COMPLETE CHECK-UP FOR A MILLIONAIRE
What makes big businessmen from Russia different from entrepreneurs in other countries? What are their investment preferences? What problems are associated with large fortunes and who deals with them? Dmitry Breitenbikher, Head of VTB Private Banking answers these questions to BRICS Business Magazine.
Russian private banking is often compared with European or American. How can be Russia and other developing countries compared in this sense – in terms of both the numbers, the business models, and the mentality?
It would be hard to compare us with the BRICS countries and most other developed and developing economies for one simple reason: they lack our Soviet experience and the transition from a planned to a market economy. It is only in 1990s and 2000s when wealth began to be made here, so all our money is relatively ‘young’.
In this sense, we stand closer to USSR’s former republics - both the ‘age’ of money and the transitional toolkit, which in many respects determines the client’s profile. Basically, these are the ‘first wave’ businessmen, still actively involved in the operating activities of their companies, and often they do not even make a rigid line between the business and their personal money.
The involvement of Russian clients in their business increases the risks of responsibility solidarization for company matters for family assets. Fedresurs statistics shows that in 2020, 39% of controlling persons (of the total applications filed) were brought to subsidiary liability for corporate debt. Furthermore, the complete understanding of ROI to your own business as an asset that generates the client’s main income, largely determines the conservative nature of investment for personal savings.
Also, compared to other emerging markets, Russia has some distinctive features with regards to succession strategies. According to surveys, not many of our businessmen who would like to leave businesses to their children. Partly, this is because they would like to leave the children a greater freedom of choice to ensure further development, which is expressed in the desire to implement their own business and leave the monetary funds to the heirs.
In many ways, however, this also makes us noticeably different from our BRICS fellows, due to strong personification of Russian business. Business is much dependent on the personality of the founder, their personal connections, the established interaction with partners and state authorities – all that would very hard to inherit.
As you can see, all differences are primarily explained by the historically different development of economies and corresponding institutions, rather than the mentioned ‘mentality’. I don’t really like this word in general, and the attempts to operate this term to explain our ‘specialness’ – which is a rather dangerous trend when discussing the ‘national specifics’. As Bedjamin Disraeli said, “all generalizations are false, including this one”. You need to be very careful if you attempt to identify some common features for any groups of people. And we do not work with groups, but with each specific client.
It may be that the reluctance to follow the typification principle in your work is explained by professional activities. The work with VIP clients, first of all, requires individual approach to each of them. Due to technology, Big Data and CRM, the individual approach gradually infiltrates mass segments, showing that the development vector is already largely determined. Everyone’s different – which is very simple and incomprehensible at the same time. Something that may be a constant for one is a variable for another. And I believe, it would be impossible to build a prosperous banking business today disregarding the difference.
Around April of last year, many bankers started talking about a powerful shift in their clients’ sentiment. Even the most conservative ones were ready to seize the moment, take on more risks, and move toward shares instead of the more familiar Eurobonds. The moment does not seem to have been played out to the end, but VTB offers investors currency irredeemable subordinated bonds. Why them specifically?
In April, the ‘powerful investment shift’ occurred in the talks of those who run after the steam locomotive. Clearly, there was a correction in March, and, naturally, we recommended the clients to strengthen their positions in stock due to their fastest recovery. First of all, we then recommended ‘growth shares’ of technology and IT companies, the main beneficiaries of the upcoming pandemic –our clients were able to make good money on this, indeed. But to be fair, I must say that it wasn’t in April 2020 when the interest to investment evoked.
In 2018-19, we systematically increased our share in investment products, but the products were different. So this is probably not the question of a ‘powerful shift’ – rather, the need to timely suggest the market situation responsive product to our VIP clients, on the one hand, and the needs of each specific client, on the other. Thanks to our smart investment proposal model, we know how to do this.
Last year, we added more than half trillion rubles of wealthy clients’ funds to our investment products.
Incidentally, this applies not to the Russian market only. VTB Capital has its own expertise in the Western markets and emerging markets. Speaking of last year, for us it was notable with a record volume of investment in foreign securities, primarily shares.
There is easily explained – the offer of technology and software companies’ securities on the Russian market is limited to only few names. So, to create a diversified growth stock portfolio, our recommendations focused primarily on the American and European markets.
Now we are looking more towards the recovery of economies, cyclical industries and value stocks. Here, the Russian market has a fairly wide range of oil and gas and metallurgical companies, they have already grown well since the beginning of the year, but still - we observe a great growth potential. I think, this year we’ll show 20-25%.
Now, talking about the second aspect of the question. VTB’s subordinated bonds are intended primarily for quite conservative investors. Rather, this is a substitute product, approximated to deposits. But aggressive investors demonstrated interest in it as well, and used this conservative but nevertheless profitable instrument to diversify their portfolios. Compared to zero deposit rates, 5% on dollar securities and 3.75% on euro securities suggest a nice bonus to the market of eurobonds.
This helped us to exceed our targets, mainly thanks to demand from wealthy clients. We sold 90 billion rubles denominated in currency, with more than 60 as part of private banking.
More than two thirds of the issue was sold through private banking. Is that what you predicted, or the success was unexpected?
To be honest, we predicted a several times lower demand. When it comes to success, together with our investment advisors, we built a smart sales model - I