PRIVATE BANKING InsideBanks are competingto woo Asia’sfast growing number ofaffluent people, writesSharlene Goff Page 3FINANCIAL TIMES SPECIAL REPORT | Wednesday November 10 2010

www.ft.com/private­banking­2010 | twitter.com/ftreports

Wanted: clients with$25m or more to spare

Wooing the ultra-wealthyremains a popular parlourgame for private bankerstrying to drum up businessin the downturn.

From Schroders to Citi,private banks are reachingout to “ultra high networth” people who have atleast $25m to hand, toimprove profit margins.

But the task is difficult.Stefanie Drews, head ofBarclays Wealth’s UHNWbusiness, points out thatthe super-wealthy demandsophisticated advice oninvestments as well astaxes, properties and pen-sions. They also want fre-quent access to their hold-ings, she says.

Ms Drews suggests thatthe super-wealthy havemore cosmopolitan invest-ment tastes in some cases,but are less willing to takerisks when markets fall orzigzag. As a result, Barclaysmanagers avoid “hugging”index benchmarks whenmanaging their money.

“In my experience, whatthe very wealthy are look-

ing for is not good returns,but good risk-adjustedreturns,” she says. “Wetend to take strong views indown markets and moveentirely away from thebenchmark and possiblyinto cash.”

Barclays’ UHNW adviserstry to provide the samelevel of service to the verywealthy that they would toinstitutions. If a client hasan interest in subordinateddebt or foreign exchange,the request is dealt withthrough a bank-wide triagesystem.

“We execute quickly,”says Ms Drews. “Say aclient has a stake in a cop-per mine and needs adviceon how to hedge his copperrisk. His adviser may seekhelp from another adviserfrom Barclays Capital orBarclays corporate.”

Barclays has also set up

an investment club whereits wealthiest clients tradestrategies with each other.

“More and more clientswant to do this type ofthing,” says Ms Drews.“Say a client is interestedin doing a deal in Korea.We put them in touch withanother client who wants todo the same.”

Another characteristic isthat the assets of the super-wealthy tend to be spreadfar and wide.

Dena Brumpton, chiefoperating officer of Citi Pri-vate Bank, says it has spentthe past 18 months trying toplug the gaps in the serv-ices and products it offersits clients to ensure thesame quality of service andadvice, whether they be inIndia, the US or Brazil. Thefirm has offices in 140 coun-tries.

Along with most rivals,Citi has an open architec-ture platform that permitsthe bank to offer financialproducts from various pro-viders. Its bankers do notreceive additional compen-sation for selling in-houseproducts.

“We have a totally openarchitecture approach,which, when combined withour fully discretionary com-pensation model, gives ourclients an unconflicted

The ultra­wealthyThe race is on toattract investorswith cash to hand,says Ellen Kelleher

Continued on Page 3

Citi’s Dena Brumpton

How to keep high f liers in the nest

Bankers passing throughGeneva airport recentlymay have noticed a newaddition to the billboardsadvertising luxury watchesand diamond rings: head-hunters for private wealthmanagers are now toutingtheir services too.

As private banks seek tostrengthen their teams andrebuild client confidencefollowing the fallout fromthe financial crisis, manyare poaching from rivals orlooking outside the indus-try for talent.

However, good privatebankers are in short supply.Demand for private bankingservices has soared in thepast decade, but banks havefailed to train enough peopleto meet it.

A report last year by PwCfound that 80 per cent ofchief executives at privatebanks thought their wealthmanagers were not of “highcalibre”.

Yet they were spendingless on internal trainingthan they did before thecredit crunch – a trend thatJeremy Jensen, leader of

PwC’s European privatebanking and wealth man-agement practice, believescontinues today.

Insiders complain thatsome relationship managersat larger banks are tooprocess-driven as a result,and have a tendency tofocus on selling internalproducts to clients ratherthan building a long-termrelationship with them.

This focus on process andthe house view can makesome wealth managers feeldisillusioned.

“They feel quite oftenrestricted and unable totake advantage of opportu-nities in the market thathaven’t been discussed inthe annual committeeinvestment meeting,” saysTim Gibson-Tullberg, thefounder of headhunter Gib-son-Tullberg, which hasbeen advertising in Genevaairport for the past sixmonths.

This swiftly leads to adesire to move on. Onenotable trend among theelite is to move from thelarger banks down tosmaller companies thatallow greater freedom.Often, they take their cli-ents with them.

“Most banks view theirwealth management armsas distribution channelsand they treat them likethat – they hang on to mostof their managers but thereare some who are temptedto believe they can serve

their clients better else-where,” says MichaelMaslinski, an independentconsultant to the privatebanking industry.

But moving too fre-quently risks losing theirclients’ trust. Mr Maslinskibelieves that a good rela-tionship manager shouldmove no more than twice inhis or her career.

The issue of churning hasbeset the private bankingindustry in recent years.Client relationship manag-ers now switch jobs every

five years, according to MrJensen.

“Unfortunately, poachinghas become a fact of life forthe sector,” he says.

For those who do not taketheir clients with them, thiscan damage the image ofthe long-serving wealthmanager who offers fami-lies a tailored service thatthe private banking indus-try prides itself on.

Mr Gibson-Tullberg saysthat larger private bankshave been setting up their

own internal recruitmentservices, but the focustends to be to get people inon the lowest possible paypackage – an offer that thebest private bankers willscorn.

In the past month, MrGibson-Tullberg has placedtwo senior private bankerswith smaller wealth manag-ers on equivalent or highersalaries to their existingpay package – which hebelieves disproves the the-ory that moving out of thebig banks means taking apay cut. Smaller banks tendto offer profit-sharingarrangements that can behighly lucrative.

