Private Banking in Canada - Stuck in a Rut

Keith Sjogren, Investor Economics, Director Strategy Consulting, Toronto, August 21, 2006


Canadian private banking is stuck in a rut. There is little real competition, with most service offers looking equally unimaginative and pri...

Canadian private banking is stuck in a rut. There is little real competition, with most service offers looking equally unimaginative and priced accordingly. The wealthy see themselves dealing with ordinary advice and performance at a luxury price, rather than superior advice and performance at an attractive price. No wonder the industry has failed to shift the percentage of eligible individuals that use the service above 33 per cent since 2000. In fact, the rate slipped from 33 per cent in 2001 to 27 per cent in 2005.

A False Sense of Achievement
Banks have been lulled into a false sense of achievement by rising numbers of private clients and the increase in the value of their clients’ business. In 2000 there were about 125,000 fewer individuals in Canada with at least C$1 million in liquid assets than there are today. That suggests about 42,000 have become new private banking clients in the past five years. In terms of new assets under management that represents about C$60 billion.

But what of the 83,000 new liquid millionaires that have emerged since 2000 who decided to stay put? What deterred them from enlisting with private banking? Why would they leave themselves at the mercy of generalist bankers and unscrupulous brokers?

Staying Put
Our research has suggestions as to why millionaires have not been rushing to private banking. Many are content with local bankers and advisors, and see no benefit to change. In other cases, there is skepticism about added value, and a belief that additional expertise will be limited and no more reliable. The pitch about benefiting from the wisdom of those who manage billions for pension funds has also failed to convince.

What Is Private Banking Anyway?
A second reason for staying put is lack of knowledge of the service. Frequently the question is asked “what does a private banker do?” The message isn’t getting out there. Advertising is viewed as too retail and costly a way to solve this problem and dedicated web sites are long on platitudes and short on detail. Despite interest in attracting new business - worth, on average, $10,000 in annual profit per client - there is little attempt to create demand by making the business more public and transparent.

A third reason for the dismal penetration rate is a reluctance to sell directly to target clients. Private bankers favour aloofness over familiarity, prefer to take calls than make calls, and display nervousness about walk-in business. Frequently, we’re told that it’s a referral business. In other words, somebody else will do the vetting and selling.

It’s About Fees
Finally, some potential clients believe that they will pay higher fees with no corresponding benefit. Often, the opposite is true. Account fees for banking services are nominal if not waived; borrowing rates are at or close to prime, and fees for portfolio management are not dissimilar to those charged to small institutional investors.

Price or the financial value to be created is not positioned as a differentiator and often there is no indication of price in marketing materials. When asked about this reluctance to discuss cost, Private Bankers mutter about “each client being different” and “need to be able to customise”. The truth is that fees are becoming important to the client. In 2000, fees were identified by 3 per cent of millionaires as being of importance when choosing an advisor. In 2005 almost 60 per cent identified fees as important.

A Significant Opportunity
Private bankers must address these issues in order to achieve a higher participation rate. Organic growth in client numbers shouldn’t be satisfactory despite the near double-digit growth forecast for the balance of the decade. Estimates of numbers of Canadian liquid millionaires suggest that there will be at least 570,000 by the end of 2010, and that by 2015 total assets of millionaires will be nearly C$4 trillion.

It’s All About People
What needs to be done? First, banks must recognise that successful people want to deal with other successful people who can demonstrate the highest level of expertise in their field. The wealthy expect to deal with specialists able to provide professional advice, solve problems and enhance wealth. They look for bankers who can take decisions rather than merely act as a conduit to some mysterious group at another office.

Some of the most frequent complaints are about service quality, weak communications and a lack of expertise, all of which reflect directly on the private banker. As an aside, we came across a private banking group that spent more on developing an identifier card for clients than they did on annual training for their bankers. So much for expertise!

We also found that the quality of the private banker or advisor outweighs the` brand` of the institution. We recently studied Northern Trust and found that the most important contributor to success was not outstanding performance or an array of products, but high quality people throughout the organisation and the location of their front-line staff.

Northern Trust’s success with locations identifies a second step. New millionaires generally fall into two categories – entrepreneurs or retirees. Most millionaires in these categories neither work nor live downtown. That being the case, wouldn’t it make sense for private bankers to establish themselves as close to clusters of millionaires as possible, rather than in the heart of the financial district? How many private banking offices are there in suburban Canada? Not many.

Access to Experts
Another step demanded is access to third-party experts. Open architecture provides investors with access to multiple investment managers without need for multiple relationships. It is a well-considered development supported by the wealthy reluctant to place their golden eggs in one basket.

Many wealth managers in the US manage less than half their client’s assets, and also provide counseling to help clients select other managers. Canadian wealth managers seem less convinced, and their goal remains asset gathering and having assets managed in-house, irrespective of the client’s best interests.

Despite the challenges, there is progress and reasons for optimism. Most clients of private wealth managers are planning to increase their business volume in the next two years. Furthermore, Canada’s wealthy are presently more satisfied with private bankers than they have been at any time during the past five years.

Clear Signs of Improvement
Satisfaction will grow as banks take initiatives to become more specialised in terms of wealth segments, and more focused on particular occupational groups. In addition, private banking groups are identifying new practice areas such as philanthropy, family office services, private equity and succession planning. Three of these services deal specifically with the family. This focus on the family will provide for the re-emergence of the trust industry which, until recently, has been relegated to irritant status by most banks.

Finally, Canadian millionaires are set to discover the benefits of venturing beyond our borders. Global banks, such as HSBC and UBS, are positioned to lead in the provision of service to established wealth searching for new markets as well multi-national families that are emerging as an important sub-group.

Private banking in Canada is attracting a lot of attention from both traditional and non-traditional providers alike. Competition will force improvements in the quality of advice and service, the range of products and the expertise of private bankers seeking their business. The penetration rate is set to rise!

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