Investment Banking & Private Banking - Essay Example

 Introduction Financial institutions play a great role in shaping the economy especially in the service industry. The benefits accruing from economic development trickle down to the financial sector from individuals of high net worth and back to the economy through capital finance for further development. Investment banking is involved in provision of services to companies by advising them on the various transactions they may engage in, help them to acquire funds, give advice on mergers and acquisitions among other services. The private banking on the other hand is involved in provision of personalised financial banking services. It deals with management of wealth for high net worth individuals by protecting and growing their assets, offering financial solutions as well as helping them to plan how to pass wealth to their inheritors among others. Wealth management involves provision of financial services to high net worth individuals and their families as well as individuals with low assets. It involves management of a client’s assets and liabilities. These individuals have amassed a lot of wealth in terms of assets and other investments and thus need financial advice on how to manage this fortune. The manager gives clients advice on how to plan finances and also on acquisition, maintenance and preservation of wealth. They also get advice on matters of wealth transfer to their successors. All this wealth can be attributed to economic development. If the economy is in a crisis, the environment for doing business worsens and the wealth declines though not for all cases and this consequently affects the private banking and wealth management industry negatively as it depends on the high net worth individuals. This paper is a critique of the economic development as a driver of the global private banking and wealth management industry. Economic Development It is the economic progress of a nation depicted by improved standards of living, literacy and life expectancy. Rapid development leads to increased demand for financial services for further development. Economic development occurs where the political and structural environment is conducive and is enhanced by the availability of abundant natural resources, productivity of labour and capital investments. A country can decide to have a market economy which is controlled by supply and demand or planned economy where the government is the controller or have a mixed one where decisions are made by state and consumers. All these systems affect the financial sector in one way or the other. According to Schnitzer (1999), a state controlled economy does not react to consumer needs thus affecting their purchasing power and their net worth and consequently downward trend for private banking. There are various indicators of economic development which shape the trends of private banking and wealth management industry. These include; economic growth (GDP/GNP), level of education, life expectancy, level of poverty, standard of living, technological advancements, level of agriculture, industrialisation and political stability among others. Private Banking and Wealth Management Industry Private banking and wealth management involves serving a very wealthy clientele. The size of this industry is dependent on economic indicators. Its clients are sophisticated due to high literacy levels and technological advancements and hence they demand high quality services based on individual needs. The expansion of services by the industry is as a result of high demand for wealth management by high net worth individuals brought about by economic development. These individuals are diverse in terms of age, lifestyle and behaviour. They also are very wealthy thus they have assets that need protection and investments which need to grow. They therefore demand for structured financial planning as well as many other services associated with wealth. The industry has expanded or improved in many areas as economy grows in order to cope with rising demand. There have been changes in products offered, pricing strategies, improved services, client segmentation and management, operations as well as new talented entrants in to the banking industry among others (Maude, 2006). Services Innovation Due to resultant effects of economic development, the private banking and wealth management industry has no choice but to cope with the trend. People are more educated and have knowledge of the existence of financial institutions through media and other advertisement agencies. This means therefore that many individuals flock to the industry to get financial services. These individuals have different needs, are sophisticated and active and have strong desire to control their wealth (Weldon, 1998). The private banks and wealth managers therefore have to device ways of improving or expanding their services to deal with the large number of sophisticated clients. The standard of living of population improves due to increased income as a result of rising GNP prompting the need to acquire assets or get involved in new investment. The industry therefore has the responsibility of offering technical advisory services to the potential or existing investors so that they can make the best choice of investment. The advisory services vary depending on individual needs and banks and wealth managers should device ways to handle advisory processes effectively. Economic development produces professionals in all fields of the economy. Private Banks and wealth managers employ this staff for research purposes. The industry needs to diversify its research to find out the available investments emerging as the economy grows so that they can get the clients to invest in such markets and be able to get favourable returns. They also expand their services so as to get funds to finance more investments as client base expands. They then buy and sell assets and carry out all transactions on behalf of the client if instructed to do so or they can employ the services of a broker (Maude, 2006). Another service area of diversification by private banking and wealth management industry is risk management. The generational change brought about by per capita income increase, sophistication and high standard of living has resulted to attitude change towards risks. The crime level is also reduced in a developed economy. These individuals have changed from being risk averters to risk takers. This makes clients not to fear the risks and uncertainties associated with wealth creation and inheritance. In a developed economy, life expectancy is extended by ensuring clean environment and reduction of poverty levels as well as provision