Mr Gibson-Tullberg saysthat while 90 per cent of thepeople he places are fromwithin the private bankingindustry, 10 per cent are‘lateral hires’ – former taxadvisers, lawyers, traders orpeople in film finance.

“The industry badlyneeds that, as the lateralhires bring in fresh view-points and also don’t comein with the rather stuffyview and ‘pull pull’ policyof trying to drag a clientbase from one place to theother,” he argues.

He says that what theindustry needs is moretraining – but frequentlyprivate banks are reluctantto undertake training them-selves, as they fear peoplecould then be poached.

Mr Jensen says that typi-cal training regimes under-

taken by other industries toretain staff, such as coach-ing or mentoring, are thingsthe private banking sectorhas not yet perfected. Hebelieves some chief execu-tives fail to listen to theneeds of their wealth man-agers or understand theircareer objectives,

But to a certain extent, inan industry that prizeslong-term steady client rela-tionships, the career pathfor a client relationshipmanager is hard to chart.And for the employers, thebig question, says MrJensen, is: “How do youretain your high fliers?”

Until the private bankingindustry addresses the issueof how to train and retainclient relationship manag-ers, those who have real tal-ent can command hefty paypackages if they decide tojump ship.

And, like their clients,many are moving abroadfor tax reasons, as govern-ments target high earners.

UK wealth managers aremoving to Switzerland,where rates of income taxcan be lower, while Swisswealth managers areincreasingly moving toAsia, which is experiencinga boom in millionaires inneed of private bankingservices.

“We’ve moved more peo-ple internationally for rea-sons of personal lifestylethis year than ever before,”says Mr Gibson-Tullberg.

Wealth managersAlice Ross findsthat better trainingmight help banksreduce churningand poaching

Many relationshipmanagers aremoving abroad fortax reasons, asgovernmentsaround the worldtarget high earners

Old customsswept awayby strongnew currents

If private bankers were hop-ing 2010 would provide arespite from the “perfectstorm” of plunging asset

prices, sharply reduced profitmargins and increased regula-tory scrutiny that enveloped theindustry after the financial cri-sis, they will have been sorelydisappointed.

After seeing the global eco-nomic downturn claim some ofits best known names, thewealth management industrymay have emerged from itsmost difficult period. Nonethe-less, it remains a sector both intransition and under pressure,experts say.

Gone, perhaps forever, are thedays where private banks madebig profits by selling complex,high-margin products to well-heeled clients who naivelyassumed their portfolio matchedtheir appetite for risk.

Gone, too, are the businessmodels that were predicatedlargely on shielding clients’assets from taxes, as govern-ments around the globe step uptheir pursuit of wealthy taxevaders to help replenishdepleted state coffers.

“We are at a moment whenmany private banks need funda-mentally to alter both theirvalue proposition and strategy,”says Alan Gemes, senior partnerat Booz & Co in London and aspecialist in financial services.

From capitalising on the inex-orable shift eastward in globalwealth distribution, to regainingthe trust of their clients andbuilding a technological plat-form fit for the 21st century, pri-vate bankers face myriad chal-lenges.

“There have been some casu-alties, but those that can adapttheir traditional business andoperating models to meet thecurrent turbulence face favoura-ble prospects,” says Ian Wood-house, a director in PwC’s pri-vate banking and wealth man-agement practice in London.“Expect to see a new line ofprivate bank leaders and losersemerging.”

First and foremost amongthose new leaders will be insti-tutions that can develop theirbrands and win share in emerg-ing markets, the primary source

of wealth generation in comingdecades.

Almost one-third of theworld’s high net worth individu-als – defined as clients withmore than $1m to invest – willlive in the Asia-Pacific region bythe end of 2011 – 2 per cent morethan in the US and 6 per centmore than in Europe, accordingto Booz & Co’s latest privatebanking report.

Big wealth gains are alsoexpected in countries such asBrazil, India and Russia.

Some senior bankers, such asJane Fraser, head of Citi’s glo-bal private bank, believe eventhose figures may be under-stated.

“We just assume now that thewealth in Asia is far greaterthan any of the numbers show,”Ms Fraser says. “We’re expect-ing that at least 40 per cent ofour clients in terms of wealthwill come from Asia in the com-ing years” – on a par with Citi’sexisting client base in the US.

Another big trend over thepast 12 months has been thecompetition for share in the so-called “ultra high net worth”space – providing a specialised,almost institutional service forclients who have $20m-$25m ormore in liquid assets to invest.

The super-rich expanded theirwealth by nearly 22 per cent in2009, outpacing the 17 per centgrowth in the high net worthmarket, according to an annualsurvey compiled by Capgeminiand Merrill Lynch’s wealthmanagement division.

Several of the Swiss banks,including UBS and CreditSuisse, alongside Wall Streetpowerhouses JPMorgan Chaseand Goldman Sachs, havealways been big players in theultra high net worth market.

But there is growing competi-tion from banks such as Citi,which, since shedding its SmithBarney brokerage business, hasfocused exclusively on thesuper-rich, as well as institu-tions that have traditionally tar-geted predominantly the “massaffluent”, such as Barclays.

Whether it is a strategy thatwill ultimately reap big rewardsis more difficult to gauge,experts say. Margins are lowerat the top end of the market, asthe most sophisticated, globalclients have the clout to negoti-ate lower fees.

Building an ultra high networth platform is also expen-sive, particularly when it comesto recruiting the bankers withboth the skill-set and the clientlist that can really add value toa business.

“We like the ultra high networth business, but it is more

intensive than some peoplethink,” says Chris Meares, headof HSBC’s private banking busi-ness. “The bread and butter ofprivate banking is still in thehigh net worth category.”

