Noble private banks venturing into investment banking, and powerful Wall Street firms pushing into private banking. Is the industry turning upside down, or are there good reasons for these crossovers?

It’s somewhat ironic that in a world increasingly defined by blocks, boundaries in banking are blurring. This is currently evident between investment banking and private banking—two branches of banking with deep cultural divides and distinctly different archetypes.

On the one hand, the flamboyant dealmaker who «makes rain» with the help of dry financial figures and reshapes entire industries with mega-transactions. On the other, the discreet client manager who stands protectively before wealthy clients, seeing themselves as much more than mere wealth managers.

Private bankers want to be dealmakers

However, this self-image is beginning to crack. Powerful Wall Street firms are pushing into wealth management, and noble private bankers also want to be dealmakers.

This shift is evident at the Brazilian-Swiss private bank J. Safra Sarasin, a bastion of discretion with a long history in Basel’s high society. As reported by finews.ch on Tuesday, the institution has now hired a new team in London, Europe's investment banking hub, to explicitly advise wealthy entrepreneurs on mergers and acquisitions (M&A).

Wealth Management Is the Order of the Day

For this classic investment banking offer, the institution has poached leading players from the business: the newly recruited employees come from American institutions Goldman Sachs and Bank of America.

Meanwhile, at Goldman Sachs, the epitome of a powerful US investment bank, wealth management is the order of the day. Bank chief David Solomon has personally designated this division, which includes institutional business, as the primary growth driver for the firm.

Currently, one-third of every dollar Goldman Sachs earns comes from wealth management; if the CEO's vision comes to fruition, this proportion will soon be significantly higher.

Doubling customer assets in Europe

To this end, Goldman Sachs' executives are also active on the «old continent». Recently, the German newspaper «Handelsblatt» quoted Stefan Bollinger, the Swiss head of wealth management for Goldman Sachs in Europe. «In the past five years, we have more than doubled the managed client assets in Europe. And this is just the beginning of our growth ambitions,» Bollinger told the paper.

Meanwhile, in Switzerland, UBS, the world's leading private bank, hopes to climb into the top ten Wall Street banks following its acquisition of Credit Suisse (CS). The goal is to be the first alternative for clients who do not want to do business with an American giant. At the helm of UBS are two men who know the field well: Chairman Colm Kelleher and CEO Sergio Ermotti are both former investment bankers with US-based Morgan Stanley.

Upside down?

All of this seems like an upside-down world – but there is, of course, the calculation behind these ventures into unfamiliar territories.

Take Goldman Sachs, for example. Since the COVID-19 pandemic, traditional investment banking has turned into a «stop-and-go» business. Persistent slumps alternate with phases of hectic deal activity, where backlogged transactions must be processed as quickly as possible. Consequently, the earnings situation is volatile and unpredictable.

To ensure a steady income, Goldman Sachs initially ventured into the lending business. However, the bank had to abandon this exercise at a high cost. Now, the focus is entirely on wealth management, which, with its steady fees, is intended to smooth out the bank’s earnings.

More than 360 degrees

Conversely, for private banks, it's not just about offering wealthy entrepreneurial families a «360-degree service», as they move into capital markets and M&A is often marketed. Instead, investment banking acts as a door opener to earnings that are yet to come. Company takeovers, for instance, are «liquidity events» for the owners, during which they suddenly come into significant wealth. This wealth needs to be invested—which is exactly the expertise of private banks.

And if these institutions are already involved in the sale, their chances of also managing the wealth mandate increase.

Foundation for a Fatal «Bank Run»

UBS is pursuing this exact approach in America, though on a much larger scale. The bank is leveraging its entire investment banking division to attract up-and-coming tech entrepreneurs and ultra-wealthy business clans to its wealth management services. According to recent media reports, the major bank is even considering paying its investment bankers a commission for referring clients to wealth management. At CS, such payments have apparently been standard practice for some time.

The downfall of CS, however, highlights the risks associated with volatile investment banking: CS had clung to the capital-intensive business for too long, and as a result, was consistently undercapitalized in terms of equity than UBS, which focused on wealth management. Additionally, the CS investment bank regularly generated losses and scandals—such as the Mozambique affair or the billion-dollar losses with Archegos—which eroded trust in the bank.

This laid the foundation for the fatal «bank run» of March 2023.

Balancing act of the UBS

UBS, which itself had to be bailed out by the state in the fall of 2008 following speculative failures with subprime securities, is therefore undertaking a balancing act with its new ambitions in investment banking. The bank has promised investors and regulators that the investment banking risks of the combined UBS-CS will not exceed a quarter of the balance sheet. This would also be the main argument against securing the financial giant with much more equity.

Already, initial demands from the Federal Council and the Swiss Financial Market Supervisory Authority (Finma) are on the table.

Every contribution counts

Conversely, private banks risk missing the boat if they don't jump on the investment banking trend now. The boost from the interest rate reversal will likely fade in 2024. After that, the institutions would once again face shrinking margins and low new money inflows.

Therefore, they can use every contribution from new business areas—especially since they will now also be competing with Goldman Sachs & Co. in their core business.