Private banking clients become more cautious

THE ECONOMIC crisis has not missed the private banking market and its clients. But unlike ordinary people, who are having to count each euro, the wealthier banking clients for whom private banks provide personally tailored services have merely seen a slowdown in the growth of their assets as a result of the crisis. For some, the crisis has even brought new investment opportunities, allowing them to boost their assets in the future.

(Source: Reuters)

THE ECONOMIC crisis has not missed the private banking market and its clients. But unlike ordinary people, who are having to count each euro, the wealthier banking clients for whom private banks provide personally tailored services have merely seen a slowdown in the growth of their assets as a result of the crisis. For some, the crisis has even brought new investment opportunities, allowing them to boost their assets in the future.

Nevertheless, the crisis has affected the behaviour of private banking clients, making them more cautious and more likely to look further into the future – but also more prone to enjoy their resources.

“Alas, the crisis has hit people with the lowest incomes, without any savings, or who have loans, the most,” Andrej Zaťko, authorised representative of J&T Banka and a member of its management, told The Slovak Spectator. “The crisis has affected the assets of the better-off significantly less and these were instead years when the growth of their assets slowed.”

Zaťko links this effect to greater diversification when investing, which is most effective when large volumes of free resources are available.

And from the longer-term point of view people with more assets and people with greater enterprise were able to use the crisis to make cheap acquisitions and thereby pave the way for more significant profits in the future.

“Here it really pays that rich people get richer more quickly,” said Zaťko, adding that the number of private banking clients in J&T Banka has increased significantly during the crisis. He attributes this also to the bank’s successful media campaign, its first ever.

Michal Šubin, the director of Private Banking at Privatbanka, confirmed that the crisis has not, on the whole, meant bad times for private banking in Slovakia.

“Private banking has been growing dynamically, in spite of the crisis,” Šubin told The Slovak Spectator, adding that the volume of assets under its administration rose by over 80 percent last year.

Zaťko and Šubin agree that the crisis has changed the behaviour of private banking clients.

“Most of our clients have experienced a crisis for the first time and thus they were not mentally prepared after 20 years of more-or-less constant growth,” said Zaťko. “For most of them the crisis has changed their view of investing. Now they are rather turning to guaranteed investments and fixed revenues. They put aside a portion of resources. This is particularly visible in the case of people who are still in business and were used to returning their free liquidity back into their business. Now they are thinking a bit more about the future.”

As a new feature, Zaťko points to wider usage of his bank’s services by its clients. During the last year, in spite of the crisis, clients of J&T Banka began intensively using the bank’s specialised lifestyle management service, where a trained team of people takes care of a client’s private life, securing maximum comfort during his or her free time, travel, and shopping of any kind, and providing consultancy.

“This means that even though people still think more about their investments, they are also beginning to enjoy their wealth,” said Zaťko.

Another field which has begun to expand is comprehensive administration of clients’ assets. This is a service by which the bank provides clients with turn-key administration of their private as well as corporate assets, further growth in these assets and legal protection.

The ambition of Privatbanka, which has been in the market for five years now, was always to administer clients’ finances in a conservative way in order to achieve sustainable revenues over the long term.

“Thanks to this attitude we were able to achieve an increase in the value of assets during 2008 and 2009, when the markets fell significantly,” said Šubin. “We do not want to change this philosophy. Thanks to this our clients are not confronted with losses and do not need to change significantly their attitude to making investments. But in general it is possible to say that clients are more conservative than in the past and pay greater attention to risks.”

A stable market

“The Slovak market for private banking is more or less stable and corresponds with the size of our country,” Zaťko told The Slovak Spectator. “Slovakia is in proportion to the world and even to Europe a small and not very significant economy and thus the Slovak market for private banking is divided between the specialised departments of retail banks, local banks focused on private banking and some non-banking subjects providing various kinds of investment services. For large foreign names our market is not interesting from the viewpoint of potential volumes and thus they are not launching permanent branch offices here.”

