Looking for ingredients to satisfy the customer

Private Banking’s quest to warrant efficiency

AP Private November | December 2020  

The Private client segment and its extreme points – HNWIs and UHNWIs – represent a true test bench for any bank, financial advisor or private banker.

In fact, because of the size of their assets, private clients generally turn to several banks, often in coopetition and competition with one another. Moreover, their demands tend to be more complex and sophisticated – they aim at maintaining large assets, but also at passing them on to the next generation.

For this reason, the Italian industry of private banking and asset management is currently adopting some of the best practices consolidated in other countries where the Private client segment is much more widespread and articulated.

Among them are illiquid investments in all their forms: private equity, private debt, infrastructures, club deals, real estate, but also investments in ships or cargo planes which are rented to third parties and, on account of their high risk component, guarantee high returns.

For quite some time, the industry of private banking and asset management has been on the outlook for investments that may generate value for the shareholder, managing their clients’ assets as efficiently as possible. Specifically, financial investments that may generate positive returns even when rates are below zero.

Illiquid investments are certainly one of the ingredients – but not the only one – for a correct allocation of the assets of Italian private clients.

Lately, ETFs have been gaining new ground in our country, especially theme-based ETFs and ESG ETFs. Active ETFs and smart beta ETFs will soon arrive in Italy from overseas, where they are achieving great success.

Therefore, the role of active managers is getting more and more challenging, as acquiring value from the equity market has become increasingly difficult.

Today, the industry of private banking and wealth management has more arrows in its quiver than a few years ago. It also has much more challenging goals.

Great opportunities await banks and financial professionals that focus on clients, starting from their objectives, time horizon and propensity to take risks, in accordance with the dictates of the MIFID 2. The offer is quite broad: it ranges from mere replicants to highly sophisticated illiquid products.

If we lived in a perfect world, every bank should make available to their clients the full range of products, offering tailor-made clothes, choosing the most appropriate fabric and color for each client. However, this is not the case – not only because banks are far from being perfect or fully focused on their clients, but also because each bank, as any other society, has its own DNA and vocation and, most importantly, one or more stakeholders to pay.

This leads to the definition of a strategy and the choice of a specific client segment to target. On the one hand, mainstream private banks tend to assist average private clients wishing to find in a private bank first and foremost a bank. An advanced home banking platform is therefore essential, together with a range of credit cards, diversified investment management, access to credit both as a natural person and as a legal entity. Other private banks focus on HNW or UHNW clients. They aim at offering access to illiquid investments, avoiding “plain vanilla” products and turning away clients asking for credit cards.

The situation is complicated by the fact that, between the two extreme points of the private client segment, there are endless declinations as well as big banking groups offering both service models.

Only time will tell which will be the winning service model or whether a third model will emerge. In the meantime, private banks and private bankers are closing ranks to face a series of unprecedented challenges.

Nicola Ronchetti