Private banking (i.e. Banking services targeted at wealthy clients) in the Czech Republic is becoming increasingly competitive as domestic and foreign players battle it out for the country’s wealthiest clients, who are making increasingly complex demands.

In the past, private banks tended to work in a confidential world, where the privacy of their client was paramount, and where investment results were discussed behind closed doors and not repeated even among close friends.

Today, however, performance is becoming an important weapon in business development and marketing strategy for private banks. Most experts agree that prospects for Private Banks in the Czech Republic look rosy, especially if they show they can adapt their products and services to local demands.

The fight for clients is only at the beginning and it will get a lot harder within the next few years. Naturally, many banks have seen the writing on the wall and intensified their private banking activities in the Czech Republic. Their activities take various forms: from increasing the number of relationship managers to creating new CEE divisions to setting up representative offices.

In the past, private banks tended to work in a confidential world, where the privacy of their client was paramount, and where investment results were discussed behind closed doors and not repeated even among close friends.

Today, however, performance is becoming an important weapon in business development and marketing strategy for private banks. Most experts agree that prospects for Private Banks in the Czech Republic look rosy, especially if they show they can adapt their products and services to local demands.

The fight for clients is only at the beginning and it will get a lot harder within the next few years. Naturally, many banks have seen the writing on the wall and intensified their private banking activities in the Czech Republic. Their activities také various forms: from increasing the number of relationship managers to creating new CEE divisions to setting up representative offices.

“Economists report that a college
education adds many thousands of
dollars to a man’s lifetime income -
which he then spends sending his son
to college.” – Bill Vaughn

Recognizing HNWI’s sophistication and expectations

Traditionally, private banking has been viewed as very exclusive, only catering for high net worth individuals with liquidity over USD 1 million. The rationale was that such high levels of wealth allow these individuals to participate in alternative investments such as hedge funds and real estate. Furthermore, this level of wealth often prevents liquidity problems. However, it is now possible to open some private bank accounts with as little as USD 50,000.

In the Czech Republic the lack of demand from cautious investors has in the past hindered the development of “true” private banking services. With public acceptance of newfound wealth still in doubt, affluent Czechs were primarily interested in offshore investing and would have been happy with modest performance. Back then, private banks relied on the stock markets to carry their clients into respectable returns. Structured products constituted three percent of all portfolios, hedge funds in most cases were not widely researched or recommended, and diversification usually meant duration spreads.

The bear market, however, together with the emergence of hedge funds promising absolute returns, resulted in disillusionment with private banks, and HNWIs sought other firms to manage their investment. Today, greater transparency and the growth of onshore private banking means that many high-net-worth investors have to consider tax implications and are insisting on better performance.

They are no longer afraid to ask questions. Ines Schober, head of private banking at Commerzbank in Prague explains: “The main difference between clients in the Czech Republic and clients in, say, Germany is that here wealth has no historical background. That means there are no old established trade families who have been wealthy for a long time and therefore bound to a private bank for ages.” That means if a bank wants to win over new clients, they need to offer services that exceed their competitors, and they can’t count on loyality.

“The main challenge we see in the Czech Republic is in changing private banking from a “red carpet” approach (i.e. selling more or less retail products in better premises) to offering a complete individualized service with tailor made products and building long term partnerships with clients,” says Martin Loubr, head of private banking at Ceska Sporitelna. Or as Jan Prachar, director of private banking at Sal. Oppenheim in the Czech Republic, points out: “We see challenges especially in quality of services because, on one hand, the HNWI segment has been significantly growing and demanding high standard of services and, on the other hand, there have been just a few entities offering real private banking and not only redistribution of investment funds or some kind of investment advisory.” Sal. Oppenheim follows a thoroughly “openarchitecture” approach (i.e. searching for best solution/ best advice no matter whether products belong to Sal. Oppenheim or not), rather than being a boutique of in-house financial products. What does this mean for the client? Prachar continues: “In the majority of cases, banks in the Czech Republic are trying to sell only in-house products or products from their own group. One of our success factors is our unique business model – our representative office has been established in accordance with Czech law and is registered with the Czech National Bank. However, accounts and securities portfolios are kept abroad. This gives a unique combination of offshore Private Banking with a local presence – in other words: our clients have an offshore account but can meet their private banker any time they want.”

Wealth management with an investment banking touch

Private banks have long been seen as great for service, but second-best in investment performance. So how important is the product (not service) differentiation for retaining HNWI customers? To be sure, private banks have been polishing up their act, investing in research and thirdparty products to diversify portfolios and win back market share in asset management from other financial service providers. Private banks now aim to match their clients with the most appropriate options. In most cases HNWI have the means to access a larger variety of conventional and alternative investments for wealth management purposes.

The majority of banks asked which products or services they have seen demand for mentioned structured products and alternative investment. Many products have an element of structuring to them – CPPI, static floors, leverage, optionality, and so on. “Also, clients are increasingly won by offers of capital-protected products,” notes Josef Benes, CEO of CSOB Asset Management. “The investment pattern of the typical Private Banking client is some kind of short-term risk free exposure. However, that does not match with his desire to invest into more sophisticated and more riskier products. The client’s knowledge about the products must further increase,” he adds.

Ceska Sporitalna offers a complete portfolio of private banking products and services, notes Martin Loubr, head of private banking at CS. “The strong position of our asset management company IsƒĺS, and the strategic partnership with Erste bank, together with our experienced and licensed private bankers, allows us to offer a wide range of products and services, such as professionally managed profiled portfolios, tailor made investment solutions, structured and guaranteed products, etc. Ceska Sporitelna is currently expanding its regional activities and introducing new products like FQI, a Real Estate Fund, and others.” Defining a winning strategy The outlook for the private banking and wealth management sector looks bright as global wealth creation continues apace. Nevertheless, private banks operate in a rapidly shifting environment, making it crucial to respond to new trends in order to capture a greater share of wealth.

Moreover, understanding the driving factors behind the needs of the wealthy and successfully meeting these needs will be vital to future performance in an increasingly competitive market. Defining a winning strategy, however, is not an easy task, since HNWI seem to be a moving target.

Asking the right questions is crucial in order to succeed: Is the target client of the private banks shifting from wealthy retirees to business family owners? Is it easier starting from the business family and then engaging the entrepreneur as a private customer or the other way round? Evaluating and capitalizing on these growth opportunities will be critical for private banks in the Czech Republic over the next years.

Hedge Funds

Mutual funds for the super-rich

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of over $1 million, along with a significant amount of investment knowledge. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

Nowadays, hedge funds use dozens of different

strategies, so it isn’t accurate to say that hedge funds just “hedge risk”. In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

Hedge funds are similar to private equity funds, in many respects. Both are lightly regulated, private pools of capital that invest in securities and compensate their managers with a share of the fund’s profits. Most hedge funds invest in very liquid assets, and permit investors to enter or leave the fund easily. Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are “locked in” for the entire term of the fund. Hedge funds often invest.