The Value of Traditional Banks in the Modern World

Transcription

2 There s no doubt that Family Offices and Financial Advisors reach out to conventional banks and consider them a vital resource. That said, the banking industry is dynamic, and time-honored banks continue to make the case that their banking models resonate now with customers and will resonate five, 10 and 20 years from now. Making that case is all about value propositions, and that s the focus of this white paper, entitled The Value of Traditional Banks In the Modern World, from TriState Capital. In it, TriState Capital makes the case for classic banking models, and how they will continue to play a valuable role for Family Offices and Financial Advisors well into the 21st century marketplace. Despite other financial products growing more and more sophisticated, straightforward deposit and loan services will continue to remain a valuable commodity for Family Offices and Financial Advisors for years to come. Inside this report, you ll learn... What is conventional banking? Why classic banks are vital to Family Offices. What value characteristics do banking clients favor with straightforward banks? How traditional bank business models can combine the capabilities of a large financial institution with the personalized service of a smaller bank. What role does personal service play in the value proposition for standalone banks? What role does technology play in conventional banks catering to middle-market client bases? Why Family Offices and Financial Advisors are an often-overlooked market segment by modern banking models. Five sure-fire ways why conventional banks bring value to Family Offices and Financial Advisors and will do so well into the future. You will also learn that old-school banking continues to bring value to the table for banking clients value that just can t be replicated at alternative banking venues. The Value of Traditional Banks in the Modern World Henry David Thoreau once said that simplicity is the law of nature. It should also be the law of banking, an industry that has grown more complicated and more impersonal in recent years. old-school banking continues to bring value to the table for banking clients value that just can t be replicated at alternative banking venues. That s where the classic banking model comes into play a dependable, efficient way for Family Offices, their Professional Staff, and Financial Advisors to leverage the changing face of modern banking. 1

3 Conventional, or original banking, simply refers to the bread and butter services of 1920 s-era banking - loans and deposits. In a traditional banking model, banks accept customer deposits, pays the customer a good rate for use of their money, and lends that money out to customers. Unlike some banks that bundled mortgages and made risky security market investments leading up to the Great Recession, old-school banks only make loans to customers who are financially equipped to pay the loan back. The twin tenets of banking - lending and deposits are almost considered quaint by new-age banks, who are busy developing cross-selling programs, charging fees, and creating new programs and services that slip past the boundaries of traditional banking. But is that what private banking clients actually want? Not really. Clients of Financial Advisors and Family Office practitioners coming out of the grip of the Great Recession, and who are increasingly wary of over-complicating their financial lives, are going back to basics. To them, banks that stick to the basics - namely safe and fee-free deposit products with competitive rates of return, and lending services that are uncomplicated and come with fair rates are the preferred options these days. That s especially so for the current generation of ultra-high net worth clients, who are looking for safety and dependability from their advisors and Family Offices. As the McKinsey 2012 Private Banking Survey puts, it, slower wealth generation in developed markets means that the growth momentum on- and offshore is shifting to clients in developing markets. Offshore growth has stabilized thanks to ultra high-net-worth (UHNW) and emerging markets clients. To maintain their position, let alone embark on a quest for growth, banks will need to adapt traditional investment and product strategies to a world that has higher capital markets volatility and in which clients have less appetite for risk. Consequently, private banks face potentially-game changing challenges in the form of more stringent regulatory requirements in the aftermath of the Great Recession, and from a new generation of demanding clients looking for safety and stability after five years of turmoil in the banking industry. Growth In Private Banking To $70 Billion Private bank profit pools to grow by over $20 billion to $70 billion over the next four years, led by Asia, according to McKinsey & Company. 2

4 A Real World Example To make the case for bread-and-butter banking in a chaotic economic environment, let s turn to a real world example. When the financial crisis struck in 2007 and 2008, the liquidity shortfall left countless businesses, families and individuals strapped for cash. Yet rather than turn to exotic financial products and services that drove up fees and added layers of paperwork to UHNW portfolios, classic banks that focused on lending and deposits were the banks that served their private clients needs best. Consider an actual Family Office, which approached its private bank about a credit facility that would allow them to refinance some loans. The family had started an industrial business a century ago and held the company for 75 years. When they sold the business, they stayed together as a unit to pursue their goals together. That included a strategy of timed private equity investment and harvesting. Using that approach they made a series of staggered capital commitments illiquid investments in private companies and private equity for a number of years. When those investments matured, they sold their stakes and reaped the profits. Harvesting each investment at the right time gave them the resources to make their next investment. That worked well for many years. Until, that is, the financial crisis steamrolled across the economic landscape. The Family Office had two primary reasons for concern: We were in an environment with very limited liquidity, the Family Office director said. We were in an environment with very limited liquidity Slow appreciation resulting in delayed liquidity In a flat-lining economy, the firm s private equity investments were not appreciating as quickly as in the past, so they did not experience liquidity as quickly as they were used to. Trouble obtaining credit Second, even though the family office had a line of credit with a regional bank, that bank was in the process of being acquired by a national bank. The national bank had previously declined a loan of this type with the family office. This raised a red flag for the family office director, who expressed concerns that when the time came to renew the loan, the large bank would decline. I felt we needed a new line of credit to provide liquidity in periods between private equity investments and harvesting, he added. We still had credit. But continuing that into the future now looked doubtful. I decided to be proactive and take steps to avoid the circumstances that would have a negative impact on our financial plan. The director had one major caveat he wanted to do business with a classic, back to basics private bank, and not a major, global financial institution. I wanted to do business with a bank who was a partner not one who just wanted to handle a transaction and generate a fee, he explained. 3

