Coutts: For Queen and Country (and not just anyone with £500,000 in the bank)

Author: By Chris Hughes

Who should David Beckham pick – Coutts or Goldman? It may be Sven-Goran Eriksson who chooses England’s squad for Saturday’s match against Finland, but Beckham, along with Britain’s burgeoning number of new millionaires, has a tougher decision when it comes to choosing who to invest his money with. Coutts, the Queen’s bank, was long regarded as the premier bank for the world’s super-rich. But over the past 12 months, it has begun to attract competitors. Goldman Sachs, the mighty US investment bank, is among the multitude of money managers eager to persuade the stinking rich – from divorcees to lottery winners and football players to entrepreneurs – to deposit their lolly somewhere other than Coutts.

For more than three centuries, Coutts was the only game in town when it came to what is now called “wealth management”. The complexity of Britain’s financial regulation system, and the London Stock Exchange’s paper-based system for handling the share trading of private investors, were huge deterrents to new entrants. Then came internet share dealing and the creation of a single financial regulator in the form of the Financial Services Authority – developments over the past year which have made targeting the “mass affluent” a lot easier for banks.

One definition of the mass affluent is people with more than £100,000 to invest. True, they are a tiny minority of the nation’s investors. But in Britain they are the force behind 75 per cent of all invested money. It’s not a homogenous species, of course. Moving up the scale, the “core affluent” people have £250,000, or thereabouts, to invest. At the million-pound mark, the business centres on quality tax advice. Multimillionaires are less interested in getting richer than planning who will inherit their money.

For a bank, all these customers are easy money. Suppose a bank charges 1 per cent for managing a typical member of the mass affluent with £100,000 to invest. Stocks and shares have risen about 8 per cent a year on average over the last 50 years, which starts the bank off with a basic annual income of £80 per customer for doing nothing. As the client’s pile grows, so does the cut the bank takes. Still doing nothing, but counting. Factor in that the client is probably going to get richer, and the bank is going to be investing his burgeoning mini-fortune, and it is not hard to see why Coutts is no longer alone in this market.

Competition is the last thing Coutts needs now because it has only just returned to profitability after a period of poor performance it would rather forget. This may be one of the easiest businesses in the world, but Coutts, with a virtual monopoly since being founded in 1692, got it wrong. Under NatWest, its former owners, Coutts went astray in the 1990s, pursuing a policy of international expansion aimed at pursuing scale. The business fell into losses after building bad debts in the wake of questionable lending decisions. In 1997, NatWest called in a pair of management consultants to return the firm to health.

One of them was Andrew Fisher, made Coutts’ chief executive in May last year, which marked a break with tradition. A former Unilever executive, 39-year-old Mr Fisher’s background was not in banking, but branding. His hobbies are not country sports, but extreme sports, notably flying to mountaintops in a helicopter and skiing down.

It has not been easy putting Coutts back on a firm footing. When he arrived at head office in the Strand in London, Mr Fisher entered an organisation whose culture was one of nervousness, “if not of fear”. He says: “People were extremely frustrated and morale was low. The strategy was to build the biggest private bank in the world. But that means nothing to the customer. Coutts was expanding into areas in which we had no competitive advantage, and the staff were wondering whether the bank would break even.”

The atmosphere at Coutts is very different today. The morning I visit, I scurry into the lift with bright-eyed Coutts workers and a diminutive man pipes up: “Going up! What floor? Two, Three?” It’s Mr Fisher, the boss himself. We get out at the second floor – planning permission restricts the use of the top floor for offices – and take a long stroll through the vast open-plan area dotted with computer terminals that looks more like a newsroom than a toffs’ bank.

“I’ve never really enjoyed formality in business,” says Mr Fisher. “Working at Coutts should be fun. This organisation needed a formal approach with respect to its customers, but a relaxed attitude when it came to management. No one stands on authority now – we operate on merit. If people think we are making mistakes, they e-mail and tell me.”

But Mr Fisher saw plenty of potential in Coutts in 1997 too. “It had a superb brand, but also the best customers in the world – customers to die for.”

No one dares say so on the record, but Coutts’ problem was that before Mr Fisher came on board, NatWest had let in the riff-raff. One City executive, who worked for one of NatWest’s rivals trying to build up a wealth management business in the 1990s, says: “NatWest did a good job at desecrating the value of the premier pukka wealth manager.”

Another Coutts observer says: “There were too many children of children let into Coutts, with daddy acting as guarantor. Coutts can only work if there’s a lot of cross-selling of services, so there were a huge amount of staff giving service but not giving it back to the bank in terms of cross-sales.

“People who are really well-to-do will look at all sorts of different services. Let in the riff-raff and there will be too many insufficiently profitable customers. Coutts allowed too many people into what was meant to be an exclusive club. It should have stuck to friends of the Queen with lots of money.”

Even Mr Fisher is unforgiving of NatWest. “It tended to have extensive bureaucratic processes,” he says. “It was hard to get things done. NatWest really needed to be taken over.”

Today, Coutts customers must bring at least £500,000 to the party, and Mr Fisher has no plans to ease the rules. In the past four years he has launched 87 programmes to get Coutts focused back on what it did best – offering private banking with a supreme personal service. Each Coutts customer has a personal banker who advises on a full range of investment products, including hedge funds that gamble on the direction of stock markets.

