The use and importance of financial planning in the German private banking industry

Doctoral Thesis / Dissertation, 2006

110 Pages



1. Introduction
1.1. Presentation of the issue
1.2. Objective and structure of the thesis

2. Definition of private clients resp. the private banking market in Germany
2.1. The different private client segments and their differentiation in general
2.1.1. The retail banking
2.1.2. The private banking
2.1.3. The private wealth management
2.1.4. The family office
2.2. Offerings and concepts of client attention of the financial service providers
2.2.1. Offered services within the private banking segment
2.2.2. Offered services within the private wealth management segment
2.2.3. Offered services within the family office segment Types and structure of the family office The products and services of the family office Particularities of families and dynasties Benefits of the family office-concept for providers and clients Disadvantages of the family office-concept for providers and clients

3. Market- and potential analysis of the wealthy private clients in Germany
3.1. Size and potential of the market
3.2. Origin of the wealth and behaviour of the wealthy private clients
3.3. Current requirements of the wealthy private clients

4. The importance of financial planning in the private banking industry
4.1. Initial situation and presentation of the issue
4.2. Definitions
4.2.1. Definition of the Financial Planning Association (FPA)
4.2.2. Definition of the International Association for Financial Planning (IAFP)
4.2.3. Definition of the Institute of Certified Financial Planners (ICFP)
4.2.4. Definition according to Dr. Rolf Tilmes
4.2.5. Definition of Schäfer and Unkel
4.2.6. Summary of the definitions
4.3. Historical development, origin and classification of financial planning
4.4. The customers of financial planning
4.4.1. Target groups and market potential
4.4.2. The use of financial planning in the private banking segment
4.5. Instruments, costs and benefits of financial planning
4.5.1. Benefits for the customer
4.5.2. Benefits for the provider

5. Content and process of financial planning
5.1. Content of financial planning
5.1.1. Principles of duly financial planning
5.2. The process of financial planning and its phases

6. Realisation and problems of the financial planning in practice
6.1. Principal possibilities of price structuring in the financial planning
6.1.1. Commission versus fee
6.2. Diverse price models at the market
6.2.1. Models of banks
6.2.2. Models of independent providers
6.3. Payment willingness of clients

7. The problematic nature of financial planning against fees
7.1. The economical problems
7.1.1. Information asymmetries
7.1.2. The principal-agent problem
7.2. The legal problems
7.2.1. The liability in case of investment procurement and investment advice
7.2.2. The consequences for financial planners

8. Potential methods of resolutions
8.1. Diminution of insecurities and information asymmetries
8.2. Price-transparency and genuine pricing
8.3. Cooperation with tax- and legal experts

9. Summary and perspective

Index of illustrations and tables


1. Introduction

“The once so powerful financial institutions of the old "German Plc.", which in times of the economic miracle partly controlled the fortune of the large scale industry, are facing the greatest test of its latest history."[1] This quotation from the year 2002 of two economic experts reflects the situation, which the German banking industry was in, in recent years, and still is in respectively. Even if many financial institutions are recovering, the reasons for the poor situation are manifold.[2] Questions about the banking model of the future are raised as well as questions about the most successful business sectors. While investment banking is particularly profitable in times of stock market booms, mergers and IPO's, it however turned out, that the relatively stable business with private clients, especially with the wealthy ones, turns out to be a solid source of recurrent income. Banks like e.g. UBS, Credit Suisse or Deutsche Bank are making high profits, whose basis is more and more the private client business. That way, the UBS drew a record profit of CHF 14.1 billion (approx. 9 billion €) in 2005.[3]

Therefore it is not surprising, if the competition for customers is increasing. The use of new products and strategies, in order to obtain and retain clients, appears more often, so the “Financial Planning” is considered to be an almost perfect instrument for this purpose. Financial planning is in Germany still a quite new financial service, that wasn't even mentioned in literature till 1998. The first academic essay in German language treating this issue was penned by Tilmes in 1999.[4] In that essay, as well as in other few studies treating this topic, merely wealthy private clients are regarded as target group. One needs to take into consideration though, that there is a jungle of terms in the area of private clients, ranging from “Retail Banking”, over “Private Banking” and “Wealth Management”, up to “Family Office”. Terms that needs to be defined in the course of the thesis, in order to understand the use and the effect of financial planning.

1.1. Presentation of the issue

Private financial planning or also “financial planning” are terms, that everyone in the financial sector is talking about at present. If you ask however the partly self-proclaimed financial planners or the clients about a definition, you'll mostly only receive insufficient answers. Since financial planning is considered as being a so called practitioner-discipline, in Germany only little academic literature exists, dealing with this subject. Therefore, a closer look has to be taken at diverse definitions like e.g. the one from Dr. Rolf Tilmes.

Financial planning is, as it has often been the case, a financial service with its origin in the USA that aims at an individual and future-oriented presentation of the private liquidity and wealth situation, in order to match ideally the client's personal objectives and requests with his financial possibilities.[5] This first sentence of a definition shows, that this is about a complex service that causes appropriate costs for the provider. But since insecurities about the possible benefit exist among those who demand it, a payment can not always be enforced without difficulty. Further insecurities and problems can result from information-asymmetries, or be of economic or legal character.

Due to the complexity and the cost/return situation thus the question arises, which clients are suitable for the service. Basically these might be households with major wealth and/or high income.[6] The term of the "wealthy private client" hence is often used to describe the attractive target group to the financial service providers. However, caused by a diversity of terms like retail banking, private banking or wealth management, it is necessary, to undertake a more precise observation, classification and differentiation of this part of the private clientele. A segmentation of this market is required to point out the different claims and buying patterns. Only by doing so, providers can embark on a precise strategy.[7]

A market- and potential analysis is necessary to point out the constantly increasing wealth and the high savings ratio in Germany, which in 2005 amounted to 10,7% due to the discussions on retirement pension plans.[8] From this can be deducted, why banks have an increasing interest in private clients, competition increases and why financial planning is being utilized more and more as an instrument to acquire and retain clients.

