Recent estimates published by the consultancy firm DBK on the private banking market in Spain confirm that this continues to be a highly desirable niche for operators in this sector. According to its latest report, by the end of 2019, the total volume will reach 480,000 million euros, and there will be 420,000 people whose level of financial wealth is sufficient to swell the client base in this segment.
Another conclusion of the DBK report is that three quarters of the market is managed from universal banking units, and the rest from a diverse range of formats and models: exclusive Spanish and foreign private banks, wealthtech, investment services companies, insurance companies, family offices, or investment banking.
Given this complex scenario, what is the ideal growth model to strengthen the business in an environment of reduced margins due to the implementation of Mifid II, market uncertainty and political instability? The answer is that each model is based on a series of differential strengths that support its efficiency and capacity to grow. And therefore, it has strengths and weaknesses. What is really important is that it achieves customer loyalty and full trust.
The strengths of size
Universal banks, which manage 77% of the market, use segmentation as a criterion to identify and provide exclusive services to private banking customers, while sharing some resources with other segments of the customer base. Size is one of their greatest brand strengths, because it distils intangible values that are highly appreciated by customers, such as solvency, solidity and security.
The remaining entities manage their own offering structure in order to focus on both the key services identified in Mifid II (investment advice - independent and non-independent - and discretionary management) and other services: wealth planning, trading, or execution. Very few provide funding and/or transaction services, which require large balance sheet size.
Non-bank models
Investment services firms (broker-dealers and securities firms, EAFs) are the ones that most need to adapt to the new environment. Some are immersed in merger processes, others have decided to diversify their structure into separate entities providing distribution, management and advisory services. The offer of independent advice based on explicit client charging and without incentives is proving complex for them.
The large insurance companies have decided to offer private banking services to their largest customers, taking advantage of the fact that, given their idiosyncrasies, they have built up a large and very loyal customer base over time. They rely on the distribution of CIIs - funds and pension plans - and on discretionary management, as well as wealth advisory services.
The emergence of technology as a tool for saving costs and improving the customer's relationship with their institution is becoming an increasingly important factor. Bearing in mind that all institutions must invest in technology to comply with Mifid II requirements, and that this environment reinforces disintermediation, offers have been launched that opt to automate distribution, advice and management.
These are models that provide managed portfolios, selection of funds suited to a predetermined profile, or investment proposals according to risk levels, among others. All these products are designed and managed with algorithms. Their main advantage is the substantial cost savings, although they do not include a fundamental element, the personal relationship with the client's manager.
Banking models
The exclusive private banking banks, both local and international, continue to firmly believe in the potential of the Spanish market. Their efforts have been focused on expanding the offering via open architecture, through third party funds, and also with alternative assets such as private equity, real estate, etc.
This strengthening of the offer can be explained by the fact that the role of the relationship manager is key, as the sole channeller and interlocutor who distributes all the solutions tailored to the customer's needs. As a complement, and to avoid the impact of growing financial disintermediation, these banks sell products (especially funds, their own and third-party funds) via digital platforms or marketplaces.
Independent advisory services, as with the ESIs, are not yet sufficiently well established among their clients. On the other hand, some international banks have their management teams outside Spain, where only client relationship managers work. A factor that therefore generates cost savings.
Other models
Finally, there are operators who enter Private Banking from other businesses. Investment banking, because the activity of advising corporate clients on mergers and acquisitions, expansion strategies and financing, among others, has generated a sufficient level of trust among those clients who are owners and senior executives of companies to build their loyalty with an offer of Wealth Management services.
Family Offices, entities that advise wealthy individuals in the selection of their investments and the comprehensive planning of their wealth, have positioned themselves as Private Banking for the largest family fortunes, insofar as they require full confidence in the relationship manager who fulfils the role of channelling the best financial and non-financial solutions for the client's wealth objectives.
Javier Ferrer
Director of the Financial Communication Department of Proa Comunicación