Across the wealth spectrum,behaviour has changed mark-edly since the financial crisis.Having lost faith in their rela-tionships with their banks andwealth managers, most clients

retreated from complex assetclasses in favour of transparent,liquidity-oriented products thatoffered steady, if low, returns.

Two years on from the heightof the crisis, wealthy investorson the hunt for higher returnsare more willing to look againat riskier products, particularlyas many edge towards retire-ment age.

However, they are demandingthe kind of transparency and cli-ent service that was frequentlyneglected during the creditboom of the past decade.

Alun Eynon-Evans, a partnerat London-based law firm Allen& Overy, comments: “Withinterest rates being so low, cli-ents are looking for goodreturns. This means that privatebanks are having to look atmore sophisticated structuredproducts to meet that demand.”

Looking ahead, some expertspredict that the industry couldenter a new phase of consolida-tion in 2011, particularly among

the smaller and midsized pri-vate banks that lack the capitalto compete with their largerrivals in today’s low-margin,highly-regulated climate.

“Some banks regard privatebanking as non-core, and intimes when capital is very con-strained in banks, they will seekto divest all non-core busi-nesses,” says Mr Eynon-Evans.

“For acquirers it is a goodsource of deposits and buying adeposit base can be very attrac-tive to institutions that havebeen more dependent on whole-sale funding.”

Bankers say it is still difficultto predict the impact the recentonslaught of regulatory and taxreforms will have on some ofthe market’s smaller players.

In the wake of a global crack-down on tax evasion using off-shore financial centres and theUS government’s landmark set-tlement with UBS over undis-closed Swiss accounts held byUS citizens, the entire industry

is assessing whether the end oftax secrecy as a potential com-petitive advantage.

Some experts fear that thecontinued scrutiny of locationssuch as Switzerland andLuxembourg will promptwealthy clients simply to shifttheir money to less regulatedjurisdictions in Asia or LatinAmerica.

But for many of the institu-tions looking to capitalise onthe rapidly shifting landscape,the changes have undoubtedlyhelped to level the playing field.

“There’s so much money outthere – the wealth numbersare staggering,” says Citi’s MsFraser.

“This isn’t like M&A whereit’s a fight to the death withyour competitors. This is moreabout all of us private bankersbeing responsible and helpingshape the industry and helpingpeople manage their wealth inan appropriate, rigorous, trans-parent manner.”

The sector is operatingin choppy waters andmany banks need toreset their compassesto address changingbusiness conditions,writes Megan Murphy

Growth of HNWI (high net worth individuals*)

Source: Booz & Co * HNWI are people with more than $1m in investable assets

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11

10

9

8

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6

5

4

3

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2002 03 04 05 06 07 08 11forecast

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50

40

30

20

10

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HNWI Population (m) Global GDP ($’000bn)

Photo: Dreamstime

When your ship comes in . . .

2.8 8.42.5

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6.1

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10.8

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GDP HNWICompound annual growth rate (%)Growth of HNWI versus GDP (2002-07)

Inside this issueCompliance Jane Croft looksat how the US Internal RevenueService, led by Doug Shulman(below), is putting the heat onbanks as it chases taxevaders Page 2

ConsolidationBankers arepredicting dealsamong smaller andmidsized firms, writesLina Saigol Page 2

Mortgages TanyaPowley examines homeloans for the richPage 2

Swiss on a roll BSI isbanking on its country’s reliableimage as it looks towards Asiafor growth, writes Haig

Simonian Page 3

On the web AliceRoss finds out howlong private banks’investment chiefsthink the emergingmarkets party will last;she also looks at the

problems private banksface with truculent

advisoryclients

2 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 10 2010

Private Banking

Logic calls for mergers but deals are hard to achieve

Global private banks couldenter a new phase of consol-idation next year, as profitscome under pressure fromrising regulatory costs, fall-ing margins and increasingcustomer demands.

Bankers are predictingdealmaking among smallerand midsized private banks,which lack the funds tocompete with their largerrivals, at a time when prof-itability has fallen sharplyand margins are beingsqueezed.

European private bankshave seen their profitabilityfall for three years running,from 35 basis points ofassets under managementin 2007 to 26 basis points in2008 and 20 basis points lastyear, according to McKin-

sey’s annual study of Euro-pean private banking, pub-lished in July.

With profitability un-likely to return to pre-crisislevels soon, some privatebanks may look to reducetheir bloated cost basethrough mergers.

John Paul McGrath, man-aging director at DC Advi-sory Partners, says: “Thesmaller businesses havebeen harder hit of late bythe cost of dealing with leg-islation and compliance,weaker equity markets –where traditionally mostinvesting has been done inthis space – and lower lev-els of profitability.”

This is particularly trueof Swiss private banks,which are facing toughertimes than some of theirlarger rivals, because of ris-ing regulatory costs.

In a recent report byPwC, “Heading for NewHorizons”, the consultancysaid it expected to seeinvestors from easternEurope, the Middle East,Asia and Latin America

acquire struggling Swissplayers in the near future.

But while the global pri-vate banking industryremains highly fragmented,finding the right asset tobuy will be a challenge.

“We expect to see moreconsolidation among pri-vate banks in [continental]Europe and the UK, but thereal difficulty is ... findingattractive businesses forsale,” says Alun Eynon-Evans, corporate partner atAllen & Overy, the lawfirm.

The scarcity means buy-ers are still being forced topay a premium to secureassets, despite lower valua-tions.

Earlier this month, forexample, Singapore’s Over-sea-Chinese Banking Corpo-ration outbid HSBC andpaid $1.5bn for the Asianprivate banking assets ofING. The price was equiva-lent to 5.8 per cent of theunit’s assets under manage-ment, after adjusting forsurplus capital.