To eventually understand financial planning as an efficient service, the content and the process of financial planning have to be analysed. In the process it is necessary to point out the basic principles of duly financial planning and to illustrate the different phases. This can, in the first place, allow a comparison of the offerings by banks and bank-independent providers, and make diverse price models clearer, which, in the end, causes the problematic nature of financial planning against fees.

These issues form the starting position of this thesis. In the following chapters, the private client market in Germany will be described, the potential presented and the different segments will be defined. Then, the contemplation of different definitions of financial planning and an analysis of the content and the process of financial planning will be the subject-matter. Furthermore, the realisation as well as the costs and the benefits will be discussed, and the possible problems of financial planning will be highlighted. Finally, potential methods of resolutions will be discussed and presented.

1.2. Objective and structure of the thesis

So, the thesis aims at gathering the use and importance of financial planning for the private client market in Germany. For this purpose it is necessary in this thesis to look into the total potential of the market and to define the various client segments. Only that way it is possible to demonstrate, why most of the financial institutions look at the wealthy private client as an ideal target.

Furthermore, financial planning is to be presented as a possible optimum instrument of client retention and of full utilization of cross-selling potentials.[9] This is all the more important as a buyer's market has emerged in the last years, whose characteristics are decreasing customer loyalty, loss of importance of the house bank-principle and the so-called "raisins-picking" ("wanting all the jam") of the clients.[10]

By means of suitable definitions, financial planning is to be put across and to be explicated, the potential applicability is to be discussed and the return/cost situation to be analysed. Contents and process of financial planning will be described that way that one will be able to relate to the basic principles of duly financial planning, and to the different phases.

In addition, implementation problems will be described and analysed, price models explained and possible insecurities will be discussed. At the same time, the issue of possible liability regarding investment advice and procurement respectively will be addressed.

By illustrating possible methods of resolution, the thesis is to be completed, so that, after all, the reader is given an overall picture of the "financial planning", especially of the use and importance of financial planning for the German private banking industry.

After the introduction in the first chapter, in the second chapter the private client market or rather the private banking market in Germany will be reviewed, terms will be defined and demarcations explained. Furthermore, in chapter three a market and potential analysis of the wealthy private clients will be discussed. The fourth chapter then deals with the financial planning and the importance for the private banking. Definitions will be discussed, the historical development and the origin will be shown and the target groups for the use of financial planning will be pointed out. The fifth chapter deals with the content and the process of financial planning as such. Special attention here is put on the corresponding principles.

The realization and the practical problems will be described and discussed in the sixth chapter. Specific attention here is put on the pricing and the various models. The seventh chapter concerns with the problems of fee-consulting considering economic and legal problems. Liability questions will as well be discussed as the possible consequences for financial planners.

The eighth chapter offers possible solution approaches/methods of resolution for the problems discussed before, especially regarding to price-transparency and the reduction of insecurities and information-asymmetries. The ninth and last chapter summarizes the treatise and describes a short outlook.

2. Definition of private clients respectively the private banking market in Germany

In times of high unemployment it seems to be paradoxical, that just the private client business proves as support to the financial sector and that it can lead to relatively stable returns. Especially the business with the wealthy private clients, which is generally summarized in the term “Private Banking”, made, according to a study of McKinsey, just in the time from 1997 to 2001 annual yields of 40,8%[11]. Yields which of course resulted in a massively increasing competition between the “servicing” financial institutions about private clients, especially because of the private banking sector being regarded as one of the growing markets in the next years[12]. The consulting and servicing concepts of the financial service providers are as various as there are terms for them. A differentiation of the segments is difficult and mostly on the basis of the traditional idea of private banking in contrast to the appreciation of the terms retail banking, private wealth management or family office. Despite the definition difficulties about these various and nevertheless similar terms, this shall now happen for a better understanding also with regard to the development of these various servicing concepts. There is a more exact view on the individual aspects of the offers and servicing concepts of the financial service providers for the various segments in chapter 2.2. of the thesis.

2.1. The different private client segments and their differentiation in general

As in every branch, there are numerous terms in the financial industry, too, its exact meaning many private clients do not know, since they also seem to overlap. In the following thus first the various private client segments are marked off. Generally one can subdivide in mass- and quantity business, i.e. in the business with minor customers, also named “Retail Banking”, and in the business with the wealthy clients, also named “Private Banking”. This sector private banking is complemented by expanded concepts like wealth management and the family office, in order to adjust to the rising claims of the wealthy clientele according to range and type of the wealth.

A segmentation of the market is necessary since the individual sectors have different requirements in terms of the financial service offering and thus show a different purchasing behaviour. Only in this way the vendors can adopt a goal-oriented and efficient strategy.[13] During segmentation process itself the vendors advance according to different methods, but mainly the criterion “financial assets” or the “net financial assets” is considered as the wealth.[14] In many cases the financial assets are also defined as “liquid or investable assets”, as in the annual appearing World Wealth Report of Merrill Lynch and CapGemini, too. The wealthy client here starts with e.g. US-$ 1 mn., while other investigations indicate quite different sizes. Thus it is to be considered, that each classification is more or less arbitrary. Since however the classification of Merrill Lynch and CapGemini is generally accepted, in this doctoral thesis the appropriate classifications and data base are used. Thus also in the literature and in practice the terms “Affluent Clients”, “High Net Worth Individuals (HNWI)” and “Ultra High Net Worth Individuals (UHNWI)” for the appropriate orders of magnitude, also used here in the following, became generally accepted.