of healthcare services. There is also price stabilisation through fiscal and monetary policies as well as tax regulations (Kollias et al. 2006). The industry therefore has the responsibility of offering products such as long term investments. They also deal with taxation issues and legal procedures while ensuring that the investments are secure and earn returns. Clients thus do not need offshore services, onshore services are encouraged. Product Innovation Economic development results to increase in wealth of individuals and consequently the demand for specialist and structured products. It is also characterised by extensive use of modern technology hence change in lifestyle. The private banking and wealth management industry therefore expands its range of products to suit customer needs. They employ the services of experts to handle the clients and their investments such as legal advisers. They also make sure that the clients are able to penetrate the inaccessible markets and in a cost effective way (Weldon, 1998). This is enabled by improvements in infrastructure due to economic development and presence of highly trained researchers. The use of modern technology and communication makes clients well informed about their investment portfolios as well new market trends. Clients can also access services at all times such as the use of products like master card which enable the users to access services anywhere and with ease (Chorafas, 2006). The use of ATM is an improvement in technology. The wealthy individuals do not have time to line up in banks to access essential services. They just have to use ATM and their needs are satisfied in no time. There are those who use online banking at the comfort of their homes or even mobile banking in settling their bills instead of travelling to payment points hence saving time. All these technological advancements by the industry are a result of economic development. Improved education system has enabled nations to produce experts in various fields of the economy including financial sector hence the development of products which are market competitive and satisfactory to clients. The industry also diversifies its sourcing for these products and put up structures for product management. They also have to improve on their distribution channels so as to give clients satisfactory services hence they reduce the use of traditional channels and instead use emerging channels. Client Segmentation With economic development emerges various types of clientele and the private banking and wealth management industry segments them according to their needs. Maude (2006) observes that private banks serve only high net worth individuals while wealth management industry serves those with low assets as well the high net worth individuals and their families. Clients differ in terms of age, level of education and lifestyle. Development in agriculture which is considered mostly as the work of women and the back bone of the economy empowers them financially. Agricultural practices have improved drastically due to economic development. Modern farm implements, inputs and new farming methods lead to increased yields. There is poverty reduction and proper health care which increase labour productivity and consequently capital income. Commercialisation of agriculture has brought about a class of wealthy individuals who emanate from selling farm outputs. These wealthy individuals turn to private banking for advice on alternative investments and for external finance so as to expand their agricultural activities. Private Banks and wealth managers therefore have segmented this group of people according to their agricultural needs. Historically, the place of women was in the kitchen but nowadays due to modernisation, women are educated and can now participate in development activities (Pillai et al. 1995). They work in all sectors of the economy and are paid proper wages. Due to increase in their income and social status they demand for financial services to cater for their needs. The industry therefore has introduced services to cater for this client segment of wealthy and sophisticated women. There is also the emergence of a new client segment of heirs. These individuals inherit a lot of wealth, are young and more skilled than the older generation. Evensky (1997) observes that the heirs are usually eager to expand their investments even in areas that involve a lot of risks. The private banks and wealth management industry helps these people to manage their inheritance by giving them advisory services and engaging in real estate management on their behalf. Due to international trade, there emerges a new client segment according to geographies. Clients are widespread all over the world as they carry out businesses in various countries for they have a lot of wealth to invest. The private banks as their credit reference abroad and give them advice on international law regarding currency transfers and export regulations among others (Chorafas, 2006). Banks and wealth managers also act as a link for those transactions like large cash transfers which need approval overseas. The client base is very diverse and complex thus the industry have to device ways of dealing with each client needs hence industry diversification. Operational Innovation With complexity of client base due to diversification of investments, the private banking and wealth management sector has put in place various innovative ways of operation so as satisfy every client. Economic development is characterised by use of high technology and industrialisation and this leads to changes in the way customers behave. It becomes necessary to look for operations which are faster and efficient and available anywhere at any time in order to cope with the rapid economic development. The sector hence uses information technology support services in its operations such as automated teller machines, mobile banking, online banking and video banking among other (Akinci et al. 2004). By use of these services, it becomes easy to provide data and information on client’s portfolio faster. The bank and managers are also able to provide information on financial services available to a large number of potential investors thus expanding their market. Moreover the highly sophisticated wealthy individuals need high quality services which they should provide accordingly. Rapid economic development leads to greater demand for external finance for investment (Bodenhorn, 2000). The private banks and wealth managers therefore in their operations have to look for alternative sourcing to cope with the increasing demand. This has led to industry expansion of products and services so as to acquire