Great potential in need of an edge.
The post Great potential in need of an edge appeared first on Executive Magazine.
"Why is there so much more research done on baldness than on malaria? Because rich people go bald, and they don't die of malaria." William H. Gates III
There were times when homegrown private banking in Lebanon looked like a short-distance runner trailing behind the field in a long-distance race. A decade ago, whenever Executive would report on the wealth management and private banking options from Beirut, representatives of foreign institutions were the natural go-to people. Local and regional directors at Merrill Lynch, BNP Paribas, Credit Suisse, UBS, HSBC and other foreign institutions provided the most insightful interviews. They also, in courting local clientele, took the business of Lebanese high net-worth families and individuals to the financial centers overseas. London, Geneva and New York stood out as the places where Lebanese private wealth accounts were managed. Sure, some local banks had knowledgeable individuals with job titles such as "head of private banking" and offices situated in unexpected corners of their respective banks' headquarters. But mostly these people would talk about interesting ideas and projects envisioning future growth, and several of them, and their fledgling departments, were no longer to be found when Executive came around again a year or two later.
Visiting with private bankers last month, the flair was stronger on the side of the locals. From the rep office of UBS and from Credit Agricole Suisse (Liban) came understandable apologies for not being available to discuss the global scenarios at this time. The Lebanese units of Swiss banking organizations Julius Baer and UBP provided perspectives originating in their global head offices, plus valuable personal insights into regional markets. But the managers of homegrown private banking were just as interesting to listen to and had intriguing news of their own to share.
Interviewees at sector leader Audi Private and at local independent FFA Private Bank signaled calm confidence about their performance and shared their assessments of the whole range of areas of financial interest -- i.e. the broad array of volatile markets and potential worry spots. Growth was clearly on the minds of Georges Abboud, global head of private banking at BLOM Bank Group, and Youssef Dib, general manager for private and investment banking at Near East Commercial Bank (NECB).
News on capacity growth
BLOM Private Bank is working on expansion of its private banking operations in Switzerland, Abboud said, full of enthusiasm. "We will definitely grow the operation in Geneva because we have a lot of demand from our clients visiting us there. We will build the advisory offering that will have a common platform between Beirut and Geneva," he told Executive after having just returned from a visit as part of a new mandate to take care of all of the group's private banking operations.
With positions in the deep middle field of the Lebanese market in terms of headcount and other metrics, NECB has not been a bank in the forefront of banking activity. For the past two years, management appeared reticent to accept interview requests as the bank was working out its merger with another institution, Banque de L'Industrie et du Travail (BIT). But as Dib told Executive, the veil of the bank's new identity -- neither to be NECB nor BIT but a new brand related to the main driving force behind the institution, banker Mario Saradar -- will be lifted within a few months. "2015 was an important year for Saradar Group with the official merger of the two banks. At present we are one group with two banks, NECB and BIT, and around April we will be one entity with a new name and new corporate identity," Dib said. According to him the merged bank will have a strategy to operate as universal bank with a retail network of 20 or more branches but private banking will be one of the key business lines. "Wealth management is in the DNA of both NECB and Saradar [Group], which is highly reputed in this field," he added.
Noting that FFA Private Bank has almost completed a decade of operating as an independent private bank (it was established as brokerage Financial Funds Advisors in 1994), and given that private banking culture appears today soundly rooted in the units backed by the country's top two commercial banks, the new positioning of Saradar Group is a welcome addition to private banking capacity in Lebanon. However, four reputable names and growth-oriented organizations do not yet make a crowd and the Lebanese market is still a good distance away from passing important milestones that would allow the local sector to compete for all the high-powered Lebanese specialists who work the world over in asset management, funds management, private banking, etc. And while IT systems are in a process of significant enhancement at Audi Private Bank and also are being beefed up at BLOM, strengths would have to increase further before advisories here can deliver on all client needs and requests. Also the national environment, as ever, will have to become conducive to the needs of bankers and clients to allow Beirut to become a rising star in private banking.
Under those circumstances, perhaps angling for ethics can help in carving out a stronger niche. It may be counterintuitive to the popular notion that banking for the rich is akin to depriving the poor or the view that a private banker's success requires loving money more than love itself, but business ethics and private banking are in no way mutually exclusive. If one attempts an unbiased examination of the contentious issue of wealth, one can find historic and new touch points with ethics concerning the what-in and the what-for of investing and the how of best wealth management behavior.
Three roads less traveled
In regard to the what-in, the reality of an alternative investment dimension has been demonstrated through growth of green, socially responsible, and ethical investment strategies as well as Sharia-compliant Islamic finance. Retail funds applying environmental and ethical selection criteria were no more than quirks in the financial landscape when first devised in developed European countries. But that was before the real spread of awareness of climate threats and the proliferation of investment choi ces. Between December 1999 and June 2014, the assets under management (AUM) in the Socially Responsible Investment (SRI) fund market across Europe grew from 11 billion euros ($12 billion) to 127 billion euros ($138.4 billion) according to a report by specialist French research firm Vigeo.
In a comparable but more recent view of the United Kingdom market, the non-profit Ethical Investment Research Service (EIRIS) of the UK, which merged with Vigeo in the beginning of 2016, said that the UK's AUM in retail funds with ethical or green orientation grew from less than 300 million GBP ($431 million) in around 1990 to more than 15 billion GBP ($21.5 billion) in June 2015.