Affluent clients means clients, with a total wealth within the range of US-$ 100.000,- to US-$ 1 mn. and thus being added to the so called “middle market”. That means they are rather in a range settled between the mass clients, i.e. the retail clients and the private banking clients.[15] Depending upon the definition of the respective service provider this segment or a part of it can thoroughly be added to the range of the wealthy private clients.

The High Net Worth Individuals own a total wealth of more than US-$ 1 mn. and so are a part of the clientele, which is strictly speaking regarded as the target group for the private banking sector. The Ultra High Net Worth Individuals own a total wealth of more than US-$ 30 mn. and are a “higher” part of the HWNI. Despite the relatively small number of UHNWI, due to their complexity and their special servicing needs this group is to be regarded as an exceptionally interesting segment for financial planning.[16]

It applies to notice, that for an extensive analysis in the context of financial planning all assets, and not only the liquid or financial ones, have to be considered.

illustration not visible in this excerpt

Illustration 1: Service-concepts of the private client segments according to size of wealth

Source: Own presentation

2.1.1. The retail banking

Neither the term retail banking nor the term private banking is defined clearly in the technical literature. Retail banking deals with and refers to the mass- or quantity business with private clients, below the affluent client size of US-$ 100.000,-.[17] Therefore it is the lowest private client segment, who usually disposes of a small income. In this group not the individual client is the focus of interest, but rather a larger customer group. The service offer of the banks here is often shaped by external factors thus like e.g. public promotion of the products, less by real customer needs. For financial planning being a service which is still often only offered to higher private clients, an appropriate offer for retail customers could not successfully be established so far yet at the market. The mass business however is not subject of this thesis and is therefore not regarded any more.

2.1.2. The private banking

Usually private banking can be distinguished clearly from retail banking. Generally it means bank services for the top clientele of the respective seller or provider.[18] Thus depending on the size of the bank already a customer starting with a fortune of US-$ 100.000,- can be counted to this segment (e.g. Deutsche Bank). The limit with major banks however is usually at least US-$ 500.000,-, very often even US-$ 1 mn. (e.g. Dresdner Bank), suitably to the definition of the High Net Worth Individuals. The American Bankers Association however defines private banking as a “deliberate program to attract and serve the affluent individual market“.[19] For a more exact definition of private banking one has to take a look at the origin of this term and the underlying traditional idea. Private banking originally developed from the designation private bank and the understanding, which accompanies with it.[20] With its origin going back to the middle age, the private banks have developed in their actual form in the 17th and 18th century. Particularly in Switzerland and in England this development can be pursued. The political stability and neutrality, a strict banking secrecy, a simple, clear legal system, a favourable geographical location and a well trained working population were characteristic. After a bloom time of the private banks in the 19th century their number however constantly decreased in Germany.[21] The original clientele of these banks were wealthy private customers, who particularly were entitled to the core services investment advice and portfolio management. By and by not only the target group became larger but also the service offerings and the number of the providers on the private banking market. Particularly in the last years more services especially for upper private clients have been developed, which contrast private banking from normal banking services. This refers for example to the so-called wealth management or the family office, terms for services for the HNWI and UHNWI.[22] As a possible definition in the modern sense the Barron´s Dictionary of Banking Terms designates private banking as “banking services, including lending and investment management, for wealthy individuals“. There is a similar definition in the German-speaking countries, too, which sees private banking as a “business with wealthy private customers, that comprises the entire pallet of bank-operational business, but in particular the field of the standardized and/or individual financial consulting.”[23]

Based on that, private banking is defined as follows by Tilmes and used as basis for the further thesis: “Private banking means the specialization on certain financial services with a high personal service- and quality component, which covers the demand of an institute-specific, clearly defined wealthy private clients group. A goal among others is the individual planning and realisation of the long-term personal and financial goals.“[24]

If you summarize several different definitions, three key characteristics can be pointed out:[25]

1. Wealthy private customers are the target group of private banking
2. Tailor-made, individual services are offered
3. The client-bank-relationship is shaped of a personal character and bases on discretion and confidence.

Thus in contrast to financial planning private banking is rather object- than result-driven. Financial planning is not about a product bundling, but about an individual high level consulting.[26]

2.1.3. The private wealth management

From the specified forms of services for the wealthy private customers the term "private wealth management" is most difficult to define, since on one hand there is hardly literature about this sector and on the other hand the range of offerings of the financial institutions do not differ much from the services of the private banking.[27] Private wealth management is a partial segment of private banking, which deals with larger, more complex fortunes from the sector of the HNWI and UHNWI. Because of the complexity a minimum wealth size of US-$ 5 mn. is often required, in order to benefit from wealth management services.

A demarcation to private banking can take place earliest, if one looks at the term "private wealth" more exactly, in particular which components of the wealth and/or fortune it contains. Since the focus of this thesis is put on the wealthy private customers, also only the private wealth is to be regarded and other kinds of fortune to be ignored. An extensive definition for the term "fortune" or “wealth” consists of the parts financial assets, tangible assets, human assets (abilities) and social assets (abilities).[28] Thus the definition for private wealth is:

Private wealth = financial assets + tangible assets + human assets + social assets

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Illustration 2: Components of private wealth I

Source: Own presentation

Financial assets in principle mean all assets and demands, like liquid assets or securities, less all liabilities of an economic subject. Premises, real estate, objects of art and private equity are assigned to the tangible assets. In the sense of a holistic view the components financial assets and tangible assets are now summarized in the thesis as the term financial assets.

illustration not visible in this excerpt

Illustration 3: Components of private wealth II

Source: Own presentation

The financial assets are set up in private balance sheets and counted, for a better understanding and a better service to the HNWI and UHNWI, either to the “earnings” category or to the “livings” category. The assets of the first category, the earnings category, thereby serve for the acquisition (earning) of income (e.g. securities, private equity or rented real estate), while the assets of the livings category do not generate income (e.g. self-used real estate or art).[29]

While financial assets can be objectively evaluated, this is not the case with human assets and social assets. Therefore, in financial planning almost the financial assets exclusively are considered.

