Recent announcements of recruitment ambitions across the globe at major private banks should ring alarm bells to the industry instead of New Year's bells to headhunters. For wealth managers looking to make a move, however, 2006 could prove a profitable year.
Credit Suisse, UBS, BNP Paribas, SG Private Banking, US Trust, Bank of America, Morgan Stanley, Lehman Brothers, Merrill Lynch and Citigroup are among the major houses all citing significant double or triple digit increases in front line commitments in 2006. The optimism backing the expansion commitments comes after 12 months of solid business performance at almost all these institutions and a recognition that 2006 is going to be the Year of Distribution.
In this context, Credit Suisse Private Banking (CSPB) announced it will increase global headcount by 275 within 24 months. Of these new hires, 100 will be in the Asia Pacific region. Here, the bank already appointed 75 advisers in 2005. The new headcount distribution elsewhere will be up to 60 in the Middle East, 90 in Europe and 20 in Latin America. Clearly, the bank's chief executive Oswald Grübel has set his sights on reclaiming much of the ground lost between CSPB and rival UBS and he recognises more front office staff is the route to this goal.
The scale of Credit Suisse's recruitment requirements should be set against the needs of others. Collectively, the US houses have indicated a desire to beef up headcount by about 500. The European firms are turning equally aggressive. For instance, SG Private Banking has indicated that in Asia alone it plans to hire 100 more to boost total headcount to 500 in the region.
Where's the fire?
The alarm bell should be that most banks appear to think they can resolve their own immediate needs by poaching, and thus recycling, 'talent' from other institutions to meet immediate asset gathering targets.
However, this is an out-of-date short-term solution and will not meet the scale of the asset requirements set by many of the players. Indeed, the growth targets are alarming some more prudent observers, although it could be argued those targets are too timid in the context of fantastic growth rates in emerging economies in Asia, the Middle East, Central and Eastern Europe and Latin America.
If one assumes the growth rates are right, this does not resolve a more fundamental problem around primary resources. If all the expansion drive headcount totals are added up, the major private banks are collectively expecting to recruit up to 2,000 private bankers across all markets with some suggesting that 50% of the intake will be in Asia.
This, based on our estimates, will mean 10%-20% of the total global labour force in private banking will be shifting desks. This number is in addition to the normal attrition and movement occurring in any given year. Such a turnover level is massive, disruptive, and costly.
Comp ratios to rise
The latter point is worth examining. The strategy for most private banks announcing major recruitment drives appears to be to throw money at the problem - either to retain top talent or poach it. CSPB has stated it has set aside 'significant' sums to support growth. SG has committed €10m for investment in its Asia Pacific private banking initiative. The net result is that the private bankers know they might soon be hitting pay dirt if they 'play their book' right and the industry enters into a wage war not seen previously.
Indeed, Boston Consulting Group announced wage inflation is likely to sweep the market with Asia Pacific an area where private bankers will become a much more expensive commodity. The firm estimates base salaries are going to increase by 20%-30% in 2006. Their research indicated experienced relationship managers (assume over 7 years) will command salaries of USD250,000 to USD350,000 with bonuses accounting for 40% of the package. Top performers and senior private bankers can expect wage packets of USD700,000 to USD800,000 and some suggest seven figure packets may become more commonplace.
The rising salary costs may be met initially by the ongoing strong revenue inflows from 2005 hitting the bottom line. Many banks experienced 20%-30% hikes in net revenues which should cover next year's wage inflation. However, in the longer term, these costs naturally impact on the overall profitability of the business.
Less poaching, more growth from within
Moreover, if the banks are not hiring prudently, such as people who sell the fact that they performed at their previous institutions, then they may be stuck with expensive non-performing resources in the longer term. Remember, client account migration is falling at a rapid rate as banks have become much better institutionally at holding on to their assets. Indeed, analysts are already trying to factor this into the future cost-income calculations.
One answer to this, in the view of Scorpio Partnership, is to also incorporate a home grown younger talent pool in to the planning process. In essence, some of the war chest money set aside for 2006 should be invested in training talent organically and encouraging recruits to join the industry at a much younger age with a view to a longer term stable career path. It is worth noting here that CSPB recently was awarded accreditation in Singapore for its training program.
However, to date the per capita investment in training - particularly around learning innovative advisory and planning skills - is still woeful when set against the budgets for recruitment. Perhaps the market will need to go through another round of bad poaching before it finally gets the message?