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Private bankers under pressure

29 September 2018, De Tijd

With a tsunami of regulation, the digital revolution, and increased competition, private banks and asset managers are preparing for a wave of mergers and acquisitions. The smaller companies in particular feel that they are a sitting target. “All diversity is at risk of being lost”.

These days, thanks to the ambitious Supernova-festival, Antwerp’s “Little Island” is the epicentre of state-of-the-art financial technology. But at the Antwerp brokerage firm Van Goolen & Co, a few hundred meters further in the shade of St. Paul’s Church, there is little sign of the digital revolution which has caused such seismic shifts in the financial sector.

No omnichannel strategy, unique app or other hip buzzwords at this tiny office, which has a client portfolio of about 50 million euro. The Antwerp house, founded in 1920, remains resolutely “old-school”: placing stock market orders or selling stocks via telephone or after a client visit to the office. The website of Van Goolen & Co comprises only one page, containing only the office’s switchboard number.

 ‘The new internet platforms have their own audience,’ says manager Jan De Cleir. ‘Our great advantage is that we can rely on a very loyal clientele. These are people who prefer to directly speak to someone they know well rather than sit in front of a computer screen to place an order. That said, our clientele is somewhat older and it’s no simple matter to attract younger people. But the older clients also have children, who eventually come knocking at our door. Unless there is some big catastrophe, and as long as no more absurd European rules are dreamed up, I see us celebrating our centenary in 2020.

High time for homework

And so while Goolen & Co is well-equipped for the future, the dozens of private banks, asset managers and brokerage firms around the country are experiencing much more nervous moments. For a long time it seemed that this sort of company, which primarily focuses on wealthy clients, was buffered from all upheavals in the financial sector. But in the meantime, even the most fashionable houses must do their homework in order to endure.

Unlike the traditional banks, the burdensome mix of strict regulation, enforced digitisation and historically low interest margins are putting the revenue model of the smaller players under pressure. That has already brought about some remarkable deals. In July, the British Duet took over the Antwerp asset manager Merit Capital. A month later, the Dutch ABN AMRO acquired the Belgian private banking arm of Société Générale.  The Bruges brokerage firm Weghsteen is also up for grabs. This has come about because the regulator National Bank became concerned about the course of events at the loss-making broker.

According to most experts, that’s just the beginning of a much larger wave of mergers and takeovers in the sector. When you ask why, you’ll quickly hear the five-letter word which is these days giving bankers nightmares: MiFID. This European regulation for the protection of investors is not new: it is for example the reason why you must fill out a questionnaire when you want to buy a share.

However, the revised MiFID rules, which have been in effect since the start of the year, go much further. The era of lifting the phone to quickly discuss an investment idea with tour banker or advisor is over. If your banker or asset manager wants to give advice, the new regulations mean that you must provide a detailed report - even the date of the call must be notified - and before an order is actually placed, it must be checked whether everything matches the client’s risk profile.

The paperwork and costs which all of this entails are  already a heavy  burden for the big players. ‘But if you have a small business with about five employees, the measures put great pressure on your organisation’, remarks Victor Zwart, CEO of the Brussels asset management firm Wealtheon. ‘You’re obliged to have a risk manager, a compliance officer...these are people that you can’t use for commercial tasks. The fact that everything is meticulously monitored is understandable. But that doesn’t always make things run more efficiently.’

‘Of course, there is still space for smaller, independent establishments’, relates Sam Adams, Managing Director of the Kortrijk brokerage firm Lawaisse. ‘We see that in our returns and in the fact that the influx of our clients is still rising. Investment firms and asset management companies which are heavily dependent on investment advice have seen their working environment change considerably. That requires a strong focus from our board of directors,  which must adapt its strategy accordingly.

The new consumer regulations are already causing some players to ask themselves whether they want to give advice at all any more.  ‘For economic reasons, we only still give advice to major clients’, says Erik Peeters, manager of Antwerp’s Leo Stevens & Cie. ‘We continue to see this kind of service provision as our raison d’être. However, the reality is that out of pure necessity, many players are beginning to focus on only selling various investment products. But it’s here that the larger players have the advantage. The diversity which previously existed in our branch is at risk of disappearing’.