The human assets describe the aspects of human resources and abilities, humans can use for the achievement (generation) of income. This consists of education, school education, further vocational training and also of the experience, e.g. investments already transacted. An increase on human assets, like for example by continuing education and training, can have an influence on the productivity and finally, in the ideal case, lead to additional income.[30]

The last part of the private wealth, social assets, now looks at the individual person in relation to its social environment and the various relationships, into this person enters. The affiliation to a social network and its structure determine the value of the social assets, which can be judged and evaluated however only under large difficulties. Regarded as components among others are acknowledgement, reputation, trustworthiness, popularity, etc., things, which only can be evaluated subjectively, but can be from quite great importance (e.g. for a banker). In order to be able to use this social network over a longer period, regular investments into an time-intensive relations work are required.

Now private wealth management can finally be defined as "all the activities of planning, realising and controlling all material and non material resources of the financial-, human- and social assets of a private person, to whom they make it possible,... to generate income- or benefit gains.”[31] As already mentioned above, the financial service providers do concentrate on the “material goods” to a great extent. Only a few offer a service in connection with “immaterial goods”. These are mainly family offices, which only deal with the very rich private individuals and families.

2.1.4. The family office

The designation "family office" originates from the Anglo-Saxon economic area and describes an institution, which among other things, manages the wealth of UHNWI.[32] Due to the high level, and often also because of the complexity of their wealth, they need a special support service. This support can include all elements of financial consulting and portfolio management, of tax and estate planning, private equity controlling, real estate administration, etc., up to the bookkeeping and even concierge services. Therefore, as a target size often the number of US-$100 mn. is mentioned (JP Morgan Chase), whilst one can find particularly in Germany offers starting from a net wealth of € 30 Mio. (FERI, Marcard Stein). Although in Europe in the past also similar services could be found, in particular in the environment of the rich aristocracy families, one of the first family offices was established in the USA in the year 1838. Under the guidance of the Morgan family it was founded in form of a private bank, which looked after the management of the immense family fortune.[33] Since other rich families had similar problems, too, the Morgan Private Bank opened for the Guggenheims and Vanderbilts. Today JP Morgan Chase Bank ranks among the world’s elite in the support service of UHNWI.[34] There has to be a differentiation with this special concept between family office-services, which are also offered by banks, and the family office itself, which represents an independent organizational unit.[35] An important characteristic here is the independence in the sense of a plain representation of the clients´ interests. In Germany the term “family office” was especially made famous in 1986 by Albrecht Graf Matuschka with the Matuschka Group.

Thus the family office describes “the organizational unit, established by a family or an individual person with complex wealth of considerable size, in which the strategic, tactical and operative services for the configuration, coordination and mobilization of the financial, human and social assets… are bundled.”[36]

2.2. Offerings and concepts of client attention of the financial service providers

The various offerings- and client attention-concepts for the wealthy private clients of the individual financial service providers are as manifold, as there are terms for these concepts. Especially in the last years the relation between demanders and providers of financial services has changed significantly. The service providers more and more try to fix the relation to the client and build up a tighter commitment to the own company. The use of modern instruments like financial planning gets intensified; more information about the client is gathered. An identification of the factors influencing the client loyalty to an institution and a preferably long-term client loyalty are necessary for the development of optimal offerings and client attention-concepts.[37] Moreover, the clients request a clearer differentiation and segmentation based on size of wealth, i.e. a clearer differentiation in the offerings from retail banking, private banking, wealth management and family office. The bigger the wealth, the more complex are the structures and requirements to the service providers.

Providers generally must try to develop a competitive advantage over their competitors. The advantage must be recognized as such by the clients in a cost/performance comparison. Due to the increasing development in the financial industry from a sellers- to a buyers-market and the increasing awareness of the providers, that it becomes more and more important to maintain an existing customer-relationship, the “relationship management” gains more and more significance. The attained awareness from e.g. the financial planning can now be used as a useful basis, in order to develop a long-term and successful relationship to the client.[38]

illustration not visible in this excerpt

Illustration 4: Relationship client - provider

Source: Own presentation

In the following, a closer look is taken on the offerings and client attention-concepts of the financial industry for wealthy private clients. As already mentioned above, it will not deal with retail banking in greater detail, only developments in private banking and its sub-areas wealth management and family office are considered.

2.2.1. Offered services within the private banking segment

Because of the high number of competitors on the market of wealthy private clients, providers must try to bind the customers by offering a holistic and comprehensive range of services. Self-speaking, they have to be co-ordinated with the ambitious needs of the clients.[39] The offered services within the private banking segment can be subdivided into the two categories “core services” and “secondary services”. The respective provider now has to try to gain a competitive advantage by offering a suitable and demanded combination of core services and secondary services, which have to stand out from its competitors.[40]

The core services thereby cover on one hand the rather fundamental services monetary transactions, as well as the custody and management of securities; on the other hand the investment consulting itself makes the biggest portion within these services. Moreover there has to be a differentiation whether the client himself is actively interested in an investment management or not. If not, because of a lack of interest, time or know-how, the provider will take it over for the client. This happens on the basis of an investment or portfolio management-contract, which is closed between client and provider, whereby the provider makes the investment decisions based on with the client agreed guidelines.[41]

The investment or portfolio management is often also equated with the term "asset management". The client can either bank on an active asset management, whereby specific selections of individual securities tries to beat a pre-defined "benchmark", or on passive asset management, i.e., an existing index is copied and adapted if necessary.

