Proper Wealth - S2 Episode 3: High Networth Private Banking - Peter Izard (Investec) - Nova

Proper Wealth – S2 Episode 3: High Networth Private Banking – Peter Izard (Investec)

Paul Mahoney:                  Welcome to Proper Wealth with me, Paul Mahoney. Shall we discuss all things wealth creation with a focus on property? Today we’re discussing high net worth private banking. And joining me today is Peter Izard from Investec private banking. Thanks for joining us, Peter.

Peter Izard:                        Yes, good afternoon and welcome. Lovely to be here.

Paul Mahoney:                  High net worth private banking. Let’s start simple and build in complexity from there. What exactly is it?

Peter Izard:                        Okay, it’s a very good question and it’s something that we’re often asked. Let’s set the scene, so in simplistic terms you have what we call retail banks, which is in the high street, which the majority of us use and bank with and have for many years. And then you’ve got private banks and private banks are there to serve what we call high net worth clients. Whereas, the retail banks are there to serve the masses, the majority of us. Probably 95% of the population banks with a retail bank of sorts, whether it be a retail or maybe it might be a specialist bank, but under the guise of a retail bank. Whereas private banks far more bespoke and serve a specific sector of the market.

Paul Mahoney:                  Okay, so focused on high net worths as opposed to the vast majority of others. Okay. Let’s move on to the next term then. What is a high net worth?

Peter Izard:                        Well, very interesting. I mean, the regulators’ definition of a high net worth client, which is quite boring, but it’s a useful starting point, is that someone whose income, net income, is in excess of 300,000 pounds and/or net assets are over 3 million. So that sort of signifies the definition of a high net worth from a regulatory perspective. And some private banks use that as a basis for the entry level into their lending criteria. But of course, different private banks have different views. But essentially, high net worth are for clients who has a high income, normally well above the 300,000 mark and whose net assets are normally well above the 3 million mark.

Peter Izard:                        Now some private banks want both income and assets, some private banks will focus more on income, and some will be very happy with just assets. Of course, there is another key differentiator as well, is that many private banks, in order to be able to facilitate a loan to their clients, want what they require is called assets under management or effectually known as a UM. As a finance industry, we love our acronyms, don’t most if that makes sense. Now what assets under management are, is where a client brings investments to that bank, provides it to the bank for the bank to invest and grow for them, and on the back of that, they’ll provide a loan. And historically, that was the domain of private banks. As the markets evolved, some private banks or an increasing number of private banks now are offering what we call dry lending. And that basically in essence means that they will provide you with a loan on your own merits without the requirement of you actually having any assets deposited or invested with that bank.

Paul Mahoney:                  Okay, great. So all right, that all makes lots of sense. Okay. So for Mr. and Mrs. high net worth person, why would they use a high net worth bank as opposed to your retail bank?

Peter Izard:                        Yeah, well it’s a great question, Paul. And again, it’s something that comes up quite regularly. The retail banks are fantastic at doing what they call it fits the box, if that makes sense. If it’s a square peg in a square hole, it’s no problem at all. And many retail banks offer a fantastic service where it doesn’t touch the sides, for want of better words. You know? They’re very competitive on rates today, there’s a lot of liquidity in the market, so actually there’s plenty of choice. But high net worths are the opposite of square peg in a square hole. They’re completely the opposite. So their requirements are far more bespoken and actually more discerning. And what I mean by that is that they will have complications that the ordinary banks just simply cannot facilitate. Let me give you some real tangible examples of that. For example, you know?

Peter Izard:                        Many high net worths earn very high income, but that income will be denominated in a foreign currency, potentially. They’ll often be very highly bonused. So they might have a relatively low basic but a very high basic. They might have income from very wide various sources. They might have vesting stock or shares or buy to let portfolios or et cetera. You know? They might need to have multiple properties up that they put up as security and required to be cross-collateralized, for example. These are just some of the reasons for it. They may well need it in a trust structure or in a limited company structure, all of which in the very main the high street can’t handle. And of course there’s one of the thing, high net worth clients don’t buy ordinary, free up, free down, send me detached houses in a very simple location. They often buy properties with large land and the acreage with granny annexes, with structures that are titles that are complex, et cetera.

Peter Izard:                        So again, the high street is built to be able to facilitate to the majority, dare I say it, the vanilla type of lending, or in certain cases not quite so vanilla. The high net worth often are super complicated. And most high net worths do have large elements of complications that require that individual bespoke understanding of their market.

