[Kabar-indonesia] Asia's Private-Banking Bonanza [+How to Clone Switzerland]

[Joyo at aol.com]

also: How to Clone Switzerland; and How to invest like
a multimillionaire

Time Magazine
Issue cover dated Aug. 28, 2006

Bespoke Banking

Asia's burgeoning class of millionaires and
billionaires offers a vast new market for the world's
wealth managers. A Special Report on the
private-banking bonanza

BY NEEL CHOWDHURY | SINGAPORE

In a conference room in Singapore's Conrad hotel in
early august, a gathering of Credit Suisse Group
employees is in the throes of an intense role-playing
exercise. As part of their training to become private
bankers, the recruits take turns acting out the roles
of bank "relationship managers" and their wealthy
clients. Taped to the wall of the room are posters
offering helpful tips on such challenges as "Resolving
Skepticism" and "Resolving a Misunderstanding." Under
the stern eye of Penny Radcliffe, head of Credit
Suisse's in-house training program, their performances
are carefully scrutinized and criticized. One stylish
and confident young woman playing the part of a
private banker is chided by a colleague for not asking
enough questions about the client's family. A young
male trainee, with the stressed-out look of someone
taking his college-entrance exams, is admonished for
asking too many pointed questions too quickly while
neglecting to acknowledge the needs of his client with
solicitous nods and smiles. After all, when it comes
to selling advice - and financial products - to the
rich, earning trust is the first order of business.
"Relationship managers are forever eager to propose
the right solutions," says Radcliffe. "We're always
trying to say, 'Slow it down.'"

Slowing down, however, is the opposite of what's
happening in private banking in Asia, where the
business of helping wealthy individuals manage their
fortunes is growing so fast that there's a shortage of
bankers. The industry's largest players are planning
for a rosy future: Citigroup Private Bank, a division
of U.S. financial-services giant Citigroup, says it
has already captured half of Asia's approximately 88
billionaires as clients, even as it launches
operations in the relatively untapped markets of China
and India. Also expanding their Asia footprints are
Swiss behemoths such as Credit Suisse and UBS. The
latter, which is already the world's largest private
bank with $1.32 trillion in assets under management,
had just 153 private bankers in Asia Pacific six years
ago; earlier this year that number reached 600, most
of them working in Hong Kong and Singapore. "By 2015,
we expect the Asia-Pacific market to be bigger than
the European market," says Kathryn Shih, the Hong
Kong-based head of UBS's wealth-management operation
in Asia Pacific. "The opportunities are huge." Says
Sebastian Dovey, managing partner of Scorpio
Partnership, a London-based consultancy to the
wealth-management industry: "Asia Pacific is where
most private banks are placing their bets right now."

That's because there's so much room for growth.
According to a 2005 report by Credit Suisse, only
about one in five wealthy Asians uses private-banking
services, which run the gamut from investing in
stocks, hedge funds and private equity to providing
tailored advice on everything from estate planning to
buying the right Learjet or yacht for your family. At
the same time, the region's robust economic expansion
is creating a population explosion in the
champagne-swilling classes. Most private banks sell
their services only to those who are, in the industry
jargon, "high-net-worth individuals" (HNWIs)?people
with fortunes of at least $1 million. The number of
Asians who attained that status hit 2.4 million last
year, up 7.3% from 2004, according to the 2006 World
Wealth Report by Merrill Lynch and human-resources
firm Capgemini. That compares with 2.8 million HNWIs
in Europe, where the growth rate last year was 4.5%.

Indeed, Asia is minting more millionaires at a faster
rate than just about anywhere else. The number of
Indians and South Koreans achieving millionairedom
last year surged a remarkable 19.3% and 21.3%,
respectively, while Indonesia and Hong Kong recorded
double-digit growth. The wealth of millonaires in the
region is expected to grow 6.7% a year through 2010,
according to the report, compared with 3.7% for
Europe. Roman Scott, a vice president at Boston
Consulting Group (BCG) in Singapore, says the soaring
economies of China and India are behind the boom: "If
you open up economies for two billion people in 10
years, multiplied by strong market performance and
fewer capital controls, you get a phenomenal amount of
wealth creation."

