Catering for the very rich

Questionable auditing, overstated accounts, a perceived loss of analyst impartiality — why should investors, particularly ‘high net worth individuals’, jump back into the discredited equity markets? Alan Chabot, COO of Citigroup’s wealth management division, argues the case

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By  David Ingham Published  March 24, 2002

Superior service?|~||~||~|Do you have at least $500,000 to invest and feel you deserve that extra ‘personal touch’ from your financial advisor? If you do, then Salomon Smith Barney Private Client Services (SSB PCS), a division of Citigroup, is now in the region and wants you as a customer. SSB PCS says that it can make a difference by providing high net worth individuals with, ‘world-class market research, investment products, financial structures and wealth management advice.’

The new regional operation is headed by Vinay Kapoor, a Merrill Lynch veteran with 13 years of regional experience. He oversees a team of twelve people, who will offer both Citigroup’s own and third party investment products, as well as conventional and Shariah-compliant products. SSB PCS is also a part of Citigroup, a financial services behemoth that has around $700 billion in assets and made net income of $14.126 billion in 2001.

All well and good, but is this enough to lure back investors whose confidence has been shattered over the last two years by a combination of share price bubbles, questionable accounting and September 11? Arabian Business spoke to Alan Chabot, chief operating officer, Citigroup Wealth Management Division, Europe, Middle East and Africa (EMEA).

What is different about the service offered by SSB PCS from what you offer the rest of us?
The most important difference is the quality of the advice and the specificity of the advice that we give. The people working in the Dubai office have collectively over 100 years of experience in the financial services business. We think that by coupling their general skillsets and our overall research capability we can deliver advisory service that will distinguish them from the rest of the field.

Does that mean you get better advice than people at the lower end of the wealth scale?
Yes, I would argue that these people do get better advice and the niche for Salomon Smith Barney is advice on individual securities. We do sell mutual funds, we do sell discretionary services, but the real core is advice on individual securities.

As you know there’s a lot of scepticism about equities given all that’s happened in the last two years. Do you offer real alternatives for those that don’t trust the stock market?
We are the global leader in almost every type of traded security. There’s equities, of course, but you’ve also got fixed income, preferred securities, convertibles; you also have options and futures. We can give clients advice on all of those financial instruments.

Will we have another stock market boom and bust in the next ten years unless we reform the system?
Over the long term we believe that the stock markets will be a good place to put your money assuming you’re taking the advice of a quality advisor. Whether you’re using SSB or someone else, get quality research from someone you trust and work with a company that has a strong balance sheet. We’re optimistic regarding the equity markets around the world.

Don’t you think the P/E levels are still too high compared to historically?
If you look at the S&P, it’s certainly higher than it would be historically coming out of a recession. However, we feel that like in most markets there will be winners and losers. Coming out of this slowdown in the global economy, we believe that it’s even more important to have strong stock selection because there will be winners and losers.

But will investors ever regain confidence unless there is reform in the system?
I’ll let the legal people and the politicians decide what they need to do in terms of reform. But historically, when there is a downturn, you oftentimes find problems that were created in the system during the bubble and it is the downturn that exposes those problems. The Enron situation has surfaced an issue, that issue is being addressed by regulators, but you’ve seen it before with problems in the United States and a whole lot of problems outside the Untied States. It’s normal when the cycle slows down to incur some problems.
||**||Is capitalism broken?|~||~||~|
But you have magazines like BusinessWeek saying the boom of the 1990s was the product of creative accounting and bad auditing; some people say it’s the relationship between your very own analysts and the people who underwrite the IPOs. Surely your investment clients are asking how they can trust your analyst ratings with all that has gone on?
If you’ve followed the ratings of our analysts, generally speaking one has done fairly well in your investment portfolio. I would also say that Salomon Smith Barney, in particular, has been at the forefront in creating that Chinese Wall between analysts and investment bankers and then fortifying and strengthening it by forcing analysts to do things like disclose their holdings. Analysts are required to reveal specifically if they own any of the stocks on which they report and we’ve taken a pretty firm stance on that.
I think, however, that at the same time, some of the publications, arguably the one you referred to, are in the business of selling stories. Part of the bubble is created by, one might argue, excessive publicity of the market and stories saying that the world has changed, when in reality the world didn’t change. Now, publicity is focused on exposing some of the inconsistencies inside of the market.

Would you say there are fundamental problems in the capitalist system; that the checks and balances aren’t working?
I think that forever you will have a natural conflict in the capital market, whereby if you want these things to function in a free market environment, people will forever try to take advantage of that. It’s normal, it’s human nature and markets have always done a good job of correcting themselves. I don’t think there’s anything fundamentally wrong with the overall capital markets in the US, and I hope not globally, but you constantly have to be vigilant to try to remove these kinds of conflicts and problems.
||**||Is Enron a one off?|~||~||~|
Is your position that Enron is a one-off or do you as Citigroup believe that you need to work with the US government to improve the system?
We’re always working with the US government to try to improve the overall system, to try to safeguard investors and improve the transparency of how the machine works. Citigroup has always been very supportive of those efforts and will continue to be.

What are your estimates for the amount of business you can do here?
I’ll go back to the estimates mentioned yesterday [at the launch of SSB PCS] by third parties of $750 billion to one trillion dollars of wealth in the region.

Do you expect to do significant business in Islamic products?
It’s part of the offering that one has to have to be successful in the region. We expect it to be a relatively small percentage of the business we do in the early days, but everything we do is based on client need. We’ve got clients from a wide variety of geographical and cultural backgrounds, so we don’t know what the exact demand is going to be. We do know that within Citigroup we’ve got a reasonable product offering to tap into if the demand does substantially increase.

How exciting are Islamic products for Citigroup?
I think they are an exciting proposition for Citigroup; I can’t comment on their profitability specifically. For me, as a manager of the regional offices of Salomon Smith Barney, I would say it’s a product that the region is looking for so we’re going to try to offer it. As a distributor, we level the playing field from an incentives perspective for financial consultants, whether it’s an Islamic product, mutual fund, or transactional services in brokerage. We make every effort to level the playing field so a consultant is not incentivised to do one type of business over another type of business. Do what the client wants and we’ll all profit.

How do you avoid conflict over commissions?
We have a very thorough process through which any product we wish to sell has to go. There’s a product approval process in New York, there’s a product approval process in London, through which every product has to go prior to being sold.

But how do you assure that commissions aren’t excessive and that management fees won’t swallow a big chunk of the investor’s money?
That’s part of the product approval process. Anything that’s a package product, where we charge a fee, has to go through this approval process. The only products that don’t go through this are stocks and bonds — individual securities. I know that process is very robust. If you look at most of the people on those [approval] committees, they have twenty plus years of experience. Their job is number one, to protect the client from themselves and number two, protect the firm.

Are we going to have another dot-com type of bubble in the near future?
I don’t currently see another bubble coming.

Do you think we’ve learned though? Can we avoid it or is it inevitable?
You can go back to tulip bulbs, you can go back to junk bonds, then you can go to the technology bubble — people sometimes make investments that don’t correlate with underlying values. We try to caution people against doing that.

But will there be another bubble of some sort out there some time in the future?
I would again refer to the research analysts. And will we advise clients to be cautious when those bubbles come? Absolutely, we will.

What was your position on dot-coms at the time?
We were relatively late to the party and were slow to advise people to jump into it. On a relative basis with our competitors, you’ll find we were much less aggressive.
Even back then, we tried to focus on companies that were participating in the Internet but which had earnings, a real balance sheet, instead of a bunch of capital they’d raised from an IPO and were burning through.||**||

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