In the investment consulting or investment management the provider analyses the clients’ wealth with his help and works out his investment objectives. Afterwards, a suitable concept is developed on this basis and presented to the client, who finally has to make the decision. The provider hereby acts only as an advisor to the client and executes the portfolio management according to the clients’ instructions.[42] The individual wealth management also covers the administration of real estate, private equity and other investments, like e.g. gold or art, however, only for an appropriate large wealth.

The newer concept of financial planning also takes the clients fiscal situation as the starting point for the strategic and operational investment decisions, in order to optimise the asset and liquidity situation of the client, especially after taxes. But also the age-provision and succession planning, particularly within the UHNWI, are important aspects and therefore integrated into the financial planning.

Also other various services have to be counted to the core services, e.g. electronic banking, cash management or the supply of the client with information about the economy and financial markets.[43]

A positioning on the basis of secondary services is necessary, in order to differentiate oneself from the competitors. Among others, an outstanding service quality, a broad and in-depth service program and a high degree of fast and correct service execution can be counted to that. The clients, however, demand these service aspects as fundamental conditions, so that the "added-value services" and the label of the provider are more suitable for the differentiation from competitors, even the design of the "physical facilities". The international presence and network of the provider are more and more of importance, particularly to the UHNWI.

The added-value services mean the various small services round the actual financial service itself. This can be information about the financial markets, about investment products and product innovations, but also the advice on inheritance and fiscal issues. Also the advice on formation and administration of foundations, trusts or corporations and holdings belongs to those services.[44]

An important point within the secondary services, if not the most important one, is the labelling or development of an image or brand, whereby the company’s popularity is not the major object for the wealthy private clients, but the values, it represents. Values like competence, reliability, stability and discretion, etc. belong to them. Due to the frequently missing of rational criteria the image of the provider is considered as a decision basis. Thus the provider must try to build up his company as a trademark/brand and to transport this to the clients.[45]

Physical facilities mean the buildings as well as the equipment of the premises, which have to reflect the image and the values of the company, so that they can also be realized by the clients. The range goes from location, over to the design of the buildings, reception and offices, to an adequate hospitality of the clients.[46] Things, which sound unimportant, but can quite impress the client and show an effect.

The actual concept of private banking, the comprehensive and holistic consulting of the wealthy private clients, has extremely changed over the years, because the former ideas of an outstanding service with highest quality standards are unfortunately no longer synonymous for this service form. Private banking has changed from a special service idea to a trademark image, where also the minor matters are important.

This break with the actual idea behind has led in an increasing dissatisfaction of the clients with its providers on a very fundamental level.[47] This displeasure of the clients did not primarily rose from the bad performance of their investments, but rather from the providers` lack of understanding of their clients` needs. The service providers had often sold inadequate products to their clients, which did not correspond to the needs. Even the advice was not always objective and/or the service was unsatisfactory.

Whereas the clients in the past were, nevertheless, very loyal to their private banking providers, this has changed within the last years due to the increased competition and alternatives.[48] Furthermore, there is the better education and thus the better understanding and know-how of the present generation of heirs.

Since the clients set more and more high value on objective advice, they are critical against providers, who only want to sell their products. Therefore, they are looking for service providers which put the client’s interests above their own. However, real pursuers of this concept can hardly be separated from those, who deliver the commitment of priority of their clients only as a lip-service.[49] The clients´ lobby can most frequently be found in the highest segment of the UHNWI, which uses the family offices and/or even set up own family offices.

Especially the providers of private banking are often accused of concentrating in selling their products. Thereby mostly own products are sold and only where necessary those products of other vendors, which generate the highest commissions for the service provider. Also the client advisors are concerned, as their bonus is very often calculated based on generated revenues, a fact, which can quite easily lead to a lack of objectivity in the advice. Such behaviour does not only have a negative impact on the client’s satisfaction, but also destroys the confidence and reliability, the most important basis for a customer-relationship. Only an "open-architecture"- principle, which conveys the client of existing transparency, e.g. by passing third party commissions to him, can prove the vendors (service provider) objectivity. Thus the client can be sure that he only gets offered the best-in-class products, no matter whether internal or external, exactly as foreseen in the open-architecture-principle.[50]

Since open-architecture is only seldom used in its purest form and many advisors only consider themselves as vendors of company-own products, they quit the large financial institutions in order to set up their own companies. These enterprises give boutique-like the clients the possibility to select and pick the products and services, they actually need and want to use. Mostly they also have less employee turnover, which demonstrates a further advantage.[51] Large financial groups have even problems in finding adequate advisors.[52]

With the present sales-oriented focus of the private banking providers the high needs of the wealthy private customers cannot be covered, with the result of sinking loyalty of the clients vis-à-vis the providers.

2.2.2. Offered services within the private wealth management segment

Whereas the term private wealth management a few years ago was still almost unknown in the financial industry, many companies have since then build up corresponding departments.[53] An important reason for that was the increasing dissatisfaction of the wealthy private clients with the, by then, offered private banking to them. More and more clients from the middle segment of the affluent market ask more and more for services, which were rather limited to the HNWI and UHNWI.[54] By an increasing expansion of private banking to lower wealth groups, also the level of the services offered by the providers, the quality and mostly the individuality-idea fell. The result was the so-called "demystification” of the private banking-concept, and the wealthy private clients were not satisfied by it anymore.[55] Particularly in the range of US-$ 5-30 mn. the requested demands are increasing. Many clients from this segment demand services, which could be defined as "family office services".