Julius Baer, the Swiss

bank, paid 2.3 per cent forING’s Swiss assets lastyear, while in May, India’sHinduja Group paid €1.35bnfor the private banking armof Belgium’s KBC, or about2.9 per cent of assets undermanagement.

These prices are consider-ably more than the 1 percent of private bankingassets under management

that Standard Charteredpaid in 2007 – at the peak ofthe debt boom – to acquireAmerican Express Bank.

Bankers also expect theshift to onshore banking –triggered by the crackdownby regulators on suspectedtax evasion in some off-shore financial centres – todrive deals among thesmaller banks.

Unlike offshore banking,onshore banking generatessmaller pre-tax and grossmargins, so size matters.

“As private banksincreasingly focus on theonshore model, they arelikely to see higher volumesof assets under manage-ment, but lower margins.This means that scale willbe increasingly important

to success,” says BenDavey, co-head of BarclaysCapital’s financial institu-tion group for Europe, theMiddle East and Africa.

But while private bankingdeals make sense on paper –not least because of thesynergies from saving backoffice expenses throughscale – in practice they canbe hard to achieve, espe-cially when several taxjurisdictions are involved.

Mr Davey warns: “Clientattrition can be a concernwhen two private bankscombine, with potentiallydifferent cultures and regu-latory regimes comingtogether.

“Integration can be a verydelicate operation.”

Bankers are also predict-ing more deals betweenEuropean private banksand their Asian counter-parts, as the former try tocapture some of Asia’s fast-growing wealth.

“The quest for assetinflows and yield is likely tosee more European inde-pendent players move into

Asia,” says Mr Davey.But identifying potential

targets in the region is noteasy, and international pri-vate banks are also balkingat the price of recent dealssuch as the OCBC/INGtransaction.

A further obstacle to con-solidation in the region isthe tight controls countriessuch as China – the region’sbiggest source of wealth –have on the movement ofmoney offshore, as well ason foreign banks’ opera-tions onshore.

Bankers say that, as aresult, they expect to seemore alliances and jointventures between privatebanks, as they try to gain afoothold in emerging mar-kets.

Industry experts say,however, that potentialbuyers of private banks willneed to move quickly.

As markets continue toimprove, so will valuations,and any buyer that balksat prices today may beinadvertently missing abargain.

ConsolidationSmaller banks areunder pressure asprofitability falls,says Lina Saigol

Keen to buildlong­termrelationships

Private banks have becomea dominant force in theprime residential mortgagemarket, as they targetwealthy borrowers who willestablish a long-term asset-based relationship withthem.

There has been stronggrowth in the central Lon-don property market,fuelled by demand fromwealthy foreign buyerslooking to benefit from theweakness in sterling, andreduced competition forlarge loan business fromhigh-street lenders. Thishas allowed private bankssignificantly to expandtheir share of the mortgagemarket.

“We’re now doing 70 percent of our businessthrough the private banks,because they offer a moreflexible solution for wealthyborrowers than high streetlenders,” says Melanie Bienof Private Finance, themortgage broker.

Demand for large mort-gages has increased, aswealthy investors looktowards the prime centralLondon property market asa safe haven for theirmoney.

According to figures fromHalifax, the number of £1m-plus ($1.6m) property salesin London in the first halfof 2010 were more than dou-ble those of a year earlier.

The increased appetite forprime property has led sev-eral private banks, includ-ing JPMorgan and StandardChartered, to gain regula-tory approval to lend onresidential property thisyear.

Shayne Nelson, globalhead of Standard CharteredPrivate Bank, says theuncertainty in the markets,combined with low interestrates, have turned investorsto real estate.

Private banks have alsorealised that buying prop-erty is an emotional invest-ment for most clients andcan help form the corner-stone of a relationship.

“In other words,” saysNigel Bedford of Largemort-gageloans.com, a mortgagebroker, “if a bank lends aclient money to help thembuy their home, it is farmore likely to gain a largershare of the client’s futureasset management andbanking.”

He adds: “Because privatebanks are so focused onlong-term relationships, themortgage becomes animportant piece of the pie.”

Simon Clark, director ofLloyds TSB Private Bank-ing, agrees. “We see lendingas a prime opportunity tosatisfy the needs of our cli-ents and as a very goodentry point for new rela-tionships. If you can pro-vide quick, efficient, cost-effective and creativefinancing, that can helpopen the door to otheropportunities,” he says.

Most private banks admit

they are not interested in adebt-only relationship witha client. “Debt can be thestarting point of a conversa-tion, but we’re not in thebusiness of just lending,”says Carlo Sammartano ofBarclays Wealth. “We are awealth manager, we wantto develop that relation-ship.”

To access the lowest ratesvia a private bank, clientswill usually have to investother assets with the bank’swealth management arm,but the amount of fundswill depend on the bank.

For example, UBS andEFG Private Bank bothrequest that half theamount borrowed isinvested with them, whileCredit Suisse requires that100 per cent of the mortgageamount be invested with itwithin 12 months.

Other private banks, suchas Investec and BarclaysWealth, do not stipulate thetransfer of any savings atthe time of the transaction,but they will look at waysto develop their relation-ship with the client.

Private banks typicallyoffer bespoke mortgages.They tend not to have a“best buy” list of rates,deciding instead on a case-by-case basis.

Ms Bien says it is not justprice and fees that areimportant when selecting aprivate bank – deliverytimes are crucial.

“Many of our clients arein high-pressure deadlinesituations and it is impor-tant to select the bank thatcan deliver,” she says.

Private banks are willingto be more creative withfunding structures thanhigh-street lenders, animportant factor forwealthy clients who mayhave relatively modestbasic salaries but large, reg-ular bonuses as well as sig-nificant assets.

