of bureaucracy was created to ensure that such processes are not given temporary lip service and that they are here to stay.” He does not think this is merely cosmetics to ward off public wrath against lax private banking practices. “What we are seeing is what it will look like in the future. I don’t believe there will be much of a deviation of the current relatively strict interpretation of a bank’s responsibility in case investment advice backfires.”

All this makes a lot of sense, Kreis points out and is something that a good adviser would have done all along, even without the meltdown and regulatory backlash to prod him.


Shih: Compared to Europe and the US, Asia is a less mature wealth market
Kathryn Shih argues that the environment in which all parts of the financial services industry – including wealth management – operate has changed dramatically over the last 36 months. “It is an environment characterized by new liquidity requirements, product regulation, selling and suitability norms, more robust adviser certification coupled with more cooperative, uniform and consistent regulation of cross-border businesses,” remarks the CEO of UBS wealth management for the Asia-Pacific. “Rather than simply collecting assets, wealth managers will need to focus more on investment and product performance. Satisfying this demand will require wealth managers to make heavy investments in education, compliance and technology, because the new environment will prompt clients to demand much higher levels of technical and market competence from their advisers.”

Better risk absorption

The question remains whether tighter requirements and other regulatory developments can insulate people from market mishaps and meltdowns. Kreis says the more disciplined advisory process takes into consideration the product’s risk profile as well as the clients’ risk profile and their ability to absorb risk. By themselves, those considerations are no guarantee that investments will not backfire and that investors will not suffer potentially heavy losses. The only way for financial institutions to protect their reputation and regain the confidence of their clients is to become more transparent.” Kreis recalls that in the heydays of accumulators – when everything was going up – nobody really paid much attention to the potential downside.

“We have seen this with other investments as well. Consider gold which has been steadily climbing since it traded for less than US$300 an ounce, a long time ago.” The volatility of commodity prices has always been there, believes Kreis, and no one will ever be able to ring the warning bell when it’s time to get out and no one will ring the bell when it is time to get in.

“Investment advisers will simply have to make the necessary calibrations about the level at which clients are comfortable exposing themselves to fluctuations in commodities or currencies, but the debate about how much you can lose is an important one for them to explore with clients. The amount of risk taken is often directly correlated to the degree of leverage. If you buy stock and pay cash for it, the shares of the company can go up or down and you can lose a lot, but the maximum that you can lose is the cash you put in. It is an altogether different ballgame if you have leveraged your position. These are the kind of conversations that need to take place.” If you pursue an options strategy, there is a certain time when the option loses its value as you approach the strike date.

Kreis feels that since 2008 clients have become more aware of the potential downside of investments. “Investors are generally optimists who tend to look at the upside, but 2008 destroyed an enormous amount of wealth both with financial institutions and with private individuals. This has reshaped their investment behaviour.”

Wooing talent

A major challenge to UBS reaching its growth ambitions across the region, Shih agrees, is the war for talent. “Our major competitors have announced aggressive growth targets for the Asia-Pacific – which are normally coupled with aggressive hiring targets. But there is a limited supply of high-quality private bankers in the markets in which we collectively operate.” UBS experienced a flight of senior talent during and after the financial crisis, but has since begun a recruiting drive across all markets. The demand for talent has jacked up remunerations for experienced private bankers.

In countries such as China, the drive to recruit is reaching fever pitch with all the major banks keen on offering services catering to the wealthy segment of the population. China Merchants Bank, for instance, in 2010 began an all-out recruitment drive for talent. Unless there is a concerted effort to keep the talent pipeline flowing, Shih of UBS believes that there will be a shortfall of around 900 relationship managers around the region.

Kreis acknowledges the vast changes that have swept through the industry and have made private banking more challenging. But citing the region’s surging potential and accelerating growth in the number of HNWIs, he has nonetheless set ambitious goals for growing the business in the coming years.