more funds. Some banks own corporations although it is prohibited in some countries. They also engage in offering insurance services such as property and health insurance and real estate management among others. The managers’ device new operation techniques which produce desired effects by clients. The clients should be satisfied and confident with their services and security of their wealth even during inflationary times (Amenc et al. 2009). Private Banks and wealth managers hence improves on their research and risk management techniques to make sure the right decisions are made by investors. Wealthy individuals especially heirs are risk takers hence take up high risky investments and the banks should be able to ensure security and returns on those investments. The banks are lending institutions and due to economic growth, there comes up new investors who want huge loans and this prompts the banks to device ways of dealing with the high risks involved such as default. New Entrants Economic development is associated with high level of education and technological advancements. This has an effect on private banking and wealth management. Professionals from all sectors of the economy enter into the industry, which improves management of wealth. They get experienced relationship managers from all fields such as law and accounting to deal with client needs (Maude, 2006). This enhances service delivery as clients are served by competent and qualified professionals. The legal experts are useful in arbitrating family disputes regarding inheritance, dealing with creditors, tax issues and other legal matters. The accounts ensure that client portfolios are correct and up to date. The industry also engages the services of marketing professionals from different brands of goods. These professionals help in marketing the bank products to a wide area including the inaccessible areas. They give advice to the industry players on modern marketing strategies. This is aimed at convincing the new wealthy individuals from the growing economy to entrust their wealth on them. These professionals know the market well and can tell client preferences and therefore help in market segmentation. As Evensky (1997) notes, the industry uses sophisticated research techniques to find new ways of producing high quality products and thus attract more investments. The entry of new brand of operations staff is a great advantage to private banking and wealth management industry. These are mainly from the manufacturing sector which is as a result of industrialisation in a growing economy. These professionals are involved in developing new systems and delivery channels like internet for efficiency and profitability (Bradley & Stewart, 2003). They detect problems in an operating system, rectify them and test their implementation. They also ensure transactions are cleared and settled without hitches. With the presence of these professionals, the industry is ensured of smooth operations and better service delivery. Banks Formation Due to rise in demand for financial services and improvements in international trade as well as influx of foreign investors, it becomes necessary to establish new private banks to provide services to the expanded client base. The environment for founding banks is also conducive in a developed economy. There is political stability as well as legal and institutional structures hence creating a good environment for banking. Urbanisation is prevalent in a developed economy and so are its advantages. People acquire knowledge on various issues like productive health and there are various centres offering health care. This translates into a healthier and productive population who engage in more income generating activities. According to (Auty, 2001), population decreases due to productive health leading to a decline in dependency ratio and as a result, there are more savings, more investments and emergence of individuals of high net worth. This translates into a new market hence the foundation of more banks and wealth management offices. Population increase as a result of improved standards of living on the hand, leads to income inequalities and depletion of resources and consequently a decline in capital investments and strains in the industry. Some private banks and wealth firms consolidate in order to share costs. Pricing The emergence of high net worth clients due to economic growth and development has led to banks changing their pricing strategies to cope with increasing demand for funds and to ensure profitability. Lynch (2008) notes that pricing is widespread to make sure that interest on deposits do not supersede interest on loans. Private Banks are now involving themselves in provision of various services such as insurance products and investment management. The clients therefore have the advantage of getting various products at one place just like a supermarket and this saves them time. It also contributes to increased profitability for banks. Many individuals have changed their preferences from less risky investments to more risky ones and they borrow loans to fund these investments. The banks therefore charge a higher fee on those loans especially if there is a possibility of default. Less interest is charged to any client who is credit worthy. The interest rates also depend on the amount borrowed. Private bankers and wealth managers have also developed various payment products so as to convenience clients. Clients do not have to carry huge sums of money for transactions as they are provided with credit cards and debit cards for that purpose (Akinci et al. 2004). This has been made easy by use of technology which is one of the benefits of economic development. A transaction fee is charged to those firms who accept card payments and on the other hand, interest is charged to card users. This helps the industry to raise funds for further investment and to raise profit. Offshore and Onshore banking As economy continues to grow, more wealthy individuals emerge. They become more sophisticated as benefits of growth are felt and hence keep changing lifestyle and behaviour. The new generation of the wealthy has changed attitude towards risks and rewards associated with taxation. According to Weldon (1998), individuals now demand for more transparent and legal wealth management services. Previously, the wealthy used offshore services which are secretive and instrumental in evading tax. Instead of one keeping deposits in home country, he/she deposited it abroad for investment where tax jurisdiction is low and there is confidentiality and also for protection against political instability. Due to economic development, these views have changed over time. There