The new expectations of Private Banking clients as seen from Switzerland
For clients and their private bankers, 2022 will undoubtedly have represented a major paradigm shift. During the previous decade, interest rates and inflation remained at historically low levels. However, the global pandemic, successive measures to safeguard economies and the war in Ukraine precipitated the return of inflation and a rise in interest rates almost everywhere in the world, with prices rising by 2.8%(1) in Switzerland and the SNB(2)'s key rate rising from -0.80% to +1.00% over 2022(3).
In these unusual conditions, private bankers are facing a significant and legitimate change in their clients' expectations, whether in terms of the sophistication, diversification, or customisation of their offering.
A growing demand for sophistication
Traditionally, banks have seen wealthy clients' appetite for financial complexity as limited. However, there is nothing traditional about the current market environment, and it is hardly surprising that their needs are becoming more complex in line with the economic climate.
Against a backdrop of high financial volatility, many wealthy clients are turning to real estate as a safe haven. However, the rise in interest rates is making property acquisition ever more expensive, with mortgage financing costs more than doubling in Switzerland in 2022, as has the rate on 10-year fixed mortgages, which rose from 1.35% on 03.01.2022 to 3.11% on 02.01.2023(4) . As a result, UHNWIs(5) legitimately expect their bank to be able to offer them solutions to optimise the cost of their real estate transactions in order to improve the overall return. For example, the current rise in interest rates is encouraging structuring that incorporates IRS, or interest rate swaps, and reduces the cost of the transaction thanks to a differential between short and long interest rates. So, when it comes to credit, the specific know-how and associated technical skills of private banks enable them to stand out and offer their clients solutions that are certainly more elaborate, or even complex, but that are also much more advantageous than those offered by so-called traditional banks.
Although 2022 was marked by an almost unprecedented concomitant fall in the equity and bond markets, with the SMI(6) index down by more than 17%(7) and two major bond crashes, retail investors did not desert the financial markets for all that. For example, just over 1.5 million French retail investors invested in the equity markets in 2022, a fall of just 5.5% on the previous year(8) . As a result, banks have had to develop bespoke strategies to protect their clients' assets from the turmoil. For example, the sale of systematic short-term options helped to limit the decline in many clients' portfolios, thereby responding to a fundamental change in their needs in the face of a deteriorating environment. It is therefore the downturn in market conditions that is behind the more or less conscious change in wealthy clients' expectations in terms of financial sophistication. In other words, in order to withstand the headwinds, portfolios have had to be adapted, and in most cases, this has meant more complex investment strategies.
In addition to these sophisticated solutions, which are nonetheless based on classic mechanisms, private clients are also increasingly seeking diversification, in order to contain the risk associated with their investments.
A greater need for diversification
These days, UHNWIs expect their advisers to think carefully about their asset allocation as a whole, in order to determine the right degree of diversification to protect their portfolios from conditions that are a priori unfavourable to conventional strategies.
Private markets assets(9) are now among the investments most favoured by wealthy clients. In 2020, they were already the fourth most popular investment vehicle for private investors(10) , just behind equities, mutual funds, and ETFs(11). Consequently, some private banks have changed their strategy, shifting from a simple distribution structure to a full-service model in order to meet their clients' needs. An integrated, open-architecture offering, based on 100% dedicated segregated(12) discretionary or advisory mandates, enables bespoke allocation across the entire spectrum of private markets, as well as the creation of resilient, diversified portfolios in terms of assets, strategies, managers, geographies, and vintages. And, in the current market context, that's exactly what clients seeking diversification and robustness are looking for.
Despite mixed performances over the medium to long term, the most experienced private clients are showing a real interest in a specific category of hedge funds. These are so-called trend-following strategies, also known as CTAs or Trend Followers. Some of these vehicles have achieved returns of over 20% in 2022, in stark contrast to the sluggish performance of equity and bond markets. These funds invest mainly via futures contracts in a wide range of financial assets, using a quantitative approach to detect and profit from both upward and downward trends. The return of volatility and directional trends(13) provided a particularly favourable environment for alternative managers in 2022. In 2023, continued high inflation, rising interest rates and persistently high valuations should mean wide price variations and dispersion between asset classes, which CTA managers should be able to take advantage of. It is now up to private banks to make their experienced clients aware of the potential benefits, but also the risks, of this asset class.
