☀️☕️ Citispam: Private Bankers hit the phones

📊 Also: US record high #11; Berkshire trims Apple; China crowded short, Mag7 crowded long; Nikkei partying like it’s 1990; Japan in recession, falls behind Germany (also in recession) 🎓 Private Banking

📈 Market Roundup [16-Feb-24]

US large-cap S&P 500 closed 0.58% UP ▲

Tech-heavy Nasdaq Composite closed 0.3% UP ▲

Pan European STOXX Europe 600 closed 0.68% UP ▲

HK/China’s Hang Seng Index closed 0.41% UP ▲

Japan’s broad TOPIX closed 0.28% UP ▲

📝 Focus

  • Citispam: Private Bankers hit the phones

📊 In the Markets

  • US record high #11; Berkshire trims Apple; China crowded short, Mag7 crowded long; Nikkei partying like it’s 1990; Japan in recession, falls behind Germany (also in recession)

📖 MoneyFitt Explains

  • 🎓️ Private Banking

💸 Personal Finance Corner

📝 Focus

Citispam: Private Bankers hit the phones

Citigroup is implementing new measures to revitalise its struggling wealth management business, including tracking relationship managers' client calls and discussions. Mirroring practices long in place in investment banking, private bankers must submit call reports detailing all client conversations, with a push to contact clients at least once every 90 days.

The aim is to increase investment product sales and asset management fees, particularly targeting clients of theirs with significant net worth but no investments with Citi, as identified in a McKinsey review. The new move reflects efforts by Citi's new head of wealth management to boost performance in the underperforming division – despite CEO Jane Fraser's emphasis on growth in the division, Citi's private bank revenues fell 17% in 2023. 

“... core pillar of our strategy [that] will improve our business mix by adding more fee-based revenue and drive improved returns”

Citi CEO Jane Fraser on the wealth management division (March 2023)

The strategy aligns with industry trends as banks like JPMorgan Chase and Morgan Stanley capitalise on stable fee-based profits from wealth management. (Ironically, MS massively scaled up its own business when it acquired Citi’s Smith Barney wealth management unit after the GFC in 2008.)

..... ▷ The remuneration structure for private bank relationship managers is designed to motivate them to drive business growth by delivering outstanding service and cultivating strong client relationships. Of course, many private banks also emphasise a fiduciary duty to act in the best interests of their clients. 

Most private bank relationship managers are compensated through a hybrid structure combining several elements:

1. Base Salary: This provides a stable foundation income but is typically lower than in other financial services sectors.

2. Bonuses: These are performance-based and can be significant, often tied to asset under management (AUM) growth, new client acquisition or revenue generated.

3. Fees: Some banks may compensate RMs with a portion of the fees they generate from client transactions, such as sales of investment products or trading commissions.

5. Incentives: Additional rewards might be offered for exceeding targets, achieving client satisfaction benchmarks or participating in cross-selling initiatives.

6. Some banks provide incentives for retaining high-net-worth existing clients and maintaining long-term relationships.

..... ▷ Some banks are shifting towards subscription-based models where RMs receive a fixed fee form the client regardless of AUM, encouraging long-term client relationships.

The subscription model has a stronger presence in Europe compared to other regions, particularly in Switzerland, Germany and the Netherlands.

The subscription model is gaining ground in other regions like Asia and the Americas, but adoption rates are generally lower than in Europe.

..... ▷ RM’s are often incentivised to offer products with higher potential commission structures such as these:

Structured products: These complex, somewhat customised investment vehicles often involve embedded fees and higher commissions compared to standard investment options.

Alternative investments: Private equity, hedge funds, real estate and other alternative investments typically carry higher management fees and performance-based bonuses for advisors.

Complex life insurance products with riders and additional features can also yield higher commissions for private bankers.

📊 In the Markets

Stocks in the US closed at record highs on Thursday, the 11th record high for the S&P 500 so far this year, as retail sales declined more than expected, boosting hopes for Federal Reserve rate cuts. (MFM: CME!)

US retail sales unexpectedly dropped 0.8% in January, with auto and gasoline sales weighing heavily, though partially from the effect of chilly weather and price discounts, easing some of the knee-jerk concerns earlier in the week about high inflation and boosting investor sentiment. 

On the still red hot US labour market front, initial claims for the week ended Feb. 10 were marginally lower than Wall Street brainiac estimates.

Bets for rate cuts in May were little changed at 40%, with June at roughly 80%, as implied by futures prices via the CME's FedWatch Tool

So far, 80.3% of S&P 500 companies have beaten earnings expectations, slightly ahead of the annual 76% average, according to LSEG data.