Last year, Asia's HNWIs were worth a total of $7.6
trillion, according to Merrill Lynch and Capgemini.
That large number belies popular misconceptions about
the private-banking industry. To the uninitiated,
private banking is an exclusive little world of secret
Swiss bank accounts and starchy "wealth advisers"
plotting corporate takeovers and tax dodges with their
superwealthy clients over lobster and Château Margaux.
While the banks do offer many perks, it is no longer
such a rarefied niche market. For many financial
institutions, private banking is increasingly crucial
to the bottom line. For example, 46% of Credit
Suisse's pretax banking profit in the second quarter
of this year was generated by private-banking
operations. While retail banks must focus on volume by
hawking me-too products to millions of less-wealthy
customers, private banks can rack up bountiful
revenues by offering a wide range of lucrative
services to a smaller number of rich and superrich
clients. It's not uncommon for a top private banker to
thrive with as few as a dozen clients, who are happy
to pay richly for personal guidance on such esoteric
matters as, say, reducing taxes, setting up a
low-risk-high-return hedge-fund portfolio, investing
in emerging-markets property or establishing a
charitable foundation. "The profitability comes in
because the client has many different relationships
with the bank in terms of private equity, real estate,
trusts and stockbroking," explains Deepak Sharma,
chief executive of Citigroup's global
wealth-management arm for Asia and the Middle East.
"This relationship is very deep and very broad." It
can also be very close-knit, going beyond the nuts and
bolts of standard personal finance. Citigroup Private
Bank and UBS host wealth-management training sessions
for the sons and daughters of their clients, for
example, helping them prepare to manage their
inheritance or even take over the family business.
Kaven Leung, managing director for Citigroup Private
Bank's north Asia and Canada operations, says he
regularly takes trips to New York with the family of a
multibillionaire Hong Kong tycoon to meet with market
analysts and fund managers. Says Leung: "We try to
address both the financial needs and the human needs"
of customers.

Although the current scramble for Asian clients is
driven by the region's growing wealth, the seeds of
the boom were sown not by prosperity but by adversity.
In the past, Asians have tended to manage their money
without professional help, and to stash a lot of it
conservatively in cash, savings deposits and real
estate. "The Asian rich have had a high propensity to
hold cash," says Scott of BCG. "That was why private
banking didn't take off for a long time in Asia." But
several economic shocks -including the tech-stock
crash of 2000 and the 9/11 terrorist attacks the
following year - prompted the world's central bankers
to slash interest rates in an effort to revive
economic growth. With returns on savings deposits
falling to around 1% (or even lower in Japan), Asia's
wealthy were roused to seek alternatives. Today, they
tend "to expect a lot more return from their
investments" than investors do in other regions, says
Shih of UBS. Clive Bannister, the London-based CEO of
HSBC Group Private Banking, notes that Asians are more
"hands-on" in their investment decisions than the
bank's European clients - and less willing to wait for
returns to be realized. "There is no doubt that the
investment time horizon for many of our Asian clients
is shorter than it is for our European ones,"
Bannister says. Asia's wealthy also tend to be younger
and to have made their money through their own
entrepreneurial efforts, while there is more inherited
wealth in old-world Europe.

To meet the demands of this growing demographic of
impatient and increasingly sophisticated Asians,
private banks now offer a slew of new investment
products. One of the most popular: so-called
structured notes, which are complex derivatives that
often pay a guaranteed minimum return like bonds, or
pay above the minimum depending upon the performance
of other asset classes, such as stock-market indexes
or commodities. "The beauty of structured products is
you can tailor them to clients' needs," says Gary
Tiernan, head of product management for Deutsche Bank
in Asia. It's a buoyant enough business that Deutsche
now has a structured-product team of five or six
people in Singapore alone, catering to private-banking
clients there.

Some banks go even further in offering products that
provide not only profits but that aura of exclusivity
and sophistication that the client with everything may
be inclined to prize. One vehicle with almost
irresistible snob appeal is the "Ultimate Wine Fund"
offered by the private-banking arm of the French giant
Société Générale Group. Available primarily to
customers of SocGén's Asian private bank, the fund is
linked to a specially created Cayman Islands firm
that, acting on the advice of wine experts and auction
houses, buys and stores select vintages. Investors
wanting to cash out after the minimum one-year holding
period may redeem their shares for actual bottles of
wine, which can be drunk or resold at a profit (or
loss) by a wine broker. "It's a physical fund, and
it's very liquid," quips Daniel Truchi, the CEO of
SocGén's private-banking operation in Asia. The
minimum investment in the fund: $300,000.

