Few people would argue that the private banking industry, and indeed the financial services sector...
Few people would argue that the private banking industry, and indeed the financial services sector as a whole, is operating in one of the toughest environments in modern times. It is not only the difficult stock market climate that has had a major impact, but also the amount of competition there is in the marketplace for high net worth clients by the newly evolved private banking sector, which had previously been fragmented.
If one examines how private banking has developed over the past 15 years, it was the Swiss players such as UBS and Pictet who originally had the sector sewn up and clients had to have several million dollars to get a foot in the door. For many years, other service providers tried to use the Swiss banking model to carve out a position for themselves in this lucrative sector, but at a much cheaper price. However, some have now adopted a more modern style of private banking and, without sacrificing quality, have created their own way of doing business that has differentiated themselves from the Swiss. The Swiss private banks are still extremely strong and the formula still works for them but there are others now operating with their own style and catering to their clients' needs with no reduction in service or advice.
Private banking means different things to different people. For some, it is upmarket retail with traditional banking products on offer smartly presented in leather chequebooks. For others, private banking centres on the formation of offshore structures usually a trust and/or a company combination, (or in some cases a foundation, in civil law countries). Once the structure had been put in place with all the appropriate tax planning advice, it was the management of those assets within the structure where private banks added value. Typical assets included real estate, intellectual property or an investment portfolio.
While most people have a basic understanding of what a trust is, many do not have a clear definition. A trust is an arrangement where one person or people give or transfer money or other assets to another person(s) for the benefit of a third-party or parties.
The concept of a trust is far from new, dating back to 11th century England. Guernsey is one of the offshore jurisdictions to offer these well recognised and much used financial structures, which remain key tools in international tax planning.
The Guernsey trust has developed into one of the most popular vehicles for financial activities and Guernsey has its own modern and comprehensive trust law: trusts are recognised by The Trusts (Guernsey) Law 1989, as amended by the Trusts (Amendment) (Guernsey) Law 1990. As pure tax planning tool, trusts are somewhat less effective due to the increasing legislation in many onshore jurisdictions. However, trusts have not lost their appeal because there are still extremely useful tools for transferring wealth to successive generations.
While private banking in the 21st century still has its roots in trust creation linked to asset management, clients are becoming ever more demanding as they have access to significant information flows, principally as a result of the internet. Hence, private banking has developed much further, with many providers offering bespoke services such as specialised lending. Clients may require debt for tax-based transactions, liquidity requirements and gearing opportunities to finance their investments. Typically, the bank will lend against assets ranging from cash and bonds, through to discretionary investment portfolios, loan notes and single line stocks, either for gearing or capital release.
A new era
Some credit solutions also extend to property finance where the bank plays an integral part in funding property acquisitions and development transactions for commercial and residential clients.
culture as people have had their fingers burnt and are now looking for quality advice and alternatives.
This is where some private banks have been quick to realise the potential of specialised and alternative investing. The traditional asset mix mentioned above has morphed into a new type of blend entirely. However, some hedge fund management houses have a reputation as being opaque and many managers tend to be very secretive about their operations, only giving you their impressive performance figures.
There has been an increasing trend in innovation by some investment management firms to develop funds of hedge funds, therefore spreading the risk among a wide variety of managers with different hedge fund styles. Clients' assets are now typically split between cash, bonds, equities, property, alternative investments and structured products.
In fact, the term hedge fund is a misnomer because it does not specifically relate to one type of fund but encompasses a wide variety of different trading strategies, such as long/short equity, macro trading, convertible arbitrage, distressed debt as well as futures and options, to name but a few.
The other big area of investment interest is structured products. These structures are typically developed to provide clients with the ability to participate in an underlying asset; be it traditional equities, baskets of hedge funds, currencies and even commodities. The main attraction of protected products is that the client's capital is repaid in full at the end of the lifetime of the investment. Private banks source these products with the help of specialist investment houses. Quite often the guarantees associated with these products are from AA-rated institutions.
These structures are very attractive to clients because they allow participation in the upside of a wide variety of asset classes often without risk to capital. In a low inflationary environment, as we have now, even if a client merely receives their capital back, after say five years, due to the underperformance of the chosen asset class, the purchasing power of their capital will not have been significantly eroded. By developing a range of structured products, similar to those mentioned here, private banks can capitalise on their ability to change strategy quickly and expertly take advantage of the best options for wealth enhancement for their clients.
While private banking has its roots in trusts, it has developed much further, with many providers offering bespoke services such as specialised lending.
Some credit solutions also extend to property finance where the bank plays an integral part in funding property acquisitions.
Given today's uncertain markets, private banks have had to extend their product offerings to include alternative investments and structured products.
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