Some major banks tried to work against this trend by outsourcing the retail clients (e.g. Deutsche Bank with Deutsche Bank 24) or by reviving old traditional names (e.g. Dresdner Bank with Bankhaus Hardy). The formation of private wealth management as a new concept within the private banking segment enabled the providers to address again the groups of the HNWI and UHNWI separately. Thus they wanted and still want to reproduce a feeling of exclusivity. This idea is also underlined by the higher entrance barriers within this segment, which reaches from US-$ 5 mn. up to US-$25 mn. with large banks such as Merrill Lynch, Morgan Stanley or UBS.[56] However, the offered services for the clients in the private wealth management segment, goes from financial planning up to a wide-ranging product and service offering , which among other things includes asset management as well as the management of insurances, real estate, taxes and provision planning. A rather vendor-oriented interpretation describes private wealth management as "asset management, debt/credit management, tax and legal management and risk management".[57] Thus private wealth management actually offered in the financial industry differs from the definition of private wealth, on which this thesis is based, since there is still often a focusing on pure financial assets while the human and social assets get no attention.

Thereby it is very important to have a comprehensive and competent optimisation of the wealth in the context of wealth management, whereby service must play a prominent role.[58] Many organisations do not assume a comprehensive and holistic wealth-term, at least not below UHNWI level, and also do not offer the range and quality of products and service, which could satisfy the wealthy clients.[59] A pallet of services, which could be regarded as sufficient for the HNWI and UHNWI, includes the sectors already specified as well as a consulting in “Philanthropy” and in the formation of trusts. Additionally "Concierge Services" are offered by some providers (e.g. assistance in buying a real estate, support services for the education of the children, etc.), which have nothing to do with the actual management or augmentation of wealth, but represent a kind of a premium service.[60] The larger the wealth, the easier to find these kinds of services, both by the providers’ offerings and clients demand. Particularly within the UHNWI with more than US-$ 100 mn. this becomes more and more the standard, which is mostly covered by separate units like the family offices. This combination of products and service reduces the price elasticity, i.e. the clients are willing to pay higher fees and also build up a closer relationship to the providers.[61]

A negligence of human and social assets by the financial service providers, in contrast to the financial assets, is also reflected in the evaluation of the wealthy clientele. Mostly they especially count the financial resources (94,4% of the interviewed persons), the properties (94,4%) as well as an eventually existing company and private equity (83,3%) to the wealth term. Already followed by components of human assets, as e.g. working capacity (68,5%) or health (66,6%), however the gaps are significant. The children (55,5%) or the family (53,7%) follow afterwards as parts of the social assets.[62] Thus no wonder that also the service providers give a lower importance to these categories. Of course, one can find a group among the wealthy private clients, which possesses a comprehensive understanding of the wealth term with all of its asset-classes, however, there is also a large group, which only considers and understands the financial assets as wealth.[63] Also here it’s generally safe to say, the larger the wealth, the more understanding about the complex wealth-term exists.

This is now the challenge for the providers, to submit appropriate service offers to the respective groups according to their needs. To what extent now the wealthy private clients are moreover ready to delegate the management of the three asset-classes to an external manager, must be regarded separately. The responsibility for the management of the total wealth lies mostly, from the wealthy private clients´ point of view, still with the asset owner. On the financial assets side, the willingness to give the responsibility to a third party is the highest, while it is almost excluded on the human and social assets side.[64] Mostly only advice is asked and given here. Therefore, from the providers´ point of view it is more favourable, to make an outstanding product and service offering available for the attendance of financial assets, and to offer, where necessary, additional services to the clients, e.g. also in the context of the concierge services, in order to cover the other asset classes.

To what extent the service offering corresponds with the mentioned clients requirements concerning objectivity and transparency, is another point. Here as well, some organisations can be found, concentrating on sale and the primarily offering and sale of own products.[65] Therefore the wealthy private clients also with this concept have to pay attention to providers, acting in the clients’ interest. The term "private wealth management" does not always show, what the client may perhaps know and expect of such a servicing concept.

2.2.3. Offered services within the family office segment

Since the family office represents a very interesting offer for the top of the UHNWI, on the assumption that it optimal covers all interests of the target clients, the thesis will deal at great detail with this kind of service in the following part. The structure and types of the family office are discussed, as well as the services themselves and the pro and cons. Types and structure of the family office

The number of family office providers in the US is approximately estimated on 3500, in Europe approximately on 200, with clearly rising tendency. The potential clients are very uncertain about the question, which provider and which services they do effectively need.[66] In contrast to the offers, which primarily concentrate on investment consulting and which are, due to their limited approach to only one generation, positively accepted, the concept of the family office has, due to its very complex business nature, a hard standing in really satisfying the clients.[67] Also even empirical data is simply lacking in Europe, since this concept really arose e.g. in Germany only in the last years. UHNWI, which represent the target group for the family office, must try to find a suitable service provider, whereby they are often let by too much influence of emotional aspects, like e.g. the sympathy for the responsible advisor.[68] For a proper decision the ideal structure and development of the relationship between client, family office and their particular experts, is of greatest importance. This can almost lead to families founding their own family office, which only represent their interests, since all responsible persons and experts are employees of the family.