Paul Mahoney:                  Okay, that makes sense. So in essence, it’s around flexibility and suitability to a more complex type of client. Okay. That’s definitely something I’ve experienced, you know, with the retail banks being a tick box exercise and everything being very centrally managed and finding it very difficult to speak to someone who can make a decision outside of that. Whereas, it seems what you’re saying is with the private bank, the right private bank for that person, they probably will have someone that they can speak to that can make some more flexible decisions and make things happen in the way they want them to happen. Is that fair to say?

Peter Izard:                        I think you’ve articulated it perfectly. If I may use an analogy, which I think a picture paints a thousand words, if you excuse the pun. Most of us will buy a suit from a retail outlet, it may be Marks & Spencer’s, Next, or T.M. Lewin, whatever your taste is. And you’ll buy a suit off the peg and actually it will be quite competitive and the quality will be quite good and you’ll be very happy with your purchase and it will look perfectly fine. Okay? But just occasionally you may want to go to Savile Row. Okay? And you know that you’re actually going to pay considerably more, but that suit’s going to fit you like the proverbial glove. The service that you’re going to receive will make you feel $1 million. The quality will be like no other suit you’ve had and it will be made to measure. Okay. And it will fit your exacting requirements.

Peter Izard:                        I think private banks are the Savile Row of the tailoring world type of analogy, if that makes sense. Something that’s complete bespoke, that is actually made to order, that actually can fit to your individual specific needs. You will pay more for it, but actually, that is a price that you’re very willing to pay.

Paul Mahoney:                  I like that analogy. I’m going to reuse that. If you don’t mind me taking it from you.

Peter Izard:                        No.

Paul Mahoney:                  Okay. Little question for you. So you mentioned about criteria so far as what is a high net worth and the definition of that roughly being your 300,000 pounds a year of income, your 3 million pounds plus of assets. I know a lot of people that would partially fit that criteria, but most of them don’t pay themselves 300 grand a year, especially if they’re business owners. How does that work? Is that a part of the sort of flexibility that a high net worth bank would provide so far as understanding that?

Peter Izard:                        Yes. Well I think, again, business owners I would often deem as entrepreneurs in mind and in spirit. And actually, a successful business owner often only pays them, takes out of the business, what they need to take out to live. Because of course the more you draw, the more you pay in tax. And actually, again, that’s tangible. But a private bank that specializes in an entrepreneurial field would understand that and would be able to look beneath the accounts and actually taken, for example, things like retained profit. You know? I only draw what I need to, but if I needed to, I could draw far more. And then they can work out on that. It’s a great example of offering that bespoke requirement that isn’t tick-box lending.

Peter Izard:                        And I think what private banks really pride themselves with is understanding the client. Okay, so actually, before you can make any decision, you’ve got to speak with the client or their intermediary if they’re coming through from that channel and actually find out what it is, what’s their background, what’s their current situation, and where are they going? Because once you’ve got those three key components, you can then actually be able to provide what they require or not as the case may be. But again, it’s square peg, round hole, isn’t it, type scenario, if that makes sense. And it’s having that true understanding and that expertise that a private bank world by size is obviously very large loans in comparison, but the numbers that, the client numbers, are low compared to the retail space. But of course, that’s where you have the expertise. That’s where you have the staff, the private bankers in the main that really get to know their figures and understand their market. And that’s the key component.

Paul Mahoney:                  Excellent. Well look, I think we’ve done a great job there of establishing what high net worth banking is and what they can offer. So we’ll need to go to a break now. Join us after the break where we’ll relate high net worth banking to property.

Speaker 3:                          Property is a great investment option, but it’s one of the largest purchases that you’ll ever make. As individuals, we’re all limited by our resources. And regardless of our experience, knowledge, or time, we can achieve much more with the help of a qualified team and extra resources being available. Nova Financial specialize in assisting clients to achieve financial freedom through property investment. With over 100 years of experience, we shape your family’s future. To invest in property with absolute confidence, call us on 0203 8000 600. Or visit nova.financial.

Paul Mahoney:                  Welcome back to Proper Wealth. And today we’re talking about high net worth private banking. With me is Peter. So before the break, we covered in quite a lot of detail what high net worth banking was, who it relates to, why a high net worth would utilize it, and how it differs from other types of banking such as retail banking. We’re going to talk more about property, how that relates to property now. But before we go onto that, a fairly common thing that comes up is if someone is wealthy and they’ve got quite a bit of money, well why would they need borrowings? So can we talk a little bit around that?