is government intervention in stabilising prices and regulating tax and hence a good atmosphere for investment, there is political and financial stability (Arnold, 2008). The wealthy individuals therefore nowadays prefer transparency which is associated with onshore banking. Their wealth is thus subject to tax and foreign exchange rules of the country where deposits are kept moreover, the countries are offering attractive investment opportunities. However, offshore banking is still on the rise especially for the client segment of wealth concealing and illegal businesses dealers and also politicians although at a slow pace. Onshore banking is the most preferred in modern private banking. Management The private banking and wealth management industry will automatically have to review its management styles to ensure the high net worth individuals are served efficiently. The client base is wide spread and more sophisticated and hence require high quality services. The banks and wealth managers develop strong relationship with sectional managers to ensure they are satisfied and can deliver effectively. To achieve the desired effects, they give incentives to high performing managers in order to encourage and retain them. They also organise training in order to develop their skills and keep up with technological advancements associated with economic development. Private Banking and wealth firms also change the way they manage assets and investments to a more efficient way (Amenc et al. 2009). They ensure no errors occur in any transactions regarding clients’ assets or their deposits by employing efficient staff. This is enhanced by the high literacy levels and production of skilled and productive labourers associated with development. Asset Protection The industry is entrusted with the responsibility of ensuring that the assets of high net worth individuals are safe from creditors, lawsuits and are passed on to inheritors without hitches. There are technological advancements with economic growth and hence the banks also need to improve on existing structures or device new ways of protecting assets moreover, the client base is also diverse. The banks therefore act as trustees for clients and this reduces client’s tax liabilities as the assets are not included in estate of the deceased hence no tax on inheritance. The clients also have privacy since assets are not listed under their names. (Adkisson & Riser 2004) notes that this service is especially offered by offshore banks where there is trust and civil procedure laws to deal with trustees and creditors. Lending Economic development is as a result of capital investment and this means that there is heavy borrowing from private banks to fund investments. The high net worth individuals borrow in order to grow their wealth and cope with rising growth. The private banks are affected much by this heavy borrowing which is risky and hence have introduced measures to deal with the risks (Amenc et al. 2009). They now demand for guarantee for the loans so that in case of default they don’t incur loss. They also charge a higher interest rate to risky client’s loan. Most private banks are moving from asset management towards lending services due to increased demand. They also offer wide range of credit facilities like mortgages and use of credit cards. As peoples standard of living improves they acquire self esteem and their needs change accordingly. They require material needs such as better housing and other luxuries hence the mortgages. Taxation The government encourages investments by regulating taxes .It gives tax incentives to those who would like to invest in domestic market so as to avoid offshore banking and encourage growth (Maude, 2006). Private banking and wealth managers should be able to advice their clients accordingly. Reduction of taxes encourages consumption and reduction of prices and consequently the standard of living improves. This enhances growth of wealth management industries and private banking due to increased savings. Environment Economic development policies are aimed at ensuring a better life for the population. The government ensures that its people live and work in a clean and secure environment. It also ensures availability of essential services like provision of safe drinking water, good sanitation and proper health care. As businesses are put up they should ensure corporate social responsibility (Hopkins, 2007). The private banking and wealth management industry therefore has a responsibility to ensure a proper working environment for its employees. They should also ensure good relationship with the surrounding communities by offering social amenities like recreational facilities in order to improve their welfare. It is also their responsibility to ensure they do not pollute the environment while discharging their duties. Conclusion The global private banking and wealth management industry has had many improvements steered especially by economic development. The industry has transformed its operations to the use of advanced technology and therefore it has been able to provide services efficiently. It has also developed in terms of products and services .The advisory services are more technical and of high quality. Clients can access essential services anywhere at any time by use of technology such as ATMs, credit cards and internet banking. The industry has also been able to offer products like insurance cover and real estate management due to client demand and sophistication. Asset management has greatly improved because of the use of experts to handle and protect assets. Investments have grown are continue growing with time as a result of economic development. The industry has been able to acquire a large market. Due to the large market and diverse needs of clients, fragmentation of clients has become necessary .Offshore services are declining while onshore are increasing due to government intervention through tax incentives and increased investment opportunities in domestic markets. References Adkisson, J.,Riser,C. Asset Protection: Concepts and Strategies for Protecting Your Wealth. 2004. New York, McGraw Hill. Akinci,S., Aksoy,S., Atilgan, F. 2004. “Adoption of Internet Banking Among Sophisticated Consumer Segments in Advanced Developing Country”. International Journal of Bank Marketing .Vol.22, 3 pp.212-232. Amenc, N., Goltz, F., Schroder,D. 2009.” Private Bankers on Private Banking: Financial Risks and Asset/liability Management”. Journal of Wealth Management, Vol. 12, 3 pp. 39-50. Arnold, R. 2008. Macro-economics. 8th ed. Thomson Learning inc. Auty, R. 2001. Resource Abundance and Economic Development. 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