If the client does not like to participate in the management or administration of his asset, no matter for what reasons, the family office provider acts as a mediator between the client and the experts and represents his interests and requirements, informing him at the same time about the developments.[69] In Germany the client, however, acts very often on one level with the family office provider and also holds contact to the experts, since he often integrates his already existing advisors like e.g. his lawyer and his tax advisor.

illustration not visible in this excerpt

Illustration 5: Ideal situation of the family office service

Source: Düzgünkaya, S., 2002, P. 24, own presentation

Reasons are either lacking confidence to the provider or simply lacking experience with family office concepts, but also surely the fact, that the client does not want to delegate everything completely, but continues having influence and control. The UHNWI can choose, whether they want to found an own family office, which is called "Dedicated Family Office" or "Single Family Office", or they want to join an already existing family office. A provider, who serves several clients at one time, is called "Multi Family Office".[70]

Whether the set up of a family office is worthwhile or not, depends often on the size of wealth which should be managed, whereby no clear minimum size is defined. In the USA a dedicated family office is often only recommended starting from amounts of US-$ 100-200 mn., while in Germany amounts of Euro 50-100 mn. are mentioned by providers[71] But also a certain complexity of the wealth is necessary, since if the largest part is invested in tangible assets, the use of a family office is not recommended. Also the clients see the appropriateness of the foundation of their own family office only starting from a higher amount, whereby an average size of about Euro 150 mn. is resulted.[72]

A great advantage of a single family office surely lies in the concentration on one client and/or one family and its wishes and needs. All inquiries and problems of this client concerning his wealth are solved by particularly employed staff, without putting the family office under pressure to make profit by dealing with the customers.[73] In addition, the owners have complete control over the organisation and thus are able to adjust everything needed for the fulfilment of their requirements, and/or possess a personalized "lifestyle management".[74] Even if the ownership of a single family office goes with a certain prestige for the client, it can be quite useful to open it also for other UHNWI, who have the same needs for all-inclusive services. A single family office can develop to a multi family office, if it outlives its original objectives or if the costs become too high.[75] Thus some originally as single family office conceived service providers mutated to multi family offices in the past (e.g. JP Morgan).

By the transformation to a multi family office the assets of all clients can be concentrated and therefore negotiation power can be strengthened. Thus enables the clients to invest into products, which otherwise would have been refused to them (e.g. in the hedge fund sector). They can hire more experienced staff and based on a broader expertise and higher efficiency obtain a higher performance.[76] By bundling assets, this kind of service is now open to clients, who otherwise could not have been able to afford a single family office. A multi family office lowers the costs for asset management. Especially because of the usually extensive and complex service offered within this segment, the costs for the family office are very high. These can be in a range of 0,15% to 5% per annum, which can result in quite high amounts for the clients, due to the high minimum investments.[77]

For the founders of a family office it is important that by opening it up to new clients, these clients fit to them, since they give up the complete control and this also can lead to problems between the customers concerning the organisations focus and direction.[78] But also new clients, who join an existing family office, do often fear playing only a minor role and that the founders enrich themselves at their costs, since the products and services were rather adjusted to the founders needs.[79] Therefore, the UHNWI should be certain that the products of the multi family office fit to their needs and that saved costs are also passed to them. Here as well, "open architecture" can provide more transparency and independency.[80] A positive example in the USA of a development from a single family office to a multi family office and finally even to a multi-client family office is JP Morgan Chase Bank (originally JP Morgan), but also in Germany FERI Trust (originally Quandt family, today divided into FERI and Sauerborn Trust, which belongs to UBS in Germany since 2005).


[1] Cp. Pauly, C.; Reuter, W.: Kassieren und abhauen, in: Spiegel Online, 14.10.2002

[2] Cp. Schnettler, D.: Deutsche Grossbanken sind wieder wer, in:, 06.05.2005

[3] Press-release UBS, 14.02.2006

[4] Cp. Tilmes, R.: Financial Planning im Private Banking, 1999, 1. Issue

[5] Cp. Eder, R.: Financial Planning - Eigenständige Bepreisung in Theorie und Praxis, in: Bank Archiv, 2002,

Book 2, P. 116-124

[6] Cp. Hofbauer, S.: Financial Planning im internationalen Vergleich, in: Bank Archiv, 2002, Book 12, P. 972

[7] Cp. Lingel, M.: Zukünftige Wettbewerbsstrategien deutscher Privatbankiers, 2003, P. 139

[8] Cp. Deutsche Bundesbank (Hrsg.), Monthly Report 02/ 2006, P. 66

[9] Cp. Berger, S., Kirchhoff, A.: Financial Planning – Status Quo eines Dienstleistungsangebotes im

Multikanalumfeld, in: Banking and Information Technology, 2003, Book 1, P. 61-69

[10] Cp. Kähny, F.: Praxisorientierte Erfolgsfaktoren bei der Einführung von Financial Planning, in: Banking and

Information Technology, 2003, Book 1, P. 53-60

[11] Cp. n.a., Im Banking schlummert Renditepotenzial, in: Finanz Betrieb, Sammelband 2002, Issue 7-8

[12] Cp. n.a., World Wealth Report, done by Merrill Lynch and Capgemini, 2004

[13] Cp. Lingel, M., 2003, P. 139

[14] Cp. von Maltzan, B.A.: Private Banking, in: Hagen, J./ Stein, J.H. von (Hrsg.): Geld-, Bank- und Börsen-

wesen: Handbuch, 2000, 40th completely revised issue, P. 925-937

[15] Cp. Fuchs, H.J.; Girke, M.: Wachstumsmarkt Wealth Management, in: Die Bank, Sammelband 2002,

Issue 2, P. 90-95

[16] Cp. Düzgünkaya, S.: Family Office – Finanzdienstleistung für Highend-Kunden, 2002

[17] Cp. Tilmes, R.: Financial Planning im Private Banking, 2002, P. 85

[18] Cp. Dembowski, A.; Ehrlich, B.: Financial Planning, Ganzheitliche Finanzkonzepte für gehobene

Privatanleger, 2002, P. 165

[19] Cp. Gardner, M.; Mills, D.L.: Managing Financial Institutions, An Asset/Liability Approach, 1994, P. 340

[20] Cp. Schaubach, P.: Family Office im Private Wealth Management: Konzeption und empirische

Untersuchung aus Sicht der Vermögensinhaber, 2003, 1. Issie, P. 12

[21] Cp. Lingel, M., 2003, P. 10-12

[22] Cp. Huth, O.; Werkmüller, M.A.: Family Office: Eine neue Dimension in der Betreuung von