Private banks will lend onall types of residential prop-erty, including cross collat-eralising on two or moreproperties and other non-property assets such asshare portfolios, yachts andart collections.

“The wealthy are oftenasset-rich but cash-poor,which means banks have tolook at clients’ overallfinancial picture, so we canstructure a loan just forthem,” says Mr Clark atLloyds TSB.

Wayne Preston ofInvestec says it completed46 per cent more mortgagedeals between June andAugust than it did in thefirst three months of 2010.

He believes this reflectsthe bank’s personalisedservice and the fact thatindividuals are strugglingto get loans approvedbecause of inflexible lend-ing criteria used by otherbanks.

‘If you can provideefficient, costeffective financing,it can help openthe door to otheropportunities’

MortgagesTanya Powley onflexible loans forwealthy borrowers

Authorities around theworld have long been pur-suing tax evaders, but nowinflated government deficitsand stretched state budgetsmean they are likely to takean increasingly tough line.

The UK government’spledge to generate £900m byclamping down on tax eva-sion fired the opening shotof a fresh assault onwealthy individuals whoare trying to shelter theirassets outside the country.

The UK sent a strongsignal of its determinationto recoup unpaid tax whenit struck a landmark dealwith Switzerland lastmonth, through which itwill receive revenue fromfunds held by British tax-

payers in Swiss accounts.Switzerland acts as a

haven for some of Britain’swealthiest individuals – UKinvestors are thought tohold about £100bn-£125bn inaccounts there – and itsauthorities have been reluc-tant to co-operate with for-eign governments and risklosing Switzerland’s reputa-tion as a safe place forwealthy investors.

While governments, par-ticularly in the UK, havemade good progress tack-ling tax evasion in smalleroffshore locations such asLiechtenstein, tax special-ists say it is the funds inSwitzerland, which dwarfthe amounts held in otheroffshore locations, thatauthorities have been mostkeen to crack.

“The real key has been toget to Switzerland. That’swhere the big money is,”says Bill Dodwell, a taxpartner at Deloitte.

But while the new agree-ment will generate a regu-lar stream of revenue from

Swiss accounts – it intro-duces a withholding tax onincome generated by fundsin Swiss banks and penal-ises inherited accounts thathave not been declared – itdoes not go so far as toreveal the identities ofaccount holders.

Germany, which hasstruck a similar taxarrangement with Bern,and the UK initially pressedSwitzerland to hand overautomatically informationabout their taxpayers, butthe Swiss authorities wereunwilling to jeopardise theprized secrecy of theirbanking system.

This illustrates one of thebiggest headaches for gov-ernments. While they aremaking progress in recoup-ing unpaid tax, they havelimited power when itcomes to chasing individualtax evaders.

Some places still refuse toreveal information onaccount holders unless theauthorities that are chasingthe tax already have their

names and details of wherethe money is invested.

Nevertheless the tougherapproach to tax evasionleaves wealthy individualswith fewer options when itcomes to sheltering theirassets from tax.

In April 2009, the Organi-sation for Economic Co-op-eration and Developmentpublished a blacklist ofcountries that had not

agreed to tax standards andnamed those it thoughtneeded to improve, includ-ing Gibraltar, Liechten-stein, Andorra and SanMarino. Leaders of the G20countries have since agreedto enact sanctions againstthe tax havens thatappeared on the list.

This paved the way for a

number of informationexchange deals as smalleroffshore locations buckledunder the increased pres-sure from authorities.

Such deals encourage taxevaders to declare theirdeposits in return forreduced penalties, typicallyof up to 10 per cent onundeclared funds.

Authorities are also tar-geting banks directly in anattempt to force them tohand over informationabout their clients. In theUK, the government haswon court orders againstthe largest banks to makethem provide details aboutaccount holders.

However, tax specialistssay investors tend to openaccounts directly in a for-eign bank’s home country,rather than with the UKoperations. “If you’re a taxevader you’re prettyunlikely to go through frontdoor,” says Mr Dodwell.

Also, while the recentagreements with traditionaltax havens signal the end of

an era for people looking toshelter assets, many areseeking new shelters.

Some wealthy investorsare moving funds out ofplaces such as Switzerlandand into the Middle East orAsia. While it is harder toopen accounts in theseareas, fears are growingthat newer markets maybecome popular with richtaxpayers.

Authorities are trying toinitiate talks with some ofthese jurisdictions, but taxexperts say it could beharder to strike agreementswith them. It could also bepolitically difficult to black-list these locations for fearof jeopardising trade links.

However, UK investorswho move money to otherjurisdictions in order toshelter it from tax may endup paying a high price.

From April next year,they run the risk of a 200per cent penalty undertougher evasion rules set tobe introduced by Revenue &Customs.

RegulationSeveral countriesare taking a harderline on tax evasion,says Sharlene Goff

Soaring deficits prompt fresh clampdown

IRS pushesbanks to putpressure ontax evaders

A fter the US Departmentof Justice settled its caselast year against UBS,the Swiss bank, for help-

ing US citizens evade taxes, somelawyers asked which jurisdiction,or bank would be targeted next.

The closely watched case forcedthe Swiss bank to pay $780m andhand over account data on morethan 4,000 US clients in a land-mark decision that underminedSwitzerland’s famed bankingsecrecy.

The fine underscored the USgovernment’s efforts to crackdown on tax evasion – particu-larly in Switzerland, which ishome to an estimated third of theworld’s undisclosed personalwealth.

At the time, Doug Shulman,commissioner of the InternalRevenue Service, said it would“vigorously pursue tax cheatsaround the world, no matter howremote or secret the location”.

Lawyers say the UBS settlementhas been instrumental in persuad-ing taxpayers to come forwardvoluntarily.