Compared to Europe and the US, Asia is a less mature wealth market in which most of the wealth – which was created after World War II – remains in the hands of the first and second generation, notes Shih. “The typical client is an entrepreneur aged over 50 who runs/owns a business.” The bulk of a typical client’s wealth in the region is linked to the business and there is a tendency to reinvest heavily back into the business. In addition, there will be family and business succession issues to be addressed. Historically, the investment behaviour of HNWIs in Asia-Pacific has been characterized by a high risk appetite and straightforward asset allocation.

There is no great shift in the offshore and onshore private banking businesses on account of the strong domestic economies in the region, says Kreis. Credit Suisse recognizes that it is fully on board domestically and operationally in Japan and Australia in order to adequately manage the needs of clients. The franchise is growing because clients recognize the valuable contribution the bank is making to make them even wealthier. “One of the key differentiators between us and our key competitors is our ability to offer investment banking services as well as wealth management services,” Kreis points out.

An underserved market

Although there are regional differences, tangible domestic asset classes, such as direct investments in private equity and real estate, have been preferred sometimes with the use of leverage. Furthermore, in the liquid part of the portfolio, HNWIs have tended to focus on a limited number of asset classes, typically, cash, equity and forex (or structured products replicating these exposures).

In light of the entrepreneurial background of the majority of HNWIs in the region and the preference of most entrepreneurs to be “in charge of their own destiny”, they tend to be actively involved in the management of their investments. However, Shih asserts that the situation is changing and increasingly sophisticated clients in Asia demand that wealth managers maintain a wide range of products and services to cater to their specific needs. But the sharpest difference between the potential evolutions of wealth management in Asia relative to that in the rest of the world is the sheer scale of the market. “We believe that only between 10% and 15% of bankable assets held by HNWIs and ultra-HNWIs are currently managed by traditional private banks. In other words, the opportunity is immense.”

According to the Credit Suisse Global Wealth Report, economic expansion in the Asia-Pacific means that growth in the average household wealth per adult is up to 10 times the global growth rate. China stands out in particular having become the third-largest wealth generator in the world, with total household wealth of US$16.5 trillion, behind only the US with US$54.6 trillion and Japan with US$21 trillion. Household wealth in China is set to more than double by 2015. China’s wealth is 35% greater than that of France which has US$12.1 trillion, the wealthiest European country, and is almost five times that of India.

One major performer is Indonesia whose average wealth per adult has grown the fastest in the Asia-Pacific, by 384% to US$12.112 trillion since 2000. That is the fourth-fastest growth rate in the world.

Stefano Natella, global head of equity research at Credit Suisse, says global wealth could grow 61% to US$315 trillion by 2015. He says their study shows that the middle segment of global wealth has been replacing indebted US households as the global growth locomotive.

New loans reflect confidence

Kreis says the industry has learned its lesson from what happened to rivals. In Europe and in Switzerland, recognition has grown among private banking institutions to be more selective about the clients they work with. “For us to provide investment services, the clients must have met their financial obligations, including paying taxes and other obligations to their respective governments and taxation authorities. There is clearly some money leaving the banking system in Switzerland as a result, but “net net” the country continues to grow.”

Kreis credits this to Switzerland’s status as an international banking centre, driven mostly by tax-declared money rather than cash squirrelled away to be hidden from tax authorities. “You will be hard-pressed to find a location in the world that has such an expertise in international finance. Switzerland has always been cosmopolitan and the Swiss have always been confident about dealing with currencies.” The wall of money entering Switzerland with renewed vigour is coming from emerging markets such as Asia and the Middle East, explains Kreis, and not from mature markets. “It is coming from countries such as Russia that have benefited more recently from the resources and commodity boom. It is still growing.”

