The Australian, Wealth
IT isn’t possible to have too much money. But it is possible to have too little debt. This is one of the main differences between choosing private banking services from the private banks born on the shores of Lake Geneva and local retail banks born on the Yarra or Sydney’s harbour. Both kinds of banks cultivate an air of exclusivity but in reality most are open for business from the increasing number of high-net-worth individuals in Australia.
The definition of a high-net-worth individual, according to the CAP Gemini Consulting/Merrill Lynch World Wealth Report is a person with more than $US1 million ($1.2 million) of investable assets. There are 161,000 of these people in Australia, an increase of 44,000 or 27 per cent since 2003. The entry requirements for a private bank vary from being merely wealthy to extremely rich.
The NAB Private bank demands either a salary of $250,000 or $1 million (the latter figure about $US900,000 at current exchange rates) in investable assets, which could all be in superannuation.
Other high-street banks are tougher in their requirements, for instance, Westpac requiring investable assets of $1 million and an income of $250,000.
But it is the private banking arms of the global banks and multi-family offices that offer the most exclusivity.
At the top-end are Deutsche Bank and Citibank, with entry requirements of investable assets of more than $10 million.
Citibank claims that most of its clients have investable assets of between $50 million and $100million.
Meanwhile, it’s not even worth talking to the Myer Family Office unless you have $30 million to play with.
These extremely rich clients with investable assets of more than $US30 million air classified as ultra high-net-worths.
There are thought to be about 1100 of these people in Australia out of a total of 17,500 in the Asia-Pacific region.
At this level of wealth it becomes viable to establish a family office, but local private bankers estimate that there are only about 30 or so of these in Australia.
What they do share is a wish for anonymity.
“At the every high end of the market, the families are extremely private and do not want their social contacts to know who their advisers are,” says Deutsche’s Murphy.
“In almost every case, our clients do not want to be on the rich list. And there are several cases that I know of when the clients are not on the BRW rich list and they should be — people who are extremely private.”
Australians are an egalitarian bunch, with few using private banking services, according to Carl Molden, head of strategy and business operations St George Private Bank.
“There are more than 160,000 Australians who qualify by the international definition. Only about 30 per cent of them actually use private banking services,” he says.
“There is a large opportunity here for domestic and international players to make their mark in that space and obviously we are looking to do that.”
Of those, pretty much all of them will use the main retail banks with their extensive branch and retail networks for their everyday borrowing and transactional banking.
Some will use their retail banks for their wealth management, others will use global banks, andsome have multiple relationships across institutions.
Thomas Murphy, head of investment research at Deutsche Private Wealth Management, is himself a client of one of the high-street banks.
“Just about all the families we deal with are, as well,” he says.
“The reason being is even high-net-worth families do require the products, services and even the loans facilities of those institutions. And for us to engage clients side by side with those retail banks, it actually works extremely well for the client.
“I think the clients are better off than choosing either one independently.”
Most people’s wealth needs are simple and based upon debt and managed funds, local property or stock market investments.
The services offered by each retail bank is similar, with some having their own particular twists that may suit particular clients better.
NAB groups its Private Bank under its business banking. Westpac groups it under BT financial, its specialist wealth-management arm bought in 2003. “We just compete in a different space,” says St George’s Carl Molden. “For the international global banks, their strength is definitely in the wealth sphere.”
Credit Suisse says it wants to work with entrepreneurs who may not have the cash on hand to invest because it is tied up in their own company.
Most of the local arms of the global banks, such as Merrill Lynch, UBS and Goldman Sachs, also have expertise in local and international stock markets.
Deutsche Bank’s Murphy singles his bank out as being better at offering large private equity and alternative investments, which could include wind farms or individual property assets.
“Frankly across most product categories and most managed fund categories nearly every dollar goes to competitors,” Murphy says. “That is the key distinguishing point between our bank and the others in that most of the more generic products go to third parties.
“The value we have added has tended not to be in stock standard domestic shares. It’s been in these other esoteric asset classes and it has also been on big asset allocation calls.”
Another difference between institutions is the expertise of a client manager and the time allocated to an individual client.
Each bank gives differing figures. The exclusive Myer Family office and Citibank Private Bank have about 10 relations per manager, according to Private Banking in Australia 2007, a report produced by the Invest Australia’s Axis Australia.
“I think the general rule of thumb in the industry is that one relationship manager holds somewhere between 75 and 150 relationships,” says Nick Kalikajaros, head of the Credit Suisse private bank.
Merrill Lynch’s Alexy says the bank likes to keep the ratio of relationship managers to clients in the 30- to 50-to-one range.
The level of attention a client is given depends on the earning potential of the bank, which is a combination of assets invested and the complexity of the investments involved.
According to Jan Swinhoe, the head of Westpac’s Private Bank, qualified financial planners and accountants are allocated to clients with complex needs such as trust structures. But other clients may have simple needs, a large housing and margin loan, a credit card and some insurance.
“In those cases, while it is completely appropriate to have their own private banker, it’s not complex,” she says.
Linda Duncombe, acting head of the NAB private bank, says that a few years ago the bank’s top-end customers would have been with it because of their borrowings and deposits.
Now, however, services including estate and financial planning are growth areas.
“I have heard some banks have a criteria that a minimum level of lending is required to be in the private bank,” Duncombe says.
“I think that is a very limited approach. Our approach is that if you are earning $250,000 income a year and/or $1 million in investable assets, we’d like to be speaking to you because we think we can add some value.”
No bank will admit to holding clients to minimum borrowings, but there are plenty of anecdotes of clients who have been relegated back to regular banking after paying off their mortgages.
Tom Alexy, head of Merrill Lynch’s private bank locally, says that, after returning from abroad after selling his home, he found himself out of the picture.
“I was gently told that I was no longer a private bank client because I had paid off my mortgage and been shipped back to the main office on one of the streets here in Sydney,” Alexy says.
“I wasn’t given an option. What if I wanted to pay the $595 fee just to have that option of being able to call a private banker and was just about to whack in a million bucks into the bank because I had sold something offshore? That’s not private banking.”
What the banks are realising is that you do need different service levels for different types of customers.
“And that to me is what the Australian banks are doing,” says Credit Suisse’s Kalikajaros. “It is understanding that they do need to service their more valuable, more profitable customers in a higher-touch way than in which they have done in the past.”
Most of the retail banks charge a standard fee to become a member of the private bank.
St George and Westpac do not, although members do pay standard day-to-day fees for the products they use. Westpac is reviewing its fee structure and may move to a package fee.
Outside retail banking, fees for wealth management is usually a percentage of total funds invested.
The larger the funds the smaller the fee charged, under 0.5 per cent in some cases. But for smaller amounts and more complex products, costs are about 1.5 per cent or higher.
Merrill Lynch’s Alexy says that simple transactions may be charged at 30 or 50 basis points. When fees are charged on investments, it may be 1.5 per cent up to $10 million.
“And then we can negotiate. It is really to make a distinction as to whether we are doing this a la carte or an account fee,” he says.
Australia is a competitive market and Australians, while paying for what is almost the most expensive retail banking market in the world, are savvy about the fees they pay for wealth-management services.
St George’s Molden says: “At the end of the day, the pricing around wealth and advice is relatively similar in the marketplace. And that is the nature of prices and markets. They find their natural level.
“Where we distinguish ourselves is the quality of the advice and the experience that we bring to the table.”