Peter Izard:                        Yeah. Paul, it’s a question that I’m continually asked. And actually, many of the clients that we deal with actually have more than sufficient cash to buy their property outright. And so, it’s why do people who have the cash choose to lend? And there’s a number of reasons for that. First and foremost, let’s look at the current environment. The current environment today is that interest rates are at a historically all time low and competition with the liquidity in the market as a whole is ensuring that prices are still kept low, that rates are kept low, if that makes sense.

Peter Izard:                        Now, if you’re dealing with a serial entrepreneur or a high net worth client, actually what they borrow at and what actually they’re receiving on their assets are very different. And trust me, the borrowing is low and the asset appreciation is greatly higher, if that makes sense. So an entrepreneur will borrow at two and a half, 3% and he’s making a return on investment of 15%, if that makes sense. It’s a way of making their money work far harder. That’s the first key reason.

Peter Izard:                        Secondly, I think to most high net worth clients, debt is not something to be feared. Debt is something actually to embrace. And debt is a form of leverage that allows you to be able to further your business or to be able to further your investments or be able to further your opportunities. Cash is king, if that makes sense. So why would you invest it all into that, if that makes sense, you know? That’s another key consideration.

Peter Izard:                        Thirdly, of course, you have tax planning. Okay? So it might be inheritance tax planning, for example. Or it might just be that you need that flexibility. But many clients want to have debt registered against their estate because their accountant, having taken expert tax advice, which is absolutely essential in these scenarios, working in conjunction with your IFA as well, many of them are advised to have debt against their estate.

Peter Izard:                        So for the likes of you and I in the main, a mortgage is something that you wish to pay down as quickly as you possibly can. You get to the ripe old age of 50, 55 and you actually declare with a great grin, and you’ll say, “I’ve now paid off my mortgage.” And your life is complete, for example. And that’s the majority. And I understand that completely. The high net worth private bank sector, should I say, is the opposite, if that makes sense. They’ll embrace debt, they’ll see debt as an opportunity to make more money. And today is a greater extolation of that opportunity. So it’s something that’s to be embraced and welcomed and our market understands that. And private banks that truly operate in this market understand that as well.

Paul Mahoney:                  Yeah. Look, I tend to agree. It’s a conversation I have constantly about separating in people’s minds the difference between good debt and bad debt. And to me, the difference is good debt is investment debt. It’s what helps you better utilize your resources to create wealth. And as you say, it’s cheap. It’s usually tax deductible. And the reality is most people won’t reach their goals without using it. Whereas, bad debt is personal debt. It’s your home loan, your credit cards, your car loan. Those things, aside from perhaps the person you mentioned being the entrepreneur that can get a much better return on their cash, generally you want to try to get rid of those things. But separating those things and carrying good debt is generally a good thing and often a necessity.

Peter Izard:                        Yes, absolutely right. And I think that the key component there is knowing the difference between good and bad, if that makes sense. So unsecured debt, as you’ve given by way of example, often is predicated by higher rates, et cetera. And in the main, that’s not cost effective. Secured debt, the right lender sort of thing is very competitive and is longer term. And actually, you can make your money work. It’s all about maximizing your leverage to make your money work as efficiently as it possibly can.

Paul Mahoney:                  Yeah, okay. That makes lots of sense. So, okay. So we’ve spoken there a lot about high-net-worth banking and also why high net worths might borrow. If we can move on to the high net worth mortgage market, the current state of that market, what’s happening and where it’s going.

Peter Izard:                        Yeah. Okay. Well, I think there’s two ways of looking at this. First of all, there’s the actual market for the high net worth mortgage market. And then there’s the high net worth property market. And let’s take two in isolation, if we may, if that makes sense. If we look at the mortgage market, what we see here is that there’s lots of liquidity, as we’ve already articulated. And what we have seen is we’ve seen an increase in new lenders across the board. What’s very interesting is that to my knowledge, and I’ll be quoted on this accordingly, very few, if any new private bank lenders have originated in recent years, if that makes sense. The new lenders that are on the market tend to be the specialist lenders, some that are more widely known than others. So huge amounts of competition.