Warren Buffett's Berkshire Hathaway trimmed its Apple stake by selling 10 million shares in Q4 2023, reducing its position by 1.1%. Despite this, Apple remains a significant part of Berkshire's portfolio, with a 5.9% stake valued at $174 billion by year-end. 

Buffett first invested in Apple in 2016, on the recommendation of Todd Combs and Ted Weschler, either of whom could be his successor at the helm of the firm. (Greg Abel was recently named CEO, handling operational aspects, but investment leadership remains separate.) Berkshire's top holdings also include Bank of America, American Express and Coca-Cola. In Q4 2023, Berkshire increased its holdings in SiriusXM, Chevron and Occidental Petroleum. 

During the year, Berkshire exited its investments in payments business StoneCo, insurers Globe Life and Markel Corporation, homebuilder DR Horton, General Motors, UPS and Procter & Gamble.

Bank of America's February Global Fund Manager Survey shows that going short Chinese stocks is becoming even more popular. This trade was already the second most crowded trade for several months, only behind long positions on the Magnificent Seven. (MFM: Uninvestable China?)

Still Magnificent, still the most crowded - Image credit: The Magnificent Seven (1960) / United Artists via Tenor

The survey also signals a shift in investor sentiment, with optimism on global economic growth hitting a high not seen since February 2022 and two-thirds of fund managers expecting a soft landing. Fund managers prefer growth over value stocks and have boosted global equity allocation to a two-year high, with allocations to cash and defensive stocks decreasing. Optimism stems from anticipated lower interest rates, with only 4% predicting higher short-term rates.

Asia-Pacific markets rebounded after mostly falling on Wednesday, with Japan's more export focused benchmark Nikkei 225 rallying to close above 38,000 for the first time since 1990, while the broader based Topix saw smaller gains.

Japan’s exporters love the weak Yen as much as its investors love ultra loose monetary policy - Image credit: Tenor

Japan entered a technical recession as its GDP contracted for a second consecutive quarter. Japan's fourth-quarter GDP fell 0.4% annually, massively missing the growth of 1.4% expected by Tokyo’s Finest, and grew by 1.9% for the whole of 2023. In absolute terms, its gross domestic product (GDP) stood at $4.2tn meaning that Japan lost its place as 2023's third-largest economy to Germany (at $4.5tn but facing its own growth challenges) while future growth won’t be helped by the country’s ageing, shrinking population.

In 2023, the German economy shrank by 0.3% due to a combination of factors, including higher energy costs and weaker industrial demand. Germany’s dominant industrial base, excluding construction, fell by 2% during the year and household consumption also declined. Despite recent price declines, elevated living costs and interest rates continue to affect economic growth. 

With a heightened risk of a second consecutive year of negative output, Germany may experience another year of stagnant growth in 2024.

📖 MoneyFitt Explains

🎓️ Private Banking

Private banking emerged in 18th-century Europe, catering to high-net-worth individuals (HNWIs) and families with bespoke financial services. Discretionary investment management, estate planning, and access to exclusive products characterised the space. 

Wealth management, broader in scope, evolved in the 20th century to serve a wider range of affluent clients, often including financial planning, retirement planning, and tax advice alongside investment management. 

Both prioritise personalised service, long-term relationships and sophisticated solutions for complex financial needs, and typically yield higher margins on individual clients. 

However, overall profitability may vary as personalised service from relationship managers (RMs) and compliance demands raise costs.

Complex client structures, international reach, and high transaction volumes make them susceptible to money laundering activities. 

The relationship between private banks and government officials (Politically Exposed Persons, PEPs) presents unique challenges and raises ethical concerns

And terrorist organisations also often use complex financial networks to fund their activities, potentially involving private banking channels.

Stringent Anti-Money Laundering (AML) and Know Your Client (KYC) processes and ongoing monitoring are crucial, but balancing these with client privacy remains a delicate balance. 

Facilitating or turning a blind eye to tax evasion also pose legal and reputational risks. Balancing client discretion with reporting obligations and navigating cross-border complexities is a minefield. 

The FATCA (Foreign Account Tax Compliance Act) was enacted by the US in 2010, requiring foreign financial institutions (FFIs) to report information on US account holders to the IRS, a significant operational and cost burden for private banks globally.

💸 Personal Finance Corner

Learn something new by exploring MoneyFitt’s article of the day!

You can find this content and much more on our MoneyFitt personal finance app - optimised for Singapore - here.

📸 Capture your audience's attention

Engage With a Community of 7000+ Like-Minded Investors

To learn more about advertising with us, reach out to [email protected] with the subject “MFM Sponsorship” or book directly with us here.

How did you rate today's email?

Login or Subscribe to participate in polls.

Join the conversation

or to participate.