Estimates of the number of existing and potential private banking clients remain rather vague, as banks do not generally discuss them. While Zaťko was tight-lipped, Šubin was a bit more open, estimating the number of potential private banking clients at over 20,000.

“Thus the potential of the market is huge,” Šubin said. “According to some involved, more than 50 percent of the people who could use the services of private banking still do not know about this possibility or have not been offered these services – or they consider it to be a useless luxury.”

Gold, diamonds or mutual funds?

Gold, diamonds, land, real estate and other commodities represent certainty for investors during an economic crisis. When they are afraid to invest their savings into stocks or bonds, when they do not trust the economy and banks, these investments are interesting for them, according to Zaťko. And whether an investment in gold is only another bubble or a really good long-term investment, a smart investor can profit from it, he added.

Šubin ascribes the higher interest in gold to a media focus on the metal as an investment instrument, followed by offers from some banks.

“But gold has been behaving like any investment: it has its good times and equally it can fall,” Šubin said. “A very important element is also the way in which the investment in gold is made. I do not understand a bit investments in physical gold, for which the client faces extremely high fees connected to supply and storage. Investing via securities, whose revenue depends on the development of the price of gold, is an alternative. Equally, one should not forget the development in the value of the US dollar.”

Affected by the crisis, it has become a trend abroad that private banks increasingly lean towards offering third-party products, i.e. products from other banks and financial institutions, said Šubin when referring to new investment trends.

“It is logical that such a course brings clients a greater extent of transparency and effectiveness,” said Šubin. “The open offer enables the client access to significantly more colourful investment opportunities and allows them to participate more actively in new and interesting investment opportunities.”

Traditional ideas and products are replaced by new ones. Šubin mentioned among these cheaper Exchange Traded Funds, offering clients faster administration and settlement. Another trend is a departure from long-term products, which bind client’s resources for five or more years.

“Nowadays, under this very dynamic environment, liquidity is an extremely important element and it has been shown that only active portfolio management can successfully respond to newly arisen threats as well as opportunities,” said Šubin.

According to Zaťko, after the mortgage bubble was detected, investors started firstly to turn to simple investment forms. Classical bank deposits, direct investments in projects, stocks, bonds, and commodities bought directly and not via financial derivatives, became the most sought-after investments. By contrast, complicated investment structures, packages wrapped up in so many investment instruments that a normal investor was not able to estimate their real value, have been marginalised. But he believes that no crisis is so strong that investors will not be able to return to them.

Who can become a private banking client?

There are no exact criteria as to who can become a private banking client and they also vary from bank to bank.

“Basically we are talking about a sum of €300,000, for which clients can enjoy several services of private banking, and about a sum of €1 million, for which the client is able to use the comprehensive offer of our services,” said Zaťko, adding that J&T Banka is endeavouring to open the doors of private banking to a wider range of clients. “We are able to offer something more than a counter in the bank and an ordinary account or standard mutual funds to clients with free assets of €100,000.”

According to Zaťko, such a client will not require demanding services for structuring assets, complicated investment schemes or concierge services because he or she is probably unable to use them effectively. Thus the bank tries to offer a palette of products and services which are suitable and interesting for such clients and in a form that is also profitable for the bank.

In Privatbanka an account and cooperation can start with €25,000 or more.

“If you have €25,000 to €30,000, we can start cooperating and buy stocks or securities,” said Šubin. “From €170,000 we can offer you an actively managed portfolio, and we consider this service from the long-term point of view to be the best instrument able to respond to the latest developments in individual markets.”

When administering clients’ assets Privatbanka uses so-called open architecture. This means that it offers to clients – and builds portfolios out of – securities and instruments from outside its group. This approach, which is characteristic of specialised banks, significantly broadens opportunities for investing.

Future development

“At first sight it might look as if the revenue offered would exclusively be the key factor,” said Šubin. “But our experiences have shown us that the general philosophy and operation of a specific bank is the decisive element. It is becoming clear that clients often prefer a specialised institution and in the end its size is not decisive.”

Another important factor is fees and their transparency, as well as a good reference, “which an existing client conveys to a potential one,” said Šubin.

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