Such offbeat offerings indicate the growing need for
private banks to distinguish themselves from
competitors in a fragmented market that's ferociously
competitive. The largest global private banks in Asia
are UBS, Credit Suisse, HSBC and Citigroup, but there
are scores of others, and no single player is
dominant?Citigroup, which manages roughly $70 billion
in Asian private-banking assets, is one of the
top-three regional players, yet it still controls just
3-4% of the Asia market. With customers up for grabs,
selling services can be about marketing the
sizzle?bragging rights and a sense of privilege?as
well as the steak. Thomas Meier, head of Asian private
banking at Bank Julius Baer, one of Switzerland's
oldest private banks, argues that his institution's
classic pedigree gives it a particular edge in Asia.
Headquartered in Zurich, the firm started out more
than a century ago as a simple foreign-exchange office
on the city's exclusive Bahnhofstrasse, where
Switzerland's largest banks - and costliest jewelers -
are housed. "Asians love history," says Meier. "If you
can show them 120 years of history, it gives them an
enormous level of comfort." Other firms find their own
ways to impress, not least with a seductive patina of
opulence. A stark, cool modernism pervades Credit
Suisse's Singapore office, while the Persian rugs and
somber oakwood in Citigroup's office across town
convey a reassuring, grandfatherly solidity.

The biggest challenge for now is not, in fact,
attracting clients but finding and training enough
qualified staff to service them. Asian private bankers
differ from their European counterparts, according to
Credit Suisse industry analysts. They tend to be
relatively young (average age: 35). Yet, because of
the proliferation of esoteric investment choices,
their work is becoming more complex than ever before.
"The technology in private banking has evolved
tremendously," says SocGén's Truchi, exacerbating the
need for more sophisticated bankers. "It's gone from
simple brokerage services to hedge funds and
derivatives." Says BCG's Scott: "The biggest pitfall
is that customers are getting more demanding, but the
talent base isn't able to [meet] their demands."

The problem has become so acute in Singapore - which
aspires to become a regional hub for wealth-management
- that the government has helped to create a
vocational school to groom aspiring private bankers
(see next story).

One result of this gap between client demands and the
ability of a single bank to satisfy them is that many
savvy Asian clients open several accounts and play
bankers off each other to get the cheapest price.
"Some of the serious guys have four to five accounts,"
says Scott. Another result is rising salaries as banks
tussle with one another for talent. Industry
consolidation may be the inevitable endgame. Only the
biggest banks will be able to satisfy the growing
salary demands of private bankers, so middle-tier
players may gradually be squeezed out. "The big will
only get bigger," says Didier von Daeniken, head of
private banking for Credit Suisse in Southeast Asia.
"As a middle player, it's not easy to make money
because [staffing] costs have risen."

For now, though, there's a sense that the party has
only just begun, with much of the expansion
opportunity driven by the recent opening of the
financial sectors of China and India to foreign
private banks. Having joined the World Trade
Organization five years ago, China is required to
start making its banking market more accessible to
foreign firms in 2007. In anticipation, Citigroup
opened a private-banking office in Shanghai in
March?the first such office on the mainland?in a bid
to attract some of the 300,000 Chinese millionaires
that it reckons are currently underserved. "With the
kind of wealth that's been created in the last 10
years or so, clearly there is a lot of raw material,"
says Citigroup's Leung. "There's a high savings rate,
just under $1 trillion in assets have been
accumulated, and it looks like that number will double
in the next decade or less." Citigroup expects China
to become the single largest private-banking market in
Asia outside Japan.

India, too, is becoming a hot spot. Its pool of
millionaires is growing roughly three times faster
than China's, according to the 2005 World Wealth
Report; Indian assets under management stand at $307
billion and have been growing roughly 15% a year,
according to BCG. Much of the activity is now focused
in Bombay, but Citigroup, for one, is planning for
rapid expansion in other key Indian cities, too. "You
need to be on the ground in Calcutta or Delhi to offer
domestic products," says Citigroup's Sharma. In the
next three to five years, he aims to have as many as
100 offices and roughly 1,000 employees across India,
up from about 100 employees in the private-banking
operation today. The next generation of private
bankers had better learn fast. Asia's burgeoning band
of millionaires will be counting on them.

With reporting by Adam Smith/London 

---------------------------------------------------------------

Time Magazine
Issue cover dated Aug. 28, 2006

How to Clone Switzerland

Tiny Singapore is becoming a wealth-management haven
by cleverly mimicking what made Zurich and Geneva rich

By NEEL CHOWDHURY | SINGAPORE

Several years ago, executives with Singapore's major
private banks came to the government with an enviable
problem. Asia was minting so many rich people, and the
lucrative business of managing their wealth was
growing so rapidly, that there weren't enough skilled
private bankers to go around. The talent shortage was
so acute that banks reportedly were hiring local
hairdressers and car salesmen and turning them into
private bankers. They were also stealing employees
from rival banks. "There were a lot of complaints to
the Monetary Authority of Singapore about poaching,"
says Annie Wee, a former private banker with Credit
Agricole Indosuez in Singapore. "Clients began to
complain, too."