When the personnel of a private bank leave after a takeover, they usually take the clients with them. Then you’re left with an empty shell.

An Insider

‘The absolute minimum requirements to compete in the business are now significantly higher’, confirms Yves Van Laecke, Head of Private Banking and Asset Management at Nagelmackers Bank. ‘Not just because the regulation has become stricter and more complex in the last months, but also because players must invest in new IT applications.  You must have ever more assets under management in order to keep up, with the consequence that some groups are throwing in the towel.’

‘We are regularly approached by asset managers who want to combine forces’, says Victor Zwart of Wealtheon. ‘We’ve just had a first discussion with a small group which has a portfolio of 200 million euro. And last year we were even approached by a Belgian party who wanted to merge with us. But we want to continue under our own steam.’

Client list under the pillow

Analysts have long been predicting a wave of takeovers in the branch. But so far, this Big Bang hasn’t come to pass. ‘Also, don’t forget that closing this sort of deal is much harder than it appears’, says an insider.

‘When you take over another private bank or asset manager, you must also ask what the company’s personnel will be doing on the long term. When people leave, they usually take with them the clients with whom they’ve built up a relationship over the years. Some bankers carry around a list with the contact details of their most important clients. You’d think they have it under their pillow. When such people leave after a takeover, you’re left with an empty shell.’

Old-style client retention thus remains key. All the same, bankers should not underestimate the extent to which new digital applications can disrupt their business, says Kasper Peters of the Deloitte consultancy.  As soon as clients start to take certain new services, such as a comprehensive mobile app with real-time overview of their investment portfolio, as a given, it gets tougher for companies who haven’t kept up with the trend.

Wealtheon boss Zwart is certainly aware of this. ‘Digitisation is of course important. But your reaction to the trend will also depend on your size. We have already had visits from consultants who propose that we invest a hundred thousand euro in new technology. We responded politely that such costs outweigh the benefits for us. The situation is of course different for larger competitors. They see digitisation above all as a means to increase their profitability and win more clients at a lower cost price. That presumably has an impact on the sector.’

Moreover, the traditional private banks most pay ever greater attention to some newcomers in the branch. Houses such as Argenta or Crelan, who until now were inactive in this niche, are now also looking for opportunities and are seeking new revenue streams, says Van Laecke.

‘Within five years from now, the landscape will look completely different. Some years back, banks tried to win a greater market share for savings books. In the meantime, everything is revolving around cheap credit. The margins have become wafer-thin, shifting the emphasis to investment products. The fact that people are being encouraged to invest more is of course a good thing, but we must ensure that we watch out that no price war erupts that will threaten the profitability of the sector’.

Optima

Remarkable: according to many insiders, the National Bank is also steering a wave of consolidation among the Belgian asset managers. They see evidence of this in the fact that the Bruges-based Weghsteen itself is in the shop-window, following pressure from the regulators. ‘Both the National Bank and the stock market watchdog are starting to more closely scrutinise smaller asset management companies and brokerage firms’, relates a banker, who requested to remain anonymous.

‘After what happened with Optima, it seems to me to be simple logic. I also think that there are still companies where the steering and professional management must be organised.  A board of directors was previously little more than an excuse to sit down together for a glass. But such times are over. Now, reality forces you to work hard at such meetings on such dry subjects as financial regulation.’

Other asset managers are starting to grumble about the stricter approach of the regulators. The feel that they are being targeted, and suspect that the National Bank is gearing towards a further scaling-up in the sector. ‘Look at the fines that are levied. Two years ago, Merit Capital had to pay the FSMA 120,000 euro because they breached some rules by placing advertisements for investment funds on their website’, says an anonymous source. ‘But when BNP Paribas Fortis, the largest bank in the country, allowed a cousin of Gaddafi to buy bulletproof vests using one of their accounts over years, they only had to cough up 300,000 euro. The regulators are disproportionately focusing on smaller brokerage firms.’


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