The Life of Bryan – How the Private Banking and Wealth Management Industry Can Survive and Thrive Post Crisis
Apr 17, 2020
Bryan Henning, who in his last role was Head of Investment Services & Product Solutions, Europe and Middle East at HSBC Private Banking in Europe and before that MD and head of global investments and solutions for Barclays Private Bank in Asia, Middle East & Africa, has enjoyed a fascinating and successful working life in wealth management over many years. Today, he can be compared to a retired professional rugby referee – he has seen it all over several decades and is well placed to demystify complex rules, practices, strategies and decisions for a discerning audience. Hubbis is pleased to have met up with him on a video call from his Singapore home early April, during which he offered his valuable insights into Asia’s wealth management market of today and tomorrow, and how the incumbent players can, and indeed must, fight back against the digital platforms and a host of newer entrants. He fears that private banks and other leading wealth management players did not thoroughly learn their lessons from the global financial crisis, but he holds out some hope that in a post-coronavirus world in which there will be a greater need for advice and for ‘alpha’ generating strategies, the wealth management industry will embrace the need for major change, and take advantage by truly advocating and representing quality and differentiation.
For the purposes of this discussion, Henning starts his journey at the global financial crisis of 2008-2009, which he notes brought to light many of the weaknesses of wealth management and private banking in terms of suitability, how products and solutions had been sold, how weak documentation was and also why so many of the products collapsed during the aftermath of the debacle.
The regulatory Big Bang
“The result of that particular debacle,” he reports, “was that the GFC spawned a huge explosion in the regulatory regimes globally and locally, with every regulator trying to clamp down on suitability, disclosure requirements and processes, forcing every wealth manager to adapt. But the big question is, did the private banking industry learn from all that and truly advance? Well, my premise is that private banking reacted well from the regulatory and governance perspective, but perhaps failed to improve the service proposition significantly, and did little to prepare for another period of catastrophic market volatility and falls.”
Henning observes that this COVID-19 propelled collapse has been fast and ruthless, with indices dropping precipitously in a couple of the worst weeks in March, when volatility spiked dramatically and almost instantly overnight, while the impact to credit markets was similarly fast and furious, quickly leading to liquidity shortfalls.
Fast and furious
“Even those private clients with fairly balanced, more conservative portfolios got caught up in the rout,” he observes, “because their fixed income holdings got squeezed and liquidity dried up overnight, leading to big losses if they had to liquidate. And the spike in volatility hurt people because private banks have for long continued to sell OTC derivatives, accumulators, pivots, and more of those types of complex instruments, meaning that private clients remained quite leveraged going into this crisis, even if at lower levels than perhaps during the GFC.”
The result, he reports, as gleaned from his regular dialogue with industry leaders who are both friends and ex-colleagues, was a wave of margin calls, because not only did the clients’ equity holdings precipitously go down, but fixed income, which was supposed to be the safe, stable holding, was sometimes also brutally marked down. “And in many cases,” he reports, “clients were holding single line bonds, such as ‘name’ bonds as well as bond funds, that offered spreads I understand of only 10 to 15 points WAP. That left them hugely exposed.”
Moreover, he notes that a lot of people had CoCos [contingent convertible bonds] and other somewhat dubious instruments that had for some time been masquerading as secure holdings; almost instantly overnight the bid-offer ballooned out extremely wide and with the derivative exposures these clients had and with the volatility spiking, all of a sudden many of these clients’ collateral was being eroded. “It was like a domino effect,” Henning explains, “and with illiquidity so rampant, people were trying to sell anything in any way, the result of which was margin calls and significant damage to many portfolios.”
Henning extrapolates that the private banking industry has, therefore, in many ways, failed their clientele. “Whereas leading up to the GFC, the banks and other key players were selling all types of products and instruments indiscriminately and not really documenting them properly, this time around the regulatory side was much better but the choice of products and solutions – for example, lots of ad hoc single line bonds, OTC derivatives and so forth – was still very questionable,” he observes.
“The question, therefore,” he extrapolates, “must be whether the industry has actually advanced at all in terms of advisory, discretionary, or other types of professionally managed portfolio services, or is it just the same as before but different instruments and solutions that still add up to poorly constructed portfolios.”
The result, Henning observes, is that yet again, far too many private bank clients are going to be extremely disappointed once the dust settles. “They will find that what they might have considered well-constructed, sophisticated portfolios were slaughtered, this time by illiquidity and a domino effect, leading to margin calls,” he says. “Whereas they might have done as well or better with a rather straightforward portfolio, so the private banking industry will in all likelihood struggle to prove their credibility and value going forward.”