The market context and the increased need for financial sophistication and diversification have led to higher expectations of private bankers in terms of proximity and availability. Indeed, more complexity means more client education and support.
More proximity and customisation
The unusual behaviour of the markets is a source of concern for many clients, and, in these circumstances, the role of the private banker is more important than ever. In this particular context, availability and education are cardinal virtues in the relationship between bankers and their clients, who expect explanations and justifications for the relative performance and downward behaviour of their portfolios. In Switzerland, clients' portfolios lost an average of 15.2% in 2022(14) . What's more, offering solutions that are considered complex requires a personalised educational approach, so that clients can fully understand how they work, as well as the constraints and risks involved. Clients' expectations of their private banker in terms of availability and attentiveness are therefore higher than usual, given the current, largely unstable environment.
To meet the expectations of multi-bank clients with specific needs, digital tools are a real asset when it comes to responsiveness. Firstly, because they increase the number of channels available to clients to get in touch with their private banker, at a time when communication between them is crucial. Secondly, because digital platforms make self-care tools available, offering clients a greater degree of autonomy via increasingly advanced functionalities. In a banking ecosystem where "24/7" is becoming the norm, digital is a formidable catalyst for the client experience. However, a survey conducted by Deloitte in 2021(15) shows that private clients are willing to use digital channels for simple transactional activities, but that most of them prefer human interaction for more complex products and services. In short, in the private banking industry as in others, a successful client experience now depends on the right combination of interpersonal communication and digital interfaces, adapted to the skills and expectations of each client.
There is one factor in particular that private banks need to consider when customising their offering. A study published in January 2023 by McKinsey(16) shows that ESG(17) products are gaining ground overall in the private banking industry. ESG mutual funds are already attracting more than 50% of new mutual fund inflows and should account for more than 30% of their assets under management by the end of 2023. While awareness of sustainable development concerns among today's high net worth clients varies considerably from one individual to another, particularly according to age or origin, it is certain that these considerations resonate strongly with the younger generations. As a result, private banks must now, if they have not already done so, start preparing to offer investment and financing solutions that fully integrate ESG criteria and make them a priority - not only to meet the expectations of some of their current clients, but also to ensure that their offering matches the requirements of their future clientele.
Ultimately, the expectations of private banking clients have changed considerably in recent years, and this trend has only increased in the wake of the health crisis and the various tensions that have marked the past year (the Russian-Ukrainian crisis, high inflation, rising interest rates, the concomitant fall in equities and bonds, etc.). In 2023, while the risks of recession and economic and financial uncertainties will bring their share of challenges and questions for private bankers and their clients, there is no shortage of investment opportunities, and it is up to private bankers and their clients to seize them.
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(1) Source: Federal Statistical Office (FSO) - 04.01.2022
(2) Swiss national bank
(3) Source: www.snb.ch
(5) Ultra-high net worth individuals
(6) Swiss market index
(7) Source: Bloomberg, figures as of 30.12.2022
(8) Source: Autorité des Marchés Financiers, More than 1.5 million investors bought or sold shares in 2022, 23.01.2023
(9) Private equity, real estate, private debt, and infrastructure
(10) Source: FINRA Investor Education Foundation Investing 2020, New Accounts and the People Who Opened Them
(11) Exchange Traded Funds
(12) The mandates relate to accounts that are 100% dedicated to private markets and separate from the client's other accounts.
(13) Directional trading is an investment strategy that involves following a trend, whether upwards or downwards, for as long as possible.
(14) Source: Performance Watcher, data at 16.01.2023
(15) Source: www2.deloitte.com/us/en/insights/industry/financial-services/digitalization-in-banking.html
(16) Source : www.mckinsey.com/industries/financial-services/our-insights/european-private-banking-resilient-models-for-uncertain-times
(17) Environmental, social and governance
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