Unternehmerfamilien, in: Die Bank, 2002, Book 11, P. 732-737

[23] Cp. Schaubach, P., 2003, P. 15

[24] Cp. Tilmes, R., 2002, P. 60

[25] Cp. Obrist, Ph.: Wertorientierte Führung im Private Banking, 1999, 1. Issue, P.59

[26] Cp. Tilmes, R., 2002, P. 60

[27] Cp. Chapelle, T.: Defining wealth management, in: On Wall Street, 02/ 2004, P. 58-63

[28] Cp. Schaubach, P., 2003, P. 15

[29] Cp. Schaubach, P., 2003, P. 24-27

[30] Cp. Schaubach, P., 2003, P. 29

[31] Cp. ibidem, P. 15

[32] Cp. Huth, O.; Werkmüller, M.A., 2002, P. 733

[33] Cp. Düzgünkaya, S., 2002, P. 59-60

[34] Cp. Cvijetic Boissier, V.: Family Office: Allroundservice für Wohlhabende, in: Die Bank, Sammelband

2002, Issue 3, P. 168-171

[35] Cp. Huth, O.; Werkmüller, M.A., 2002, P. 733

[36] Cp. Schaubach, P., 2003, P. 63-64

[37] Cp. Moormann, J.: Bankbetrieb im digitalen Zeitalter, in: Customer-Relationship-Management in Banken,

2001, 1. Issue, P. 3-20

[38] Cp. Lohmann, F.: Loyalität von Bankkunden: Bestimmungsgrössen und Gestaltungsmöglichkeiten, 1997

Cp. Steffens, U.: Chancen und Risiken der deutschen Banking & Finance-Branche – eine strategische

Analyse, in: Strategisches Management in Banken, 2002, 1. Issue, P. 87

[39] Cp. Kühlmann, K.: Marketing für Finanzdienstleistungen, 2002, P. 299

[40] Cp. ibidem, P. 300

[41] Cp. von Maltzan, B.A., 2000, P. 926

[42] Cp. Kühlmann, K., 2002, P. 301

[43] Cp. Kühlmann. K., 2002, P. 302

[44] Cp. von Maltzan, B.A., 2000, P. 931

[45] Cp. Kühlmann, K., 2002, P. 302-303

[46] Cp. ibidem, P. 301

[47] Cp. Lee, P.: The reinvention of private banking, in: Euromoney, Januar 2004, Vol. 35, P. 44-46

Cp. Inigari, F.A.: Private Bank’s poor service a systems and approach problem, in: American Banker,

01/ 2001, Vol. 166, P. 12

[48] Cp. Lee, P., 2004, P. 44-46

[49] Cp. Lee, P., 2004, P. 45-47

[50] Cp. ibidem, P. 46-48

[51] Cp. Mahmud, S.: The small and the mighty, in: Global Investors, 02/ 2005, Issue 179, P. 32-33

[52] Cp. Ackermann, M.: Banks Hand-Holding to keep Clients, in: American Banker, 06/ 2004, Vol. 167, P. 12

[53] Cp. Chapelle, T., 2004, P. 58

[54] Cp. Roberts, G.: Taking private banking to the mid market, in: Finance Week, 04/2004, P. 48

[55] Cp. Schaubach, P., 2003, P. 13

[56] Cp. Chapelle, T., 2004, P.60

[57] Cp. Chapelle, T., 2004, P. 58

[58] Cp. Fuchs, H.J.; Girke, M., 2002, P. 92

[59] Cp. Ackermann, M., 2004, P. 11

[60] Cp. ibidem

[61] Cp. Fuchs, H.J.; Girke, M., 2002, P. 94

[62] Cp. Schaubach. P., 2003, P. 207

[63] Cp. ibidem, P. 212

[64] Cp. Schaubach, P., 2003, P. 214

[65] Cp. Chapelle, T., 2004, P. 59-60

[66] Cp. Avery, H.: Keeping it in the family, in: Euromoney, 09/2004, Vol. 35, P. 236

[67] Cp. Gray, S.: Changing face of the family office, in: Money Marketing, 04/2004, P. 23

[68] Cp. Avery, H., 2004, P. 239-240

[69] Cp. Düzgünkaya, S., 2002, P. 24

[70] Cp. Düzgünkaya, S., 2002, P. 76

[71] Cp. ibidem, P. 77

Cp. Gray, S., 2004, P. 23

[72] Cp. Schaubach, P., 2003, P. 308

[73] Cp. Bowen, J.J.jr., In the Family Way- Do you have what it takes to manage the complex affairs of the ultra-

wealthy, in: Financial Planning, 08/2004, P. 33

Cp. Strebel, B.:Neue Konkurrenz für Privatbanken, in: Schweizer Bank, 11/2004, P. 20

[74] Cp. Gray, S., 2004, P.23

[75] Cp. ibidem

[76] Cp. Avery, H., 2004, P. 237

[77] Cp. Gray, S., 2004, P.23

[78] Cp. Jäggi Talary, C.: Die „Haute Couture“ der Finanzwelt, in: Schweizer Bank, 11/2004, P. 16

[79] Cp. Avery, H., 2004, P. 241

[80] Cp. ibidem, P. 236-237

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financial planning, private banking, german industry, retail banking, wealth management, family office, offered services, products, concepts, market analysis, potential analysis, definition, certified financial planner, customer, target group, bank, banks, provider, asymetries, investment advice, problem, fees, commission, model, HNWI, UHNWI, high net worth, ultra high net worth, banking, financial, planning, finanzplanung
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Dr. Francisco J. Guadamillas Cortes (Author), 2006, The use and importance of financial planning in the German private banking industry, Munich, GRIN Verlag,


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