Ray McGregor, Credit Suisse’s new managing director and head of private banking Australia, is no stranger to the industry, having spent several years developing sophisticated solutions for ultra-high-net-worth (UHNW) clients.
Nonetheless, he faces a significant challenge in growing the business at a time of economic instability and bearish investor sentiment.
Although the history of the bank dates back 150 years, with private banking originating in Zurich, Credit Suisse only launched an onshore private banking business in Australia in October last year.
But while it might be the new kid on the block when it comes to private banking in Australia, it has two distinct advantages with regards to operatÃ‚Âing in this new market environment.
Firstly, the firm operates under an advisory model, meaning it is more like an annuity business than a pure brokerage business, and that’s also the case for Credit Suisse globally.
It’s common in the Australian market to find private banks with transaction-orientated business models, whereby brokers are remunerated on a commission basis.
However, pure brokerage models are likely to come under increasing pressure going forward, as transaction volumes decline and cost-conscious clients scrutinise more closely the service being provided by those who advise them.
“We don’t pay our advisers on a commission basis, we pay [them on] a salary and bonus model, and we specifically do that so they are not incentivised to go through and have a transactional-type business,” McGregor says.
“We want the advisers to advise clients on how to grow their assets and to protect their assets, not to churn their assets. As well-intentioned as an adviser is, at the end of the day if he gets paid twice as much for doing twice as many trades, it’s hard for him to resist. Our charges are based on assets under management, rather than at the transactional level… so that way we align the advisers’ incentives with the customers’ interests.”
Secondly, being part of an investment bank allows the private banking arm to leverage off capabilities that would not otherwise be available in-house.
Without this, many of the services the private bank provides would have to be outsourced to a third party investment bank, introducing a new source of risks.
“One of the issues private banks dealt with was they were selling, for instance, a product provided by Lehman [Brothers] to their private banking customers,” McGregor says.
“Perhaps some of them were white labelling it and some were not but either way, you had one bank providing another bank’s product. Some of the end customers wouldn’t have been looking at a Lehman product, they would have been looking at whoever sold it to them as [if it were] their product, so by having another bank go under which you had absolutely no control over, that had an impact on your clients.
“By having an investment bank [in-house], we know what shape the investment bank is in because it’s part of the Credit Suisse group. It’s the same funding and same credit rating; we can source product from [the investment bank], distribute that and not have to worry about third party bankruptcy risk, third party reputation risk et cetera. We do maintain the open architecture so if we want to use third party product we can, to make sure that we don’t end up with pricing issues internally by just having one source, but it makes the internal product become a lot more attractive.”
McGregor admits the market environment throws up new challenges for private banks in Australia, but believes Credit Suisse is well placed to tackle them.
He says clients have become far more aware of the risks involved in investing, and are placing greater value on “good advice”.
Credit Suisse’s private banking client base has investable assets greater than $1 million per client and spans executives, large business owners and UHNWs.
“Customers are valuing advice a lot more; they’ve become a lot more cautious because they’re aware that there are more risks and there’s a move towards more simplicity,” McGregor says.
“There’s also been a big flight to quality; what [clients] invest in, the advice they are looking for and the bank they are with, they want to make sure is quality, because suddenly they realise that banks can also go under.
“Diversification has become a lot more tolerable to people. Their expectations of the returns they’ll get back have also become a lot more realistic. Having someone that you trust who is, “a”, well informed and, “b”, has your best interests at heart, counts a lot more.”
In the aftermath of the global financial crisis, McGregor believes there will be more demand from private banking clients for products and solutions that fit their individual needs.
This is where being an integrated global bank comes in handy, he says, because clients have access to Credit Suisse’s full international product suite.
“If you’ve only got one product to sell, in the extreme example, that’s all you can sell even if it’s not really suitable for the client,” he explains.
“You keep trying to fit that product to someone else’s problem instead of looking at what problem they have and saying ‘what’s the best fit for this’. Let’s say you have a mining executive in Australia with 90 per cent of his net wealth tied up in the stock of that mining company. Quite often we’ll talk about diversification to protect his wealth; it’s tough to get true diversification in the Australian sharemarket right now if you are a commodities-based company, because pretty much everything is being impacted by commodities prices. By being able to offer international exposure you get better diversification.”
Before taking up his new role on October 21, McGregor was co-head of Solution Partners, a unit of Credit Suisse’s private banking division which specialises in delivering investment banking-style services to institutional and UHNW clients in Asia Pacific.
He first joined Credit Suisse’s investment bankÃ‚Âing business in 1996, and has worked in credit and equity derivatives throughout Asia and the US, having held roles based in Singapore, Tokyo, New York and now Sydney.
At Solution Partners, McGregor primarily dealt in institutional-style services but in Sydney he has been given the task of looking more at the traditional business, and making the investment banking capability available to UHNW clients.
Credit Suisse recently purchased a Melbourne-based corporate advisory business Hindal, which also operates in Sydney and specialises in the purÃ‚Âchase and sale of small businesses, and McGregor believes this dovetails well with Australia’s ageing population.
“Australia has a large segment of the market – the Baby Boomers – that are looking to retire and sell out of the business,” he says.
“That’s not something a private bank can offer, but with this acquisition it’s something that Credit Suisse can offer to our private bank clients if they have a business which is their key asset. We can handle the sale for them and help them with re-investment of the proceeds.”