5 After face-to-face meetings with the Family Office director, the bank representative(s) huddled with his analysts and managers, and ultimately recommended a line of credit that met the client s needs. Over the last 5 years, the Family Office has used the line to take advantage of new investments offering a good return. We ve been using it on a regular basis to fund our investments, the Family Office director said, because we weren t receiving distributions from our private equity commitments. They constitute the majority of our portfolio. The infusion of credit allowed us to continue our investment strategy. Consequently, it has proven to be an important factor in our financial success. More so, the director praised the benefits of working with a traditional bank that emphasized personal service and partnerships both hallmark features of a traditional private bank. We need custom solutions and services to meet our special requirements, the director said. That means a bank able to work with us within our structure. The key term is flexible. Our banking arrangements are nearly 100 percent custom-designed. It s not easy to find a bank to do that. We ve tried a few. If you don t fit into the square box they have defined, they can t help you. Especially larger banks. Old-School Values In a New-Age Banking World Time-honored banks, regardless of where they operate across the globe, face challenges stemming from an increasingly complex economic environment. There is no shortage of trends shaping the future of the private banking industry. Included are the move in growth and profit pools towards developing economies; the need to change the value proposition and delivery models to serve the specific needs of a new generation of clients; and the necessity to restore trust in the true ability of private banks to deliver superior customer service. Five Signs That You re Working With a Conventional Private Bank Like the Family Office director, most clients have no desire to work with private banks that are more interested in cross-selling up to 20 products and services than solving their banking problems. As Henry Ford once said A business that makes nothing but money is a poor business. But past the emphasis on generating revenues, what really separates traditional banks from larger financial institutions? 4

6 Here are five ways that Financial Advisors and Family Offices can benefit from working with real banks: 1Personal Service The classic banking model emphasizes close relationships with clients service Family Office and/or Financial Advisory UHNW clients don t usually get at larger, more impersonal financial institutions. It s common for traditional private banking to have one point of contact for five, 10 or even 20 years. Traditional banking clients are accustomed to a higher level of service service they re not getting at big banks. The watchword at time-honored banks is this An uncommon level of close personal attention provided by seasoned professionals. 2 Clients are left alone Family Office specialists and Financial Advisors have reason to worry about larger banks picking off their UHNW clients and bringing them under their own services umbrella. Rather than focusing on gathering assets and fees from Family Offices and Financial Advisors, traditional private banks are focused on building partnerships and expanding relationships. 3 A deep, experienced bench Analysts and managers at large banks tend to job-hop at a high rate, with some professionals (especially younger ones) lasting two years or so before moving on to greener pastures, and a bigger paycheck. In comparison, private banks that adopt traditional lending and deposit practices have private bankers on staff that often have 25 years or more of experience all of whom are trained to bring that extra attention to detail that UHNW advisors need to satisfy their clients. 4 Flexibility on rates Competitive rates on deposit products like MMDA Accounts and faster approval of lines secured by financial assets are easier to obtain with select traditional banks unencumbered by strict lending and deposit models. With traditional banks, rates for loans are more flexible than with straitjacketed larger banks. 5 Lower fees and expenses Fees are a thorny issue with private banking clients and their advisors. A conventional private bank may only have several Family Office staff members to support, in addition to 500-1,000 clients. A large money center bank on the other hand might have 50,000 or more clients. Consequently, larger banks are ensnared in a trap of their own making, having to consistently chase transaction and investment fees to keep the bottom line from being written in black ink rather than red. Not so with typical private banks. With a smaller client base, consisting of mostly wealthy clients, traditional banks that focus on basic services issues like lending and deposits, piling on new products and services (and more fees) aren t in the real private banking playbook. 5

7 Rising Client Base But a Demanding Client Base The number of millionaires and decimillionaires is expected to rise 30% by 2016 to about 16 million all of whom will be looking for simple, effective traditional banking services without being cross-sold and without facing high banking fees. Old-School Banks Offer Best Option For UHNW Advisors Unfortunately, there are few metrics that can define the intangibles that drive world-class banking. But in a global banking environment that grows more cumbersome and complicated in the neverending chase for fees and clients, it s traditional banking that offers Financial Advisors and Family Offices a reliable safety net. It s a safety net based on old-school services like lending and deposits, and one provided by private banks deeply-rooted in the Family Office and Financial Advisory markets. In that regard, conventional banking is the sensible choice for UHNW advisors looking for partnerships, relationships, and a classic old-school customer service. Now and 25 years from now. For more information, contact: Chuck Fawcett President, Private Bank cfawcett@tscbank.com Jim Mirasola Director of Alliances jmirasola@tscbank.com 6