Recent estimates published by DBK consultants on the Spanish private banking market confirm that it is still a very appealing niche for operators in this sector. According to their latest report, at the end of 2019, the total volume of the market will reach 480,000 million euros, and there will be 420,000 people with level of financial assets sufficient to swell the customer base in this segment.
Another conclusion from the DBK report is that three quarters of the market are managed by universal banking units, and the rest by a diverse range of formats and models: exclusive Spanish and foreign private banking banks, wealthtech, investment services companies, companies of insurance, family office, or investment banking.
Given this complex scenario, what is the ideal growth model to strengthen the businesses in an environment of reduced margins, the implementation of Mifid II, uncertainty in the markets, and political instability? The answer is that each model is based on a series of distinctive strengths that support its efficiency and its capacity to grow. For this reason, it has strengths and weaknesses. It is most important to gain customer loyalty and 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 the brand's greatest strengths, because it distils intangible values that are highly appreciated by customers, such as solvency, solidity or security.
The other entities manage their own offer structure in order to be able to focus both on the key services identified in Mifid II (investment advice -independent and non-independent-, and discretionary management) and on other services: estate planning, marketing, or execution. Very few provide financing and/or transactionality, which require a large balance sheet.
Non-Banking Models
Investment Service Companies (Securities Agencies and Companies, 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 differentiated entities that provide distribution, management and advisory services. The offer of Independent Advice based on explicit payment to clients and without incentives, is proving to be complex for them.
The large insurance companies have decided to start offering Private Banking to their largest customers, taking advantage of the fact that, given their idiosyncrasies, they have built up over time a large base of loyal customers. They rely on the distribution of IICs -funds and pension plans- and on discretionary management, as well as asset advice.
The emergence of cost-saving technology and its ability to improve the relationship between the customer and the entity is becoming an increasingly important factor. Bearing in mind that all entities must invest in technology to comply with Mifid II requirements, and that this environment reinforces disintermediation, offers have been launched that opt for automating distribution, advice and management.
These are models that provide managed portfolios, selection of sufficient funds to a predetermined profile, or investment proposals based on risk levels, among others. Products designed and managed with algorithms. Their main advantage is the substantial cost savings, although they are missing a fundamental element, the personal relationship between the client and the manager.
Banking Models
The exclusive banks of Private Banking, both local and international, continue to firmly believe in the potential of the Spanish market. Their efforts have focused on expanding the offer via open architecture, third party funds, and alternative assets such as venture capital, real estate assets, etc.
This strengthening of the offer is explained because the role of the relationship management is key, as a channel and sole intermediary who distributes client-tailored solutions. As a complement, and in order to avoid the impact of growing financial disintermediation, these banks sell products (mainly their own funds and those of third parties) through digital platforms or marketplaces.
Independent advisory services, as with ESIs, have not yet sufficiently penetrated their clients. On the other hand, some international banks have management teams outside Spain, where only customer relationship managers work. A factor that therefore results in cost savings.
Other Models
Finally, there are operators who enter Private Banking from other businesses. Investment banking, due to advising services for corporate clients on mergers and acquisitions, expansion strategies, or financing, among others, has generated a sufficient level of trust among those clients who are owners and senior executives of the companies, to make them loyal to Wealth Management services.
The Family Office, entities that advise large fortunes in the selection of their investments and the integral planning of their assets, have positioned themselves as Private Banking for the largest family estates, even though they require full trust in the manager who acts as a channel for the best financial and non-financial solutions for a client's estate objectives.
Javier Ferrer
Director of Financial Communication at Proa Comunicación