The business-friendly Singaporean government came up
with a solution: In 2004, it helped to establish a
Master of Science degree program at Singapore
Management University (SMU) geared to churning out a
stream of bright, socially savvy private bankers.
Besides offering instruction in financial black arts
such as macroeconomics and quantitative analysis, the
one-year course teaches students "soft skills" needed
to forge relationships with demanding clients,
including cross-cultural etiquette tips. "All the
bankers want hard-charging types, but our successful
students are more low-key and soft with people," says
Wee, who today is CEO of the Wealth Management
Institute, a government-backed educational
organization that oversees the SMU program. That's why
students are taught, for example, that "if you go to a
Chinese birthday party, you don't wear black," says
Wee, or that "Thais don't like to have their heads
touched."

To keep its economy chugging, the Singapore government
in the past has implemented farsighted policies to
attract electronics manufacturers and biotech
start-ups - and the masters program at SMU is part of
another official quest: Singapore is determined to
become a private-banking haven to rival Switzerland.
Several years ago, the city-state's leaders recognized
that despite its transparent legal system, low taxes
and stable government, Singapore (population 4.2
million) really wasn't big enough to challenge Hong
Kong or Tokyo as an Asian center for investment and
merchant banking. But tiny Switzerland manages to
punch way above its economic weight in private
banking. Why couldn't Singapore exploit the same
opportunity in Asia?

That's what its bureaucrats set out to do. In an
effort to create an atmosphere that would encourage
the world's wealthy to move their assets to Singapore,
over the past several years "the government studied
Switzerland very closely and created something as
good," says Roman Scott, a private-banking expert with
Boston Consulting Group (BCG). Among other changes,
family-trust laws were amended to make the transfer of
wealth from one generation to the next easier - and to
offer sanctuary from high estate taxes in the U.S. and
Europe. In addition, rules protecting customer
confidentiality were strengthened. Divulging private
financial information is now punishable by a fine of
up to $78,000 and a prison sentence of three years,
significantly more draconian than Switzerland's
maximum punishment. "You're given an extra measure of
confidentiality in Singapore," says Leslie Menkes, a
Singapore-based managing director for Morgan Stanley's
private-banking arm.

One feature of the Swiss banking scene was
deliberately left off the blueprint: Switzerland's
increasingly burdensome taxes. Under pressure from the
European Union, which was worried that many of its
residents were stashing money in Swiss accounts merely
to evade taxes, Switzerland last year began phasing in
a 15% withholding tax on personal interest income for
E.U. citizens (the rate rises to 35% in 2011).
Singapore, meanwhile, was lowering taxes. Nonresidents
who park money in Singapore banks pay no taxes if that
money is earned outside Singapore, and investment
gains earned in the city-state (from stocks, for
example) are also exempt from tax.

That doesn't mean that legions of rich Europeans are
suddenly closing their Swiss accounts and moving their
money to Singapore. After Switzerland implemented the
withholding tax, "very little happened in terms of
asset migration," says Sebastian Dovey, managing
partner of Scorpio Partnership, a London-based
consultancy to the wealth-management industry. "The
big gain for Singapore is not to take assets away from
Europe," he says. "The big gain is to attract assets
from within its own region. And [Singapore] is doing
that tremendously." For now, though, it still has a
long way to go before it can claim to be a
wealth-management capital on a par with Switzerland.
Assets under management at Singapore private banks
total about $200 billion, says Ong Chong Tee, deputy
managing director of the Monetary Authority of
Singapore. That compares with $3.71 trillion in
Switzerland by the end of 2005.

But according to Ong, assets under management in
Singapore are growing by 20% a year. Growth rates like
that make it the fastest-growing private-banking
market in the world, says Scott of BCG. And the
world's largest financial institutions - among them
HSBC, UBS and Citigroup - are expanding their
Singapore presence. Credit Suisse, for example,
currently employs roughly 500 private bankers in
Singapore, more than any place outside Switzerland -
and the bank has plans to hire 100 more this year.
Bank Julius Baer, the venerable Swiss private bank,
has similarly high expectations. "We're trying to
position Singapore as a second leg [after Zurich] to
our operation," says Thomas Meier, head of the
company's private-banking arm in Asia. Says Didier von
Daeniken, head of private banking for Credit Suisse in
Southeast Asia: "The [Singapore] government is the
smartest on earth in terms of promoting the place as a
center for private banking."