And it gets worse for the clients, Henning says, because the markets are going to be a lot tougher to navigate. “Credit spreads were incredibly low before this crisis, so investors were not getting rewarded for the risk they were taking on credit, but fixed income was apparently stable, while equity markets were incredibly overvalued but with low volatility. In that scenario, clients did not want to pay for alpha and advice in the form of fund fees and discretionary management mandates.”
“There should,” he continues, “therefore be some hope for the private banks and wealth managers, as perhaps in a much more difficult market environment that we all face ahead, the clients would be more prepared to pay for alpha seeking and discretionary. But the reality is also that a lot of the portfolios of clients in discretionary or advisory mandates with their banks have also suffered badly, so the report card for this period will be quite damning and many clients will be very disappointed. The pitch to differentiate by rebuilding those clients’ portfolios in this new situation will, therefore, be met very sceptically by many clients.”
The irony, therefore, is that while theoretically the situation facing investors should drive them more dynamically towards the experts, towards the professional fund managers and towards DPM, the recent history of their performance generally does not support that theory.
“The problem has to some extent been the poor ability of the private banks and the relationship managers to run sophisticated analytics across client portfolios, to conduct sophisticated ‘what-if’ type analysis, or crisis planning scenarios,” Henning comments. “So, it has been proven during this crisis to be all very superficial, and mostly patting each other on the back for performing well in what were easy markets. But we need more deep-dive, truly rigorous portfolio analysis, far more than what has been largely form-filling exercises based on relatively superficial risk and expectation assessments.”
Extrapolating further, Henning contends that this is a core reason for the urgent need to significantly boost the digital technologies available to the RMs, who in order to properly look after perhaps 30-50 HNW clients, will need far more than some nice looking charts and PowerPoint presentations.
“The theme we have seen over the last decade and more is private clients, especially in Asia, not really wanting to pay for advice and private banks not setting themselves up properly to provide such proper advice,” he says. “So, unfortunately during the years leading up to this latest global crisis, we have remained stuck in this paradigm of the private banks selling what they can, offering a minimum level of service, clients buying what they think they should buy and therefore sub-optimising their portfolios by incomplete planning for major changes in market conditions, or even the types of black swan events we are now seeing.”
“But never let a crisis go to waste, the old maxim goes,” Henning asserts wryly, yet also on a more optimistic note. “Here and now there is a great opportunity, as this is the perfect time to really drive significant change to your culture and to your client’s expectations and ways of doing things. Use this crisis as the catalyst, be honest with yourselves as organisations and truly cement your relationships with clients by driving for a true sea change in attitudes and approach.”
Henning also notes that most of the wealthiest private banking clients in Asia today are in their 60s and 70s and have a vivid recollection of both the Asian crisis of 1997 as well as the GFC.
“I am sure that many of them thought they were positioning themselves fairly safely before this coronavirus crisis, but if their portfolios were not constructed really professionally and managed professionally, the chances are that they got hurt badly. So, looking ahead, the banks must find the courage and the conviction to really implement a pay-for-advice type model where they formalise and legitimise how they relate to their clients. This means effectively a contract that stipulates they will not sell product; they will advise only and always in the best interests of the clients.”
He also maintains that the banks not only need to react, but they must also be proactive in their efforts to win their clients back by helping them reposition and restructure their portfolios.
“Private Banks need to put their own bottom lines on the backburner while they help their customers recover their capital. What they must not do is try to encourage the clients to roll the dice too hard to win back their losses,” he cautions. “There will be a spring back in the equity markets for sure, we have already seen some of that after the indices slumped so badly, but it is going to be haphazard as there is great uncertainty out there as to the longer-term ramifications of this crisis. So, the banks will need to show clients differentiated propositions that demonstrate they understand the new environment the world finds itself in.”
The post-GFC rising tide
In the post GFC world, quantitative easing (QE) meant that the world’s central banks were printing money like it was going out of fashion, resulting in a rising tide that floated all equity prices ever higher. And at the same time, in the few years after the worst of the GFC was over, yields on much of the fixed income paper were still very healthy, while interest rates came down steadily and liquidity proliferated, making a remarkably positive environment for fixed income globally where equity-like returns were common for this asset class.
But in the post-Coronavirus world, which hopefully is on the distant horizon at the very least, those simple plays no longer work. “People will need to radically reassess their holdings,” Henning asserts, “and be very disciplined and circumspect about the sectors of the economy in which they invest, both for equities and fixed income.”
