Adam Green of TMP, the recruitment company, gives a round up of movements within the private banking industry and their consequences during ...
Adam Green of TMP, the recruitment company, gives a round up of movements within the private banking industry and their consequences during the first quarter of this year.
Its been an active first quarter in the Private Wealth Market, with some notable movements of talent between institutions. We saw Michael Bussey announce his departure as Chief Executive at HSBC Republic and more to Schroder, where he will be responsible for running the private client business. Then it was announced that the Head of Barclays Private Bank, Richard Amos was departing and joining Credit Suisse, where he takes over from Conrad Eilts as Head of the branch in London. Conrad is relocating to Zurich to assume responsibility for the Middle East business.
Chase Fleming also suffered an eight strong team departure to join Rathbone’s in London and separately, another small team is leaving for NCL, expanding its recent acquisition of Panmure Gordon. All of these movements and the many more in the pipeline, are characteristic of the seasonable time of bonus payments. During this period, usually between February and April, bonuses are traditionally announced and paid and the private banking market can see a turnover of between 10 and 15 percent of front line staffers. Coupled with this, is a burgeoning growth within the UK Private Wealth Management Sector with a short supply of high quality professionals. It is not hard therefore, to see why many banks are addressing the issue of attracting and retaining staff by aggressively adjusting salaries and packages upwards.
Traditionally, the UK has languished behind the US when it comes to remuneration in this sector and when compared to other product areas such as investment banking, the rewards for private bankers seem trifling. Typically, a US Private Wealth Advisor earns a base salary at least 30 percent higher than the equivalent person in the UK market and bonuses have almost invariable been the most attractive aspect of the total package. However, the emergence of private money as an important source of revenue for many of the players has led to a new prioritisation of the business, with many banks now designating private banking as a global product line. In some cases, this importance is critical to the organisation. For example, Credit Suisse Group, where earnings from private banking eclipsed other activities and accounted for nearly half of total annual revenue for the Group in 2000.
With total remuneration moving up, banks are reacting by moving towards more production-led packages. This is far more in line with the investment banking remuneration model, where bonuses constitute by far the biggest part of total package. A good example of this move is HSBC Republic, a house that has for years been thought to reward its private bankers below market. The Bank has recently adopted a far more aggressive reward scheme for its staff, which is based on a salary and larger bonus component divided into cash, stock and options deferred for three years, the latter being used to improve staff retention. Another is Barclays, where the active part of the packages for private bankers has seen a very dramatic rise. There have been significant rises in bonus levels in almost all other houses this year, and this is leading to a resurgence of interest by bankers in private banking, especially those seeking to switch from areas which are being affected by the recent market downturns, such as fixed income.
What’s the effect of these rises on the profitability of individual private bankers? Typically a private banker will derive revenues of between 75 to 150 basis points (0.75 – 1.5%) of the total assets they manage on behalf of their clients. These revenues are very dependant on the type of products invested in and the transactional nature of the business. Looking across the market, the cost income ratio of individual private bankers is somewhere between 40-60%. It can therefore be assumed that in order to satisfy this significant increase in cost, the banks are going to have to rethink the revenue models and the charges they apply to their clients. There is also likely to be consideration given towards increasing average assets held by individual private bankers and the profitability of each product group.
Whatever the outcome of these trends, the challenge to all banks is going to be managing the cost of this increasing compensation trend against a backdrop of decreasing margins throughout the industry. It will be interesting to see what can be done by the banks to come up with novel and innovative ways of rewarding staff without pricing them out of the market.