Last year, the IRS said 14,700individuals from about 70 coun-tries had come forward to disclosesecret offshore accounts at UBSand other banks to avoid possiblecriminal prosecution. They pre-ferred to come clean about theirassets than continue hiding them.

By contrast, the number ofvoluntary disclosures in 2008 wasfewer than 100.

Regulatory lawyers now believethat US prosecutors could takeadvantage of the momentum gen-erated by the UBS probe toincrease enforcement of US taxcompliance globally and targetother jurisdictions, such as Asia.

In July, the Financial Timesreported that the US Departmentof Justice had informed severalHSBC customers that they hadcome under scrutiny for potentialtax evasion.

Last month, two such clients, afather and son team of real estatedevelopers, were convicted forfailing to report more than $49mof income to the IRS.

Lawyers believe that pressure isbeing put on private banks with-out US operations to carry outgreater due diligence on theirclients – or face the prospect thatthey will be unable to trade withUS correspondent banks.

Bryan Skarlatos, a lawyer atKostelanetz & Fink in New York,who specialises in representingclients in civil and criminal taxcontroversies, says: “There is amulti-pronged effort to lift theveil of banking secrecy after theUBS case.

“First, there are concerns thatother banks could face a criminalinvestigation or civil summons.

“At the same time, the IRS andDoJ are in conversation withbanks around the world aboutgetting out of the business ofhiding US customers trying toevade US tax. As a result, banksare becoming more sensitive tothese customers. It’s hard for aUS customer to open an accountin Switzerland now, for example.

“Banks are also more likely toinquire into customers furtherand request they provide a socialsecurity number, for example,”Mr Skarlatos says.

Another important issue is that

Congress has implemented theForeign Account Tax ComplianceAct, which obliges foreign banksthat want to hold US securities ordo dollar transactions to dodeeper due diligence on their cus-tomers. This will be implementedin January 2013.

Many experts fear that with theexisting scrutiny on locationssuch as Switzerland, the wealthymay simply move their moneyfrom Swiss banks to otherlocations, such as Asia or LatinAmerica.

Charles Grice, managing direc-tor of CRI Compliance, whichhelps banks with regulatory and

legal compliance issues, says thepast few months have seen achange in public policy from taxcollection to involving bankingregulators.

“Banks are worried about this,”he says, “Particularly banks inLatin America and Asia withoperations in the US. It’s movedhigh up the agenda and somebanks have already taken actionto close and clean up accounts,particularly where there mayhave been a US citizen withaccounts in Luxembourg andAndorra, for example.

“There is a concern among thesmaller second-tier private banks,which, if they have operations inthe US, are likely to be examinedto death.” he adds.

There is also greater scrutinyby larger European banks thatrecognised they had US residentswith accounts and active USmailing addresses.

Experts say that, after thebeginning of the UBS investiga-tion, banks started sorting clients

by address to ferret out US resi-dents who had exposure to theIRS. Many discovered large num-bers who claimed to reside inEurope and who then changedtheir address to the US.

The big question for lawyersand banks is just how active theUS authorities are likely to be intracking down US citizens orwhether they will allow fear toact as a sufficient deterrent.

“Banks are responding to allthis, although many are unhappyabout the changes,” says Mr Skar-latos at Kostelanetz & Fink. “Overthe next five years, I believe thatthose wanting to hide theirmoney will be pushed into thecorners of the world using smallerbanks in developing countries.

“The UBS case was the endof the first step to usher in anew era of more transparency.The big question which no oneknows the answer to at themoment is how proactive the DoJand IRS are likely to be inpursuing people,” he adds.

ComplianceAfter the UBS case,institutions are nervousand extra sensitive torisk, writes Jane Croft

The Internal Revenue Service building in Washington DC and, inset, IRS commissioner Doug Shulman Bloomberg

‘Banks are becomingmore sensitive . . . It’shard for a US customerto open an account inSwitzerland now’

Bill Dodwell:‘The key isSwitzerland.That’s wherethe bigmoney is’

* Approx

Some recent M&A transactions in private banking

Date Target AcquirerPrice ($m)

Dec 2009Oct 2009Oct 2009Sep 2009Aug 2009Jul 2009Apr 2009Dec 2008Dec 2008Feb 2008Jul 2008Nov 2007

Mourant International Finance AdministrationING Private Banking, AsiaSal. OppenheimING, SwitzerlandCommerzbank, SwitzerlandDresdner Bank, SwitzerlandUBS PactualAIG Private Bank, SwitzerlandCredit Suisse AMCaisse Centrale de RéescompteHeritage Fund Management, SwitzerlandBanca del Gottardo

State StreetOCBCDeutsche BankJulius BaerVontobelLGTBTG InvestmentsAabar InvestmentsAberdeen Asset ManagementUBS Global AMBank of ChinaGenerali

n.a.925

2,000314

115-130n.a.

2,500288358348

8,7001,700

*

Source: Booz & Co

FINANCIAL TIMES WEDNESDAY NOVEMBER 10 2010 ★ 3

Private Banking

Race to lure super­wealthy

platform,” says Ms Brump-ton. “We make decisions forour clients based on a thor-ough analysis of their risk/reward appetite.”

Rupert Robinson, chiefexecutive of Schroders UKPrivate Bank, says that halfthe £8.5bn of funds man-aged by Schroders’ UK oper-ations is provided by ultra-wealthy investors.

Schroders has had suc-cess grabbing market sharefrom larger banks such asUBS and JPMorgan – tradi-tionally kingpin players inthe market – by billingitself as a family office thatoffers a ramped-up level ofservice.