“We could double our customer base overnight, but we’d halve our service,” says Mr Fisher. “This business is not all about winning new customers, it’s about serving our core customers.”

Still, he is happy to let slip that customer numbers are up 12 per cent since he put in his turnaround strategy. And Coutts’ new owners, Royal Bank of Scotland, which acquired NatWest last March, are happy too. Fred Goodwin, the RBS chief executive, puts in a call to Mr Fisher every fortnight. It would not be hard to offload Coutts to an international buyer, but most analysts believe Mr Goodwin plans to retain the bank for a while yet, at least until he has built up decent wealth management businesses within the high street branches of RBS and NatWest.

But in the City, there is plenty of scepticism about whether Coutts can keep up the momentum. Over the last six months, the bank has watched Lloyds TSB team up with Goldman Sachs and HSBC team up with Merrill Lynch, another US investment bank, to target the mass affluent.

If e-banking was last year’s financial services fad, this year’s is “wealth management”. Hew van Steenis, an analyst at JP Morgan, the investment bank, says: “Private banking is a great business to be in. A small proportion of people can provide access to a huge amount of assets. And unlike the mortgage market, customers don’t change their bank on a daily basis. Technology is allowing banks to provide premium services to the mass market. That’s what the whole buzz is about.”

Rather like e-banking, the wealth management industry is becoming crowded. “Very soon the wealthy middle classes will be spoilt for choice,” says Mr van Steenis. “The investment banks are heading downmarket, the retail banks are heading upmarket, and the independent financial advisers are looking sideways. They are all after the holy grail of an integrated ‘omnibus’ account for cash management and stocks and shares. In one sense they are right, because it’s a good opportunity. In another they are wrong, because so many people are going for it.”

John-Paul Crutchley, an analyst at Merrill Lynch, broker to Royal Bank of Scotland, says: “It’s an undefined market but a lot of resources are being thrown at it. Coutts has a head start, and a very strong customer base, but it’s not really a scaleable business. It is hard [for Coutts] to attack the mass market without diluting a brand based on cachet and privacy.”

Another analyst says: “At Coutts’ end of the market – customers with £500,000-plus – this business becomes international, with the Swiss banks leading players. The newly-moneyed might be lured by the idea of Coutts’s fashionable name, but when they look at its performance they just mightthink again.”

For the time being, the new entrants into wealth management are concentrating their resources on the lower end of the market – some will even accept customers with just £40,000 to invest – although no one is turning away investors in the half million-plus bracket. But Mr Fisher is not complacent, though he says the bank has lost so few customers he can name them. That’s easy to say, because the bank zealously guards its clients’ privacy.

And Mr Fisher has decided it is time to tinker with Coutts’s finest asset – the brand. He is in dangerous territory, for it is hard to overstate the power of a Coutts brand, which survived relatively untarnished despite the attempts made to broaden Coutts’ appeal when it was run by NatWest.

The brand alone is regarded as having retained customers for Coutts through its recent turmoil, so why play with it now? “I’m not sure whether people will want to give up a Coutts cheque book for a Goldman Sachs cheque book,” says Jon Kirk, banking expert at Fox-Pitt Kelton.

Mr Fisher seems to disagree. “We want to make the brand more current. We’ll keep the history, but we want to avoid being seen as stuffy or old-fashioned. The competition are out there to kill you and you must kill them first.”

The plans reflect the changing constituency of Coutts’ customer base, where royalty and the landed gentry rub shoulders with two-fifths of the England football squad, and lottery winners, for whose business Coutts competes aggressively. Still, there’s no question in Mr Fisher’s mind about the continuing importance of the royal connection.

“It’s a very important part of the heritage of the brand. It’s very important that we look after the most important people in the world. That doesn’t go away.”

What isn’t changing is the cornerstone of Coutts’ offering, the customer’s relationship with his or her Coutts private banker. These money-management experts are trained for 18 months in the various methods of making their wealthy clients richer. The army is split into divisions according to expertise, to deal with entrepreneurs, landowners, divorcees, athletes or entertainers.

“They are the sort of people who would instantly recognise your wealth and strike up a conversation with you about it,” says Mr Fisher. “They do more listening than talking. You might call them nosy, but I prefer to call them inquisitive.”

The landowner team has been particularly busy. Coutts has given preferential treatment to clients whose assets are affected by foot-and-mouth, sending letters of sympathy and providing remote office facilities for farmers trapped at home by the travel restrictions.

Mr Fisher reckons this approach gives his bank an advant-age over the US investment banks eyeing his market. He says they put themselves before their customers. “The big houses have a lot of in-house investment arms they feel under pressure to use – it’s a corporate ego thing. But we don’t have that, we can be independent, identifying the best asset managers in each class from around the world.”

It is too early to predict who will prevail, but there will be casualties. “It’s clear from the large number of new entrants that they can’t all be sustained by the market growth we see,” says JP Morgan’s Hugh van Steenis. “But it’s hard to sort the wheat from the chaff at this stage.”

This year is going to be a tough one. Stock markets are tumbling, and, by Mr Fisher’s admission, Coutts’s idea of wealth manage-ment this year is about retaining wealth rather than increasing it. Tough times indeed.

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