Peter Izard:                        The existing private banks are upping their game, as well, so that the market is full of liquidity and there’s banks, both private banks and retail banks, out there to lend. That means that competition is high. Inevitably, that means that rates tend to be on a downward trend, if that makes sense. You know? And it tends to mean that the criteria, the ability for the bank to allow more people to borrow in different, more flexible scenarios is increased. So the mortgage market is very healthy. And dare I say it, and I consider that I’ve always been thinking this, but never more so now, it’s a cracking time, if you’re a consumer, to borrow. Whichever market you’re in. It really is. The competition is having an effect on that sense.

Paul Mahoney:                  Yeah, I completely agree. And dare I say it, the B word, Brexit. I think a lot of people, just to shoo, that that has or will affect the mortgage or lending market. And certainly the feedback I’m being given is that it’s not. What’s your take on that?

Peter Izard:                        Yeah. Well, I can’t believe we’ve taken this long to mention the B word, but it’s something that just won’t go away. And we’ve got some very strong feelings on it. I think what Brexit is actually doing is it’s having an effect on the property market. But the effect on the mortgage market says that actually demand, we’ve got liquidity, we’ve got plenty of lenders offering, but perhaps the demand, the take up of that lending, is not as great as the lenders’ capacity to lend is, if that makes sense. So you’ve affectively got supply and demand in the consumer’s scenario rather than the other way round. Unlike the property market where, historically, and we’ll talk about that more specifically, that as an island, we never build enough properties. So longer term, there’s more demand to buy than there ever is, for people to buy, if that makes sense. There’s not enough houses, which basically means that even though they’ll go up and down, price rises in housing is inevitable because we’re an island and we just don’t build enough.

Peter Izard:                        In the mortgage market today, it’s completely opposite. We’ve got far too much supply and not quite enough demand. And I think that is partly Brexit focused on the sense that I think the average client out there, I’m not talking high net worth, but the average client out there, is thinking to themselves, “Do I move now? Am I really going to put my house on the market, for example? Unless I have to, I might just see how this plays out, for example.” However, I think that we’ve got to a point of what we call Brexit fatigue. Okay? And I think that really kicked in after the march when when we fought Brexit was going to be delivered. And then it became, oh, well let’s extend it to the end of October and sort of the can got kicked down the road. A lot of people I spoke to just turned around and said, “I’ve had enough. I want to move. I was waiting for Brexit. It’s not happened. I don’t know when, or dare I say if, it will happen, et cetera. I’m going to make that move now.”

Paul Mahoney:                  I’ve seen a similar thing. People that have been waiting two or three weeks for six months now. And it certainly seems that at least now or certainly by next month, they’re just going to make a decision and move anyway. Which I think is a positive thing. But what you’ve said there so far as lending ability is outweighing lending, borrowing appetite. That’s certainly a good thing for consumers, isn’t it?

Peter Izard:                        It’s a fantastic-

Paul Mahoney:                  It’s almost the opposite of what I’ve heard from a lot of people that they’re assuming that lenders are pulling back from the market, whereas in fact, they’re not, which I would say is a real positive.

Peter Izard:                        Yeah. From a consumer’s perspective, it is a real positive. In my humble opinion, I think that we’ve seen a couple of lenders recently pull out of the market in the retail space citing the competition is just too great. Right. You know, they’ve got margin compression, they just cannot compete with what’s going on. And I think that there will be more to follow, if that makes sense. Do I think that will happen soon? Who knows? I don’t think it will be a massive withdrawal of lenders, if that makes sense. But from a consumer’s perspective, the markets having [inaudible 00:22:52] , you know?

Paul Mahoney:                  So that’s very interesting. So yeah, there’s a bit of a balancing act there, I suppose. It’s not that lenders don’t want to lend because they’re afraid of Brexit. It’s because there’s so much competition that they can’t compete.

Peter Izard:                        Competition is a major fact-

Paul Mahoney:                  That’s interesting.

Peter Izard:                        What also though is as well, depending on how you as a lender are funded, if you are funded by retail deposits or if you’re funded by the wholesale markets, et cetera. That’s another consideration. And again, the retail lenders, the banks that we know on the high street, will almost predominantly be lended from what we call retail funding, from savers, if that makes sense. The newer entrants will almost entirely be wholesale funding through private equity or hedge funds or other means, if that makes sense. Now, Brexit could play a part here. Because in the event of, dare I say it, God forbid, a no deal, et cetera. Which no one really knows what the ramifications are and won’t until it happens. There could be an unstabilizing in the market. Do funders withdraw from that, for example? And of course, what’s the Bank of England going to do? You know? Latest commentary is that in the event of a no deal, everybody thinks that rates will have to come down. They’re in a position of wait and see themselves, if I make sense.

