☀️☕️ Citispam: Private Bankers hit the phones

📝 Focus

• Citispam: Private Bankers hit the phones

📊 In the Markets

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

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• 🎓️ Private Banking

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📝 Focus

Citispam: Private Bankers hit the phones

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[MFM: Doing a Citi Job; Morgan Stanley's crushing Goldman Sachs]

📊 In the Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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