“Quite a lot of peoplewere badly burnt duringthe financial crisis,” saysMr Robinson. “One of thetrends we’ve seen over thepast couple of years is thatvery wealthy people or fam-ilies want to work with afirm that provides the serv-ice intensity and independ-

ence of a family office, butalso has the strength anddepth of a global asset man-agement firm behind it.

“Clients want access aswell as opinions and views.They want to be able to talkto specialists in real estateor on China or India.”

Services often demandedby clients include advice oncash management, credit,and how best to use assetson a balance sheet to theclient’s advantage, accord-ing to Mr Robinson.

There are drawbacks,however, in catering to thesuper-wealthy.

One is that margins aretighter, as the market ismore competitive – com-pared with “ordinary” highnet worth individuals, thereare fewer people in theworld with $25m in cash tohand.

Turnover rates also tendto be higher and individualsare more likely to split port-folios between advisers.

“The super-wealthy tendto be more demanding and

have more options,” saysGraham Harvey, a directorat Scorpio Partnership, aconsultancy that conductsresearch on the privatebanking sector.

Duncan MacIntyre, globalhead of Coutts PrivateOffice, which has seen itsassets jump to £3.7bn in thefive years since its launch,agrees. “The marginswithin the ultra high networth space are tighter.That’s the nature of thebeast,” he says.

It is also difficult to deter-mine which private banksare having more success.

Bank of America, UBS,Morgan Stanley, WellsFargo and JPMorgan con-trol considerable marketshare on the high net worthside, but few banks releasedata on how much businessthey are conducting withthe super-wealthy.

“I don’t think segregateddata for the ultra high networth segment exist,” con-cludes Scorpio Partner-ship’s Mr Harvey.

Continued from Page 1

Profile BSI banks on reliable Swiss image as it looks to Asia for growth

Ask Swiss private bankers about thefuture and many will say: Asia. Thereasons are clear. The region’seconomic growth is producing a lot ofwealthy individuals.

Swiss banks have a blue­chip imagefor security, reliability and service.Meanwhile, most private banksacknowledge that traditional “offshore”banking for rich European clients ismature, if not in decline.

Lugano­based BSI encapsulates thereasons for the eastward push. AnItalian tax amnesty last year proved tobe an opportunity that many wealthyItalians found hard to refuse. If thiswas a big blow for other Swiss banks,it must have been harder still for BSI,a bank from Switzerland’s Italian­speaking Ticino canton that hastraditionally focused on rich Italians.

Accentuating the pain, BSI in 2007spent SFr1.88bn buying Banco delGottardo, a smaller local rival with abroadly similar business model. Ratherthan seeing assets under managementmushroom as was hoped, BSI haswitnessed much more modest growthbecause of the amnesty.

The strong Swiss franc has furtherreduced assets under management,given that most Italian clients useeuros. So alternative sources of growthwere essential.

“We decided in spring 2009 to pushinto Asia,” says Alfredo Gysi, BSI’schief executive. “We already had astrong and successful tradition inSouth America. Now, we wanted to

establish ourselves in an area with highgrowth potential in which we had asyet no meaningful presence.”

In summer 2009, the bank startedhiring. Its biggest coup was recruitingfrom Coutts Hanspeter Brunner andRaj Sriram, two top private bankers.Some analysts reckon the pair broughtabout a third of their former team –their employer – with them.

Mr Brunner, a former chief executiveof Coutts in Switzerland and then headof Asia, has become BSI’s chiefexecutive in the region. Mr Sriram has

taken responsibility for south­east Asia.Senior hiring has continued. Last

August brought Esther Heer – alsofrom Coutts – to lead BSI’s northAsian growth from Hong Kong.

BSI now has about 190 employees inSingapore, the focus of its Asianinitiative, compared with about 30previously.

In Hong Kong, where the bank hasrecently upgraded its representativeoffice to a licensed private wealthadviser, growth is at an earlier phase.

“The hiring in Singapore is now

largely over and the push now is inHong Kong,” says Mr Gysi. The aim isto have about 100 people there withinthe next three to four years.

“Now, the objective is to get theresults,” he adds.

The new relationship managers arecentral to BSI’s goal of building up$15bn in assets under management inAsia by 2015. That compares with aninitial position of about $3bn before itsAsian push and some $5bn now –after what Mr Gysi describes as “avery encouraging start” in 2010.

Mr Gysi does not accept someanalysts’ description of the Asian driveas a “huge bet” by Generali, BSI’sItalian owner, to make its largeinvestment in the bank – particularlyafter the Gottardo purchase – pay off.

He acknowledges a Lugano bankmay not trigger the same namerecognition among rich Asians as somerivals in Zurich or Geneva. But he isconfident the Asian push rests on solidfoundations and will pay off.

“The fact that we have animmaculate reputation and camethrough the credit crisis withoutserious problems is a big advantage.Our almost 140 years of history isanother factor, along with beingSwiss,” he says.

“It’s true that knowledge of ourname is still not yet up to the levelswe’d like. But we are part of a big andsolid group. Generali is well known inAsia.”

Haig Simonian

Alfredo Gysi: ‘Thefact that we havean immaculatereputation andcame through thecrisis withoutserious problemsis a big advantage’

Battle stations as centre of gravity shifts

As the aftershocks of thefinancial crisis rever-berate around westerneconomies, the race is

on between private banks asthey battle for a share of theincreasingly attractive Asianmarkets.

While hot spots such as HongKong, Singapore and Shanghaihave been an epicentre forwealth generation for the pastfew years, the rate of growth isnow rising fast.

The number of millionaires inthe Asia-Pacific region grew by25 per cent last year, catchingup with Europe for the firsttime, according to the latestannual World Wealth reportfrom Merrill Lynch andCapgemini.

