Summit Notebook

Rich seek ways to sit on the hedge

Rich investors are taking more precautions than ever in their wealth, and instruments once seen as complex and exotic are becoming more commonplace in their portfolios, wealth managers said at the Reuters Private Banking Summit.

Asset classes such as foreign exchange, gold, oil and industrial commodities are beginning to have specific and identifiable hedging roles in portfolios, beyond the broad brush “diversification”.

That is a far cry from three years ago, when investors spread money around asset classes and managers in the vague hope that broad enough diversification would help them make money in all market conditions, or at least preserve wealth.

That notion disappeared during the financial crisis, along with around $12 trillion of market value.

Investors still want exposure to emerging markets, but they fear leveraged investments in volatile equities markets, where they were badly burned during the crash.

But, their hunger for growth unabated, this time investors are plumping for emerging markets bonds.

They are also looking to protect themselves against the vagaries of the economy.

Trusts can help women win back their fair share

Investment trusts, financial constructions often associated to clever tax structuring, can actually help women inherit their fair share in countries were they are discriminated by law, a top private banker says.

“In countries where Shariah law is applied, being a woman is not as advantageous as being a man. In that situation, the trust allows the structuring to have children taken care of,” says Karen Simpson, the Swiss-based Head of Private Banking at Royal Bank of Canada, the world’s No.1 bank player in the trust business.

But that is true only for the very wealthy, as these types of constructions are uneconomical to set up below a certain amount, tax lawyers say.

In a world where rich people are becoming increasingly globalised and the number of non-traditional families are rising, trusts are a good business to be in.

“It is a growth area,” says Simpson, whose bank serves several royal families. 

“It’s not really about taxes. If you have significant wealth and you are dealing with a lot of jurisdictions, that kind of structure makes a lot of sense”.

Fear factor driving gold higher

“Gold is not an investment. It doesn’t pay you interest and it doesn’t increase wealth,” complained one investment advisor recently as he perused exploding client demand for the yellow metal.

“It’s just a cautious asset for scared investors,” he grumbled as he waved a chart showing prices had once again hit an all-time high.

Some anecdotal evidence suggests he may have a point.

Bankers at this week’s Reuters Private Banking Summit said investors were loading up on gold to the tune of some 7 to 10 percent of their portfolios.

The traditional motive of hedging against inflation was conspicuous by its absence.

The wealthy were buying gold because they were worried by the possibility of deflation, by a collapsing dollar or by the threat of prolonged financial turmoil.

Many were getting exposure through gold-backed exchange traded funds or gold stocks related stocks.

You can’t avoid the taxman, but there may find a friendlier one in the Alps

With the German government hot on the heels of untaxed wealth stashed in Swiss bank accounts, and the U.K. government taking a tougher stance on clawing back bonuses, rich folks will likely head for the hills – or the Alps to be more precise – senior private banking executives said in Geneva. 

“People are going to arbitrage different tax jurisdictions. We are going to see European clients moving to Switzerland, very large families,” said Alberto Valenzuela, deputy chief executive of Societe Generale Private Banking (Suisse) SA.

JP Morgan, which specialises on clients with $20 million to invest, is hoping to tap into the pool of wealthy exiles.

“We are seeing an affluence of international people moving to Switzerland and we want to develop a practise that can serve families,” said Pablo Garnica, head of private banking for Europe, Middle East and Africa at JP Morgan.

Time private bankers got professional

It’s hard to imagine that a banker who represents multimillionaires would be anything but professional – but a top executive at a leading global bank thinks that’s precisely the wealth management industry’s problem.

“There is so much mediocrity in the industry we have to raise the bar here,” said Gerard Aquilina, vice chairman of Barclays Wealth, at the Reuters Global Wealth Management Summit in Geneva.

    To Aquilina’s way of thinking, private bankers need the same “institutional rigor” as investment bankers in the way they operate. To this end the bank is looking to pursue only top-quality hires.

“Our strategy is not to be the hoover that comes and hires willy-nilly, we want to be much more selective,” said Aquilina — perhaps an ironic view given Barclays acquired thousands of investment bankers from the ashes of the fallen Lehman Brothers last year.

    But he and his colleagues are so sure of their position that he said they are working on developing MBA-level courses with some unnamed top universities on private banking, especially as they see fewer and fewer interns turning up their noses at the prospect of a three-month rotation in the private banking shop.

Everyone needs a private banker

Tax evaders on the run

  By Neil Chatterjee     The U.S. has promised it will hunt down tax evaders.     And it seems tax evaders are on the run.     DBS bank, based in the growing offshore financial centre of Singapore, told Reuters it had been approached by U.S. citizens asking for its private banking services. But when told they would have to sign U.S. tax declaration forms, the potential clients disappeared.       Swiss banks also approached DBS on the hope they could offload troublesome U.S. clients to a location that so far has not been reached by the strong arms of Washington or Brussels.     DBS said no thanks. In fact many private banks and boutique advisors now seem to be avoiding U.S. clients.     Will this spread to other nationalities, as governments invest in tax spies and tax havens invest in white paint?     Is this the end of offshore private private banking?

Private bankers chanting new mantra

Private bankers still getting their ears bashed from clients enraged about massive portfolio losses now are chanting a new mantra.

    Murmur along with me, those seeking inner peace and appeased clients: the word is “holistic”.

Three years ago, before Lehman and Madoff shattered clients’ confidence, the soothing formula might have been “absolute returns” or “structured products”. No longer. 

    Bankers shooting French cuffs in Super 180 suits and obsessed with spread sheets now are seizing on a word redolent of green tea, acupuncture, crystals and the New Age. 

    “Holistic” bubbled up at least four times at the Reuters Global Wealth Management Summit as bankers and consultants in Singapore and Geneva outlined how to keep clients after the market meltdown. 

    But what does a word meaning that whole entities have an existence other than the sum of their parts have to do with rich people and the gnomes that mind their money?

    “Holistic” in bank-speak translates as handholding, face time and hustling to assure wary clients bankers are on the job. Mass mailings are out, daily phone calls are in.

Private Bank finds synergy in public bar

It is a little known fact that private bank Wegelin, Switzerland’s oldest bank is also active in the bars and restaurants business.

In its ‘Nonolet’ bars – a play on the Latin saying pecunia non olet (money doesn’t stink) – in St. Gallen and in Geneva, hedge fund managers and other financial professionals rub shoulders with other locals in the early evening over sparkling wine or champagne and snacks.

It may sound an odd sort of diversification, but Wegelin says there were forced to try a new line of business to ensure an upmarket crowd mingled on the ground floor of the Wegelin building.

“You cannot have a strange business there like a kebab shop,” said Wegelin partner Christian Raubach.

Wegelin was forced to launch a hostile takeover on a local bar which had attracted a lot of unruly drinkers near its St. Gallen branch office.

“We bought the bar, we fired the owners, and we put a nice Café in so we get a different crowd. The crowd that sits during the day drinking coffee and not vomiting drinking beer at night,” Raubach said.

The operation proved to be a success but is unlikely to develop in to a brand new business area.

Swiss brand key to banks’ cache