The Vigeo report notes that ethical AUM represent 1.7 percent of European retail AUM but that is a veritable niche and has ever-more potential for growth as attention to environmental and social issues soars, and management structures of SRI funds have been maturing and performances becoming more competitive with conventional funds.
Similarly, the Islamic finance industry has been fed by increasing appetites for religion-compliant products. A report by the Malaysia International Financial Center (MIFC), which is affiliated with Bank Negara Malaysia, the country's central bank, said last month that Islamic AUM stood at $60.2 billion globally in the third quarter of 2015, albeit down from $75.8 billion a year earlier. Attributing the drop to lower oil prices and some changes in regulatory environments, MIFC said that Islamic AUM are expected to grow to $77 billion by 2019, at slightly above 5 percent per annum, and added for evidence that the average growth rate of Islamic funds over the past five years was 9.6 percent per annum.
On the one hand, the growth potentials for ethical funds of Western and Islamic orientation seem worth pondering from a Lebanese perspective because the outlooks and descriptions have become less propagandistic when compared with some hyped-up conferences and reports 10 years ago. On the other hand, it seems a good rationale for Beirut as the prospective wealth management center in the middle of East and West to develop expertise in funds that have untapped marketing potentials in Western and Muslim-majority markets, and conceivably elsewhere in emerging markets.
The ethical what-for of investing can perhaps best be approached by examining a recent fruit of philanthropy. There are 1,382 people who work at the world's largest philanthropic organization, according to the entity's latest factsheet. Among these people are one Melinda Ann French, married name Gates, and one William Gates III. It is widely known that the Bill and Melinda Gates Foundation has been endowed with billions of dollars by the Gates family and their collaborators, such as Warren Buffett. It has a trust endowment value of $41.3 billion (at mid 2015) and grant payments of $34.5 billion since inception, according to its factsheet.
It is in no way probable that many philanthropic organizations will quickly meet the benchmarks set by the Gates Foundation. Moreover, initiatives like the Giving Pledge, which Gates and Buffett founded in 2010 to entice their high net-worth peers toward dedicating over half of their net worth to philanthropy, are yet far from creating a sustainable tradition. But all this, including the lags behind best practices, could make advising on philanthropy a more interesting pursuit for Lebanese private banks.
There are precedents from world-leading private banks. Not only do big names operate their own foundations for giving and corporate citizenship but organizations such as Credit Suisse, UBS and Lombard have instituted philanthropy advisory services as part of their offerings for high net-worth clients. Again, the what-for of giving could be an underexplored and twice -- socially and financially -- profitable niche for private banking in Lebanon.
How to be ethical?
The how of ethical private banking starts with affirmation of the best existing practice. As John Dagher, a Lebanese private banking veteran and current CEO of Julius Baer (Lebanon), put it , "Every banker and every bank should put the client as their prime focus, without any other interest." Conflicts of interests between giving the best advice to clients and pushing for sales performance in product campaigns must be avoided and he would not agree to rewarding employees on product campaigns, said NECB's Dib. "Understand your client and make her or him understand what he or she really wants. One thing that is important is that you have sometimes to contradict your client -- if he wants to take risks that are higher than what you [see as good]," he advised on the ethics topic.
Experience of criminal behavior in top financial centers such as rate-fixing in the long-running Libor scandal and countless examples of ethical failures in banks that helped custom ers get away with tax crimes have taught that the implementation of ethics requires significantly more than being honest in the dealings with the client. Being their banker, it can be a serious ethical failure to prioritize clients' financial interests over the community's financial interest. When going as far as evading the law in the process, misguided focus on a client's private interest over the public rule puts a banker's personal future at risk, not to forget reputational damages and financial punishments for the bank.
To reduce financial crimes in a banking hub as much as possible, regulations and supervision are the first line of defense. The second anti-crime rampart are codes of conduct and internal controls within the bank. The third element in keeping bankers ethical is a multi-layered tradition of best practices and ethical behaviors that ideally stretches from acculturation to values in one's family and childhood environments to training in ethical behavior during school and university studies and later on, continual education and job-training programs.
There are some elements that could be utilized to the advantage of Lebanon in quietly building capacity as a private-banking hub, especially in a regional context. "If we compare to the Gulf Cooperation Council, we definitely have more human resources for private banking. We have a strong banking sector and we have a very strong central bank, which has given a lot of power to the capital market authority as a regulator which we did not have before and which is even better for us," said BLOM's Abboud.
Lebanon's central bank has, in the past, been able to keep the market's many bankers closer to the straight and narrow than other supervisory regimes were able to do, judging from the evidence of violations in hubs like London, New York and Geneva. Incentives for a much stronger ethic are at least not inconceivable if the private banking industry here were to agree on setting up new beacons of integrity and ethical advisory services that will contribute to sustainable profitability. One way of reasoning for ethics is simple and practical: by knowing that they have more to lose from ethics violations than to gain from acts of corruption, most people will make the rational choice. The additional good news is that the managers of our private banks seem to be in agreement on the potential to make honesty a competitive edge.
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