On what he says is obviously an admittedly somewhat simplistic level, Henning explains that, for example, technology and pharma are going to be more appealing than cruise lines or airlines for some long time to come.
Will cheap beta’s star wane?
“And as a result,” he observes, “beta will not work as it has so increasingly dominantly for the past decade or so. The asset classes that are tomorrow’s winners are very different now, and for the banks to help their clients recover some of their losses, they must approach markets and portfolios in a different way. This time around differentiation is truly the key, and to help achieve that, perhaps this is the moment when the advisory and DPM proposition will begin to shine brighter in Asia, whereas for the past decade it struggled because the markets were simply so irresistibly one-directional.”
As he draws the discussion towards a close, Henning also casts his eye across to alternative assets, which have been the flavour of the past several years for HNW investors and their private banks.
“Did they perform in this crisis or will they in the aftermath?” he ponders. “Well, a lot of hedge funds have a long-equity bias still, so they would have fared really terribly. So, when people are looking at alternatives, it would need to be things that really are non-correlated to long equity markets. And real estate will be hit hard in some major places, and money might therefore be diverted to markets that come out of the crisis better.”
The other issue with non-traditional asset classes is they are generally illiquid. But precious metals are liquid and their prices have risen during this crisis, even though not to quite the peak of the years after the GFC – the closing high approached USD1,900 in April 2011. “Gold should continue to perform,” he says, “as virtually all currencies are going to be debased now because every government has been printing ever more money, so gold should naturally outperform as well as should other precious metals.”
Get back on the horse
But Henning also advises banks and investors against getting stuck in an overreaction of being invested only in cash or gold. “Nobody can hope to make gains and thereby claw back some of the losses if they are not adequately invested,” he warns. “In short, let’s convince clients to have their money managed like the institutional players.”
Henning, therefore, believes there is a window of opportunity through which previously reluctant bankers can push this concept with clients. “This idea of a once in a lifetime event has happened twice in our recent lifetimes, and not that far apart in years,” he comments, “and in Asia add to that the Asian crisis of 1997 and that makes three. That should make people much more cautious and more compelled to take a much more rigorous and professional approach.”
Although Henning does not see a repeat of the post-GFC QE-driven asset price inflation, he does acknowledge that there is a new tsunami of stimulus being pumped in by every economy globally that will continue to inflate some asset classes and reflate others that have been burst by this latest crisis.
“I do not profess to know which companies and sectors exactly will win and which will struggle,” he reports, “but what I can say is people are going to have to carefully evaluate how asset classes performed during this crisis and how they are going to perform going forward.”
A deer in the headlights?
His biggest concern, Henning says, is that the most private banks will do very little. “They will perhaps just assume like in the myth of Sisyphus that they are condemned to perpetually roll the boulder up the mountain only to see it roll back down the other side. In short, the banks need to take a new approach and to embrace the new paradigm and address that head-on with their clients.”
When pressed a bit further to make some assumptions about the future, Henning cautiously observes that the massive global stimulus will see inflationary impact in selected asset classes that will benefit from some upward inflationary potential.
“Selectivity is essential,” he reports, “as not all sectors and not all geographies are going to recover, and many will recover slower than others, so it is going to be a two-speed, three-speed equity market, perhaps with sectors such as technology or healthcare or national healthcare infrastructure and systems accelerating faster, whereas some more traditional industries will struggle more. All in all, equities will likely do well as we emerge from this crisis, but it is vital to be selective and to understand the key drivers or the key hurdles.”
He also observes that credit will be more problematic across the board because there are going to be many bankruptcies. “And emerging market debt is going to be very hit and miss,” he says, “and much will depend on the ability of those countries to support debt bailouts. Sadly, if I wonder if we might see another debt crisis coming down the road, then I must answer ‘yes we could’.”
Henning’s final comment is that this environment will probably not see a rising tide floating all asset prices. “In the post-GFC world, so many people invested really without having any clue whether they were making real returns, or just market returns. They were generally lucky as the markets rallied across most regions and asset classes broadly. But henceforth we will see a new post-coronavirus world in which people will need to be deliberate and selective to generate alpha in order to make sustained returns. And in that scenario, the door is ajar for the private banks and other leading wealth managers to finally prove they can deliver on the promise of service and advice so thirsted for by clients. They must seize the opportunity. Those that do will differentiate themselves and distance themselves from their competitors once and for all. ”
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