For years there's been a divide between how institutions and private clients are treated in terms of investments and other services. The author of this article at UBP argues that the divide is narrowing.

The boundaries between private and institutional clients can sometimes blur: an ultra-high net worth private individual who is the head of a single family office can be ranked as a private investor but also an institution, for example. For the most wealthy, their buying power gives them pricing power normally associated with a large pension fund, insurance firm or corporate. Even further down the spectrum, the differences are of degree rather than kind. There are different regulatory requirements in play, of course, and there are other differences (such as between “sophisticated” investors and lesser mortals) that have weight. 

Even so, a fading of the difference between certain investor types is important because it means that private banks and wealth managers will have to throw some old assumptions on the scrap heap and change how they treat clients. With parts of the financial arena becoming more commoditized and advisors under pressure to boost revenues and acquire new clients, understanding the terrain is more critical than ever.

To flesh out some of these ideas is Nicolas Faller, co-chief executive for asset management, Union Bancaire Privée, the Geneva-based private bank that operates in a number of regions. The editors are pleased to share these views and invite readers to respond, although this publication does not necessarily endorse all views of guest writers. Email tom.burroughes@wealthbriefing.com and jackie.bennion@wealthbriefing.com

Wealth management professionals have all noticed that every year the line between private and institutional clients is fading and their specific needs, which used to be so different, are becoming increasingly similar. And the trend is not a passing one. With the expectations of the two categories of clients converging towards ever higher standards, private bankers and asset managers have their work cut out to prove the added value of their products and services.

This convergence shows in several ways. Firstly, private clients are ever more demanding, being better informed, more digitally savvy, and more international. This is particularly noticeable in reporting: private clients are no longer satisfied with a standard performance report; they want to identify the sources of their portfolios’ returns with a breakdown by sector, asset class or manager. In short, they expect the same level of information and detail as institutional clients have been accustomed to for decades.

Off the beaten track
Another way in which demand is merging is that private clients are seeking to access new asset classes that had hitherto seemed to be the prerogative of institutions. Low bond yields have sent investors off the beaten track in search of less conventional solutions with higher return potential, such as private debt and insurance-linked securities. Whereas in the past private clients tended to stick to hedge funds and private equity when it came to alternative investments, now more and more of them are looking for ways to diversify their portfolios and reduce their volatility by moving away from traditional asset classes. 

All they are doing is copying institutional clients, which have long considered private debt an attractive alternative to bonds, but also a rather flexible tool for managing their assets and liabilities. Insurance-linked securities, in particular catastrophe (“cat”) bonds – bonds issued by insurance or reinsurance companies to transfer risk related to natural disasters – have also appeared and, in fact, have become quite common in private clients’ portfolios. 

The appeal of sustainable and socially responsible investing is also drawing private investors into an area that used to be the remit of institutions. After simmering below the surface for a long time, demand from institutional clients for that type of investments surged after the 2008 financial crisis. Private clients were slower to catch on, but they are now properly hooked. 

With awareness of environmental and social challenges spreading and the Millennials generation coming onto the scene, the movement keeps gaining momentum and may even exceed expectations. This is backed by responsible investing’s proven performance potential, especially impact investing, which targets companies that are seeking solutions to the current challenges, and those firms are looking the most likely to attract capital and achieve sustained growth over the long term.

In the case of absolute return, private clients were the trend-setters. Wealthy families and individuals were the first, in the 1970s, to go for hedge funds in a bid to achieve steady returns in all market conditions. 

At the time for institutional investors, which above all seek to outperform their benchmarks and preserve the balance between their assets and liabilities, absolute return was not the primary aim. However, they gradually started looking at hedge funds in the early 2000s in order to diversify sections of their global portfolios. The trend has persisted as institutional clients want solutions that can generate a minimum return without excessive risk-taking until financial conditions allow them to go back into bonds.

Value for money
Beyond their intersecting needs, private and institutional clients have a common creed: ‘value for money’. Both categories of clients are prepared to pay the price provided they get their money’s worth. And that value no longer depends solely on the quality of the management; it is also created by the private bank’s or asset manager’s ability to offer innovative products and tailored solutions that truly meet the clients’ needs.

With competition rife, and coming from the likes of passive management and robot advisors, the winners in our industry will be those that are able to offer tangible added value at an attractive price. It’s worth the risk: the need for managing clients’ ever-growing savings has never been bigger. The task comes with huge added challenges on both sides: in private wealth management the Baby Boomer generation is starting to scale back, and institutional clients still have low rates to contend with.