A fair number of clients borrow, he adds. “In 2008 we saw deleveraging across the board. Whatever could be sold was sold and whatever loans could be repaid were repaid. So clients in the Asia-Pacific deleveraged to a large degree in 2008, but two years on, our lending activities have grown beyond the original level we had in 2008.” The loan book of the private bank has regained momentum since then and now has more loans outstanding than it had in 2007. He is quick to assure that the bank has not adopted a more risky profile, pointing out that, in the case of the private banking clients, the loans are fully collateralized. “We don’t do cash flow lending but lend against stocks, bonds and property.”

Despite the cautious investing tack adopted by a majority of HNWIs, Kreis has seen confidence returning across all countries, driven more by fundamentals than by speculation.

“The borrowing clients tend to invest the proceeds in their own business and, in some cases, we want them to use the money to make investments with us as well,” notes Kreis.

“It has been quite entrepreneur-driven, because 2008 clearly did not destroy everybody. There were clients who were sitting on a pile of cash looking to take advantage of opportunities that arose and expand their business activities across markets. When they are a little bit cash strapped and have most of their wealth in stocks, depending on the liquidity of their stocks, we can assist them in monetizing the assets.”


A real private banking DNA

Credit Suisse’s managing director and head of private banking for the Asia-Pacific, Marcel Kreis, explains to The Asset what sets the bank apart in the private banking sphere.

Where do you see most of the wealth coming from?

It is virtually in all markets across the Asia-Pacific. With the exception of Japan, economic growth has resumed. Where you have economic growth, there is wealth creation.

Greater China remains a key growth market in the region. Look at the IPO pipeline for 2011: it looks quite strong and a lot of Chinese entrepreneurs are taking their companies public. Because China is such a growth engine for North Asia, the key beneficiaries have been Hong Kong and Taiwan.

There are strong cross-border business and investment flows from China to Taiwan and Hong Kong and back to China. It is becoming one major economic and investment theatre, irrespective of the fact that they are administratively distinct entities. China’s strong economic engine is helping generate a lot of the wealth flow into North Asia.

In addition, we look at Australia and Indonesia which are two of the main beneficiaries of the enormous demand for natural resources. Those countries are showing a strong potential for growth.

Wealth is being created in the mining sector. Last century you had the gold rush in Canada and Australia. Now, it is much broader based for industrial activity in a resource-rich country.

Are there differentiations in advisory fees?

Fundamentally, as clients become more active in their investments, they will pay for the private banking service they receive.

The increased regulatory pressure on compliant behaviour demands more resources and if these resources add cost, we need to find ways to defray the cost of those services through fees for services that are perceived as value-added. The counterargument to that is that fees will inevitably come under pressure with the numerous private banking newcomers expanding into Asia.

Credit Suisse is a financial institution that has been strong in wealth management and in the classic asset management area. We take a client’s money and we try to stretch it as much as we can within parameters that work with the client. We need to make the money work for the client.

In addition, we have a strong investment banking division helping clients raise money in the equity market and in the fixed-income area. If we can help them draw their business more successfully through corporate business activities, then this could be built into a private banking relationship.

Where lies your strength?

We have a strong platform. We continue to grow our footprint in Asia and make the necessary investments where we think clients want us to be better and stronger. We have probably one of the cleanest balance sheets of any financial institution and we are in the business of helping our clients thrive.

When I see how well we work together as a team in terms of analyzing and approving credit or getting an investment solution tailor-made for a client, we are not really sidetracked by internal managerial challenges as a result of the problems in 2008. There are few institutions with real private banking DNA. There are only two large international players that have private banking as part of their DNA – and that’s not badmouthing the competition at all.

The platform on which we operate and our business model are attractive to senior bankers. The career opportunities at Credit Suisse are pretty unlimited, really, which explains why we have been able to hire more senior bankers. The hiring comes from a diverse set of banks. It is quite a balanced picture.

We have reached a challenging stage. There are a number of strong institutions and most of our large and medium-sized clients have more than one institution that they deal with and that’s healthy because it keeps the industry honest. It forces everyone to excel and give clients a broader choice.
This article was published in the January 2011 issue of The Asset