To capture more business from wealthy investors, banks large and small are adding third-party products to their investment platforms.
High-net-worth investors have sought increasingly complex investments in the past few years. Partly as a result, banks’ market share in this business has dwindled.
Lori Heinel, a managing director and the head of investment sales at Citigroup Private Bank in New York, said banks are looking to partner with other firms to meet clients’ demands better.
“The types of products people want to have available to them are a lot more sophisticated,” she said. “It’s unlikely that an organization is going to have all of the individual components.”
Banks are turning to third parties for investments such as hedge funds, private equity funds, commodities, and real estate, she said.
Affluent investors also favor open-architecture platforms because of concerns that advisers will push inappropriate proprietary funds, she added. “Investors rely on the adviser to give appropriate, objective advice,” Ms. Heinel said.
Rus Prince, the president of Prince & Associates, a Shelton, Conn., investment consulting firm, agreed that wealthy investors worry about advisers’ bias.
“Banks want to present themselves as not being biased,” Mr. Prince said. “Open architecture is one way to eliminate any implicit bias.”
Offering third-party products also helps in retaining clients whose investments do not perform well, Mr. Prince said. “If the product doesn’t work, the bank is not tied to the product,” he said.
Citigroup Private Bank’s typical customer has $10 million or more of net worth. Even now, Mr. Prince said, less than 25% of what it sells is proprietary — and that percentage will shrink after the December swap of Citi’s asset management unit for Legg Mason’s broker-dealer business.
A Prudential Financial study released last Friday says banks can boost their share of the affluent market by offering a mix of third-party and proprietary products and by offering different assortments to different income groups.
For the study Prudential, of Newark, N.J., and 3C Financial Partners of Manhattan Beach, Calif., a merchant banking firm, asked more than 100 investment executives how they serve investors with $1 million or more of total assets.
Adding third-party products can help banks attract such investors and cut staff, sales and marketing, and client-interface costs, the study says.
Peter Green, the head of business development for Prudential Financial, said affluent investors want a wide array of investment options.
“Most high-net-worth investors fully understand diversification,” said Mr. Green, a senior vice president. “They are no longer happy with a laddered bond portfolio and a large-cap equity fund”; many also want exposure to small-cap and midcap stocks and overseas investments.
Tyler Resh of 3C Financial said that for individual banks the best product mix depends on the client base. The ideal mix can range from 10% to 90% proprietary, he said, but for banks managing $3 billion to $100 billion for wealthy clients, 65% proprietary is generally best.
“Their first step should be to cut back about 10% of what they are not doing well,” Mr. Resh said. Then they should “fill in with what they should be doing but aren’t, by utilizing a third-party-platform solution.”
The Prudential-3C study says a bank managing $100 billion of assets, all in proprietary products, for high-net-worth clients can increase its profit margin in that business by more than 11% — adding $22.5 million a year to profits — by going 65% proprietary/35% third-party. (The example assumes an average client fee of 65 basis points.)
The study recommends that banks bundle products and services for three wealth tiers: $1 million to $5 million of assets, $5 million to $30 million, and more.
“Different clients have different asset-growth needs,” Mr. Green said.
HSBC’s private bank does not have such an assortment of menus, though it considers clients’ net worth in assessing their needs, said Gerard Aquilina, who leads the British bank’s North and South American private banking from New York.
In this country its typical customer has $10 million to $50 million of assets, Mr. Aquilina said. “At that net worth, the clients pretty much know what they want,” he said. The private bank’s role is “providing advice and due diligence rather than trying to pump product into a client that they don’t necessarily need you for.”
HSBC’s mix includes about 20% nonproprietary products, Mr. Aquilina said. The proprietary products — such as overseas investments, hedge funds, and tax-related services — tend to reflect the bank’s areas of special expertise, he said.
“We can’t be all things to all people, but there are some things we understand really well,” Mr. Aquilina said.
The Prudential-3C report says the high-net-worth market is growing fast and banks can capture more market share.
Worldwide assets of such investors topped $30 trillion in 2004 and should hit $44 trillion by 2010, says the report, which is based partly on data from the Census Bureau, the Internal Revenue Service, and the Investment Company Institute.
But private banks have been losing market share, the study says. They ran 86% of those investors’ professionally managed assets in 1995 but only 38% last year, it says.
Competitors include insurance companies, institutional money managers, advisory boutiques, and family offices.