Meanwhile, the combinedwealth of Asia-Pacific’s rich peo-ple rose by more than 30 percent to $9,700bn in 2009, surpass-ing the $9,500bn held byEurope’s richest people.

Even more striking is theexpectation that, by 2013, Asiawill have more millionairesthan the US.

“Wealth creation in Asia hasbeen quite incredible,” saysShayne Nelson, head of Stand-ard Chartered Private Bank. “Itis like the financial crisis neverhappened.”

The rapidly rising number ofaffluent individuals has leftfinancial institutions strugglingto keep up with the boomingdemand for private bankingservices.

Big global banks are now ram-ping up investment in their pri-vate banking operations acrossmany emerging markets.

“Certainly, the private bank-ing industry is repositioningitself for growth,” adds Mr Nel-son. “There is huge investmentgoing into the industry acrossAsia.”

Standard Chartered, whichderives the vast bulk of its prof-its from outside the UK, plans toincrease the number of relation-

ship managers it has workingwith wealthy clients from 450 to750 by 2013.

The majority of this growthwill come in its core Asian mar-kets – Hong Kong, Singaporeand China – although the bankalso plans a big expansion of itsIndian business.

Meanwhile, HSBC PrivateBank intends to add 500 frontoffice staff over the next threeyears, focused on faster growingemerging markets.

Barclays Wealth has increasedits headcount in Asia by about50 per cent since the beginningof this year.

The crucial question is

whether banks can hire stafffast enough to meet the demandfrom wealthy clients.

Barclays says it has had toimprove the training it providesto staff and offer them a clearercareer progression to cope withthe challenge of attracting andretaining talent

Banks are also trying to cir-cumvent a drought of talent inlocal markets by moving moreof their existing bankers fromheadquarters in the UK or USinto Asia.

HSBC recently announcedthat Chris Meares, the globalhead of its private bank, wouldbe moving to Hong Kong.

Citigroup is also transferringstaff from other parts of thebusiness, such as its investmentbanking operations and itscorporate bank, to its privatebank.

“A few years ago, it becameapparent that attracting talentwas going to be a challenge foreverybody in Asia,” saysDeepak Sharma, chairman ofCiti Private Bank.

“Large organisations are nowincreasingly looking internallyfor talent.”

As well as mirroring themovement of wealth from westto east, this migration of topbankers reflects a broadening of

the kinds of services wealthyAsian clients are demanding.

Bankers estimate that two-thirds of rich Asian clients areentrepreneurs or own familycompanies, so their personaland business wealth tend to beinterlinked.

Mr Nelson says there is a gen-eration of clients requiringwholesale as well as personalbanking services. “Understand-ing both sides is important,” hesays.“Clients don’t necessarilywant the same risk correlationsfor their private wealth andtheir business.”

Barclays says its wealth busi-ness works very closely with

Barclays Capital, the invest-ment banking division, to pro-vide its richest clients withaccess to products and servicesnormally reserved for institu-tions.

“With an expected rise in ini-tial public offering and mergerand acquisition activities,wealthy entrepreneur clientswill no doubt see the benefit ofworking with a private bankthat can provide them access toinvestment banking services,”says Didier von Daeniken, chiefexecutive of Barclays WealthAsia Pacific.

Banks are also trying to differ-entiate themselves by offeringincreasingly global services toclients.

Mr Sharma at Citi says thatwealthy Asian families increas-ingly span a number of coun-tries and so are becoming muchmore global in their outlook.

“We have to deliver servicesto clients anywhere in theworld,” he says.

“Families increasingly includea number of nationalities andthey need to be able to accessour global network from a sin-gle point of contact.”

He says it is crucial that

banks have a consistentapproach to wealth manage-ment, whether they are based inLondon, Geneva or Singapore,and that they have the infra-structure to offer clients imme-diate access to their services allover the world.

Asian clients, who have in thepast tended to focus on invest-ing their wealth in local mar-kets, are now increasingly want-ing to tap into capital marketsaround the world.

“Clients cannot put all theirwealth into their own countries,as the markets are not deepenough. They have to thinkabout investing outside theirhome country,” adds MrSharma.

This international focusmeans that large global bankssuch as Citi, HSBC, StandardChartered and UBS – whichhave platforms across mostdeveloped and emerging econo-mies – increasingly have theedge over smaller regionalbanks that do not have a largepresence outside Asia.

As wealth generation becomesmore established, private bank-ers report that clients are alsopaying closer attention to thenext generation.

“There is now a greater ten-dency by ultra high net worthclients to require trust structur-ing for estate planning and suc-cession planning,” says Mr vonDaeniken.

AsiaDemand is building,but can banks hirestaff fast enough,asks Sharlene Goff

Asia takes the leadNumber of high net worth individuals

2011 forecastSource:Booz & Co

2008

31.4%

30.2%

27.9%

30.1%

26.6%

32.8%4.7%

9.2m

11.0m4.3%6.2%

5.8%

LatinAmerica

Middle East& Africa

Asia-Pacific

Europe

North America

Asia-Pacific

Europe

North America

Nice runner, would suitmillionaire, $300,000 or nearoffer: a Chinese man views aGerman­built Wiesmann GTsports car at a luxury goods fairin Shanghai Getty

ContributorsMegan MurphyInvestment BankingCorrespondent

Jane CroftLaw Courts Correspondent

Sharlene GoffRetail BankingCorrespondent

Ellen Kelleher,Tanya PowleyPersonal Finance Reporters

Alice RossDeputy Personal FinanceEditor

Lina SaigolM&A Editor

Haig SimonianZurich Bureau Chief

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact: Ceri WilliamsTel +44 (0)20 7873 6321Fax +44 (0)20 7873 4296Email: ceri.williams@ft.com

4 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 10 2010