Among those who are reaping the benefits is
Singaporean Lim Chee Hoong. After earning an
undergraduate law degree in Great Britain and working
at law firm Clifford Chance Wong in Singapore, Lim,
now 28, had a change of heart about his choice of
career. "I found litigation aggressive and
contentious," he says. Seeking a less confrontational
career, he plunked down the $30,000 tuition fee needed
to enroll in the private-banking program at Singapore
Management University. Before he had even graduated,
he'd bagged a job with Morgan Stanley's private bank
in Singapore. "The way to move forward in this
competitive industry," he says, "is to think out of
the box, to do things outside your conventional
portfolio." That's a lesson Singapore knows by heart.

With reporting by Adam Smith/London 

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Time Magazine
Issue cover dated Aug. 28, 2006

Putting on the Ritz

You don't have to be superrich these days to invest
like a multimillionaire

By MARC FABER

No wonder the rich get richer. They have advantages
that the rest do not. Their wealth gives them access
to eager-to-please private bankers, bespoke
money-management services and sophisticated investment
vehicles that are out of reach for the merely solvent.
But when it comes to investing, does membership of the
supposed élite truly provide an edge worthy of envy?
Sure, the rich can buy kid-glove professional
guidance, but they pay dearly for it, with no
guarantee of superior performance. Investing is
sufficiently difficult that even the most talented and
knowledgeable private bankers and brokers often make
costly mistakes; they can also be tempted to sell
their clients investment products that generate the
highest fees rather than those with the highest
returns.

Even if you're not that well heeled, there's every
opportunity to buy into a cornucopia of solidly run
mutual funds and other compelling investment vehicles
available to the general public. These funds pool
money from retail investors together with billions of
dollars contributed by high-net-worth individuals and
financial institutions. Within each fund, everyone's
money is managed exactly the same way. In fact, little
guys may even have an advantage if they do their own
homework instead of relying on financial planners or
private bankers to tell them which funds to buy -
typically in return for fat advisory fees that erode
overall returns.

It is true the rich have access to specialized
vehicles such as private equity and venture-capital
funds, which invest for them in leveraged corporate
buyouts, property in emerging markets, not-yet-public
companies and other frequently high-risk, high-reward
assets. Having more investment options can help
individuals diversify their portfolios, in theory
boosting returns while lowering risk. But the ability
to diversify is no longer the exclusive province of
multimillionaires. For example, thanks to the
increasingly global operations of brokerages and stock
exchanges, ordinary investors these days can quite
easily buy shares of companies listed on most foreign
stock markets. The range of financial products
available to retail investors has also exploded. Want
the stability and income stream offered by commercial
real estate? From Singapore to France to the U.S.,
listed shares of real estate investment trusts (REITS)
offer a simple way to invest at a low cost in a
professionally managed portfolio of properties.
Exposure to commodities? Exchange-traded funds (ETFs)
are index fund-like vehicles put together by firms
like Barclays Global Investors to track a wide variety
of assets including gold, oil and uranium, as well as
stocks sectors such as technology and entire countries
like Taiwan or South Korea?all at an enticingly low
cost.

What about hedge funds, which have become so popular
with rich investors? Because of wealth restrictions,
most are closed to small investors. (In the U.S., you
need to be worth at least $1 million to participate.)
But this isn't a tragedy for the little guy. Although
hedge funds' flexible investment strategies are
supposed to allow them to perform well in both bull
and bear markets, a Princeton University study
published last year found that from 1996 through 2003,
average hedge-fund returns did not even match those of
the Standard & Poor's 500-stock index. One reason:
hedge funds typically charge annual management fees of
at least 1%, plus 20% or so of any gains. And they're
under tremendous short-term performance pressure - if
they lose money their clients are gone. That makes it
tough for managers to take a contrarian, long-term
investment approach, which can be enormously
profitable for those with patience.

Maybe some of the perks enjoyed by the rich are not so
wonderful, then. Think of it this way: in the global
investment casino, the snacks may be tastier and the
liquor pricier in the VIP rooms - but punters rich and
poor all face the same odds.

Marc Faber is an emerging-markets expert and publisher
of The Gloom, Boom & Doom Report, a monthly investment
newsletter 

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