Private banking model in jeopardy: Margaret Doyle

-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

By Margaret Doyle

LONDON (Reuters) - The rich are not happy. According to the Merrill Lynch/Cap Gemini annual World Wealth Report, there are 15 percent fewer of them, and they are less well off as a group than a year ago.

The rich blame their private bankers, at least in part, for their predicament, and are looking for other ways of managing their money. Their anger threatens the cozy private banking model.

Almost half of the clients surveyed had lost trust in wealth managers and their advisers -- hardly surprising following a year in which top private banks like UBS, HSBC and Santander turned out to have put clients' money into funds managed by the fraudster, Bernard Madoff. Worse, many of those banks who pocketed fees have tried to wash their hands of any responsibility for the losses suffered.

Many of these rich clients are already voting with their feet. A quarter withdrew some or all of their funds from their wealth manager during 2008. They have also shifted their asset mix. A striking 50 percent of assets were held in cash or bonds in 2008. Though this proportion has probably already fallen as risk appetite returns, the rich should have learned that cash and government bonds offer the surest route to wealth preservation. Unfortunately for private banks, they have little scope to charge fat fees on such holdings.

Rich clients are also demanding simpler, more transparent products, having realized that many of the fancy structured products they were sold did not perform as planned. They no longer want to be stuffed with products that appear to have been designed for the fees they can earn bankers rather than the protection or performance they offer clients. Many want online access to their accounts, which will inevitably remove some of the mystique on which private banking has traded.

Edward Merchant of Cap Gemini says many bankers are simply hoping that they will return to business as usual, where fat commissions are charged as a percentage of assets under management. However, if the rich have any sense, they will insist on paying a flat fee for objective advice.

All of this points to more pain for wealth managers. They have already begun their version of austerity: expenses grew at just 6 percent between 2007 and 2008 versus 17 percent the previous year. However, the industry's cost income ratio now approaches 75 percent. This implies what everyone outside the industry has long suspected: that private banks exist more for their employees than for their shareholders or clients. This should not last. (Author biography:)

(Edited by David Evans)