Peter Izard:                        So Brexit will have an effect, either an upward or downward effect on rates and that will then be passed onto customers one way or the other. But again, it’s a wait and see. It’s that really it’s that current thing that we all struggle with, which is uncertainty. We just don’t know. And that’s what’s feeding the market at the moment.

Paul Mahoney:                  Yeah. Which is a difficult one, isn’t it? Because all of the fundamentals seem relatively strong. It’s just that I don’t quite know at this stage thing. Which, for me, says that when we do know, the market will probably pick up quite substantially.

Peter Izard:                        I couldn’t agree more. Well, let’s talk about, we’ve talked about the mortgage market, let’s talk about the property market. Now, high net worths, as a whole, and let’s focus in on that high net worth arena, if that makes sense, predominantly they’re buying in London. Okay? And I see many high net worth clients from all around the world, international clients whose business or whose employers allow them to live anywhere they so desire. And I ask them time and time again, Mr. Client, you can live anywhere in the world. Why is it that you choose London?” And they come up with the same answers.

Peter Izard:                        Education. Our education system is world class, is a leading scenario, if that makes sense. So many of them choose to have their children educated here, both from a primary, secondary, and university element perspective. So education is absolutely massive. London straddles two time zones perfectly, East and West, for example. It’s also the financial services capital of the world, if that makes sense. So we’ve got the biggest FX currency goes through London, for example, more financial services. London is the place to be seen when you’re in that sort of sector, if that makes sense. The time zones make it very predominant.

Peter Izard:                        And dare I say it as well that I know some will agree or not agree sort of thing, but Heathrow is the gateway to both the rest of the world, if that makes sense. It’s one of the leading international airport hubs, et cetera. So actually, you can be anywhere in Europe in four hours. But of course, you can be East and West on an overnight flight, et cetera. So geographically, it sits perfectly, if that makes sense.

Peter Izard:                        But above all else and taking that into consideration, London is seen as a, and hold my thought for a second here when I say this and I mean it sincerely, London is seen as actually a stable political entity. Now I know at the moment it’s anything but that, if that makes sense. But in the main, our rule of law, if you buy a property in London or in the UK, you will have legal assurity. It’s a good legal title. And actually, despite what’s going on at the moment, our political system is safe and sound and has been structured over many years and is the envy of the world, if that makes sense. UK politics are still revered. So those reasons why in the main people buy here.

Peter Izard:                        But let me give you one more, which often goes behind the radar. One particular client I never forget, I remember him saying, “I want to buy in London because it’s a cosmopolitan city. My wife loves the faction, it’s got everything I can want. It’s got the culture, it’s got the history, the shopping, the ambiance and everything like that. And it’s a place I want my children to be brought up in.” And this is a client that could’ve lived anywhere in the world.

Peter Izard:                        So armed with all of that, the demand is there. But the other thing is as well, we touched this, the UK is an island. And as we said, we don’t build enough houses. So not only do you choose to live here, but your asset appreciation consistently over many years may have come in peaks and troughs, but actually you will get good asset appreciation. The value of your investment over the longer term will go up. There’s strong demand to let it out if you ever were to go back to your family home, et cetera. It’s a good safe legal title. So I think armed with all of that, London’s in a good spot.

Paul Mahoney:                  Look, I think that’s a great way to end the conversation so far as high net worth private banking. I don’t think anyone would disagree with London being a solid property market and that being the focus for high net worths across the world. So thanks very much for joining us, Peter. And thank you for watching today. Join us next time for a discussion on crowdfunding for property development.

Speaker 3:                          Property is a great investment option, but it’s one of the largest purchases that you’ll ever make. As individuals, we’re all limited by our resources. And regardless of our experience, knowledge, or time, we can achieve much more with the help of a qualified team and extra resources being available. Nova Financial specialize in assisting clients to achieve financial freedom through property investment. With over 100 years of experience, we shape your family’s future. To invest in property with absolute confidence, call us on 0203 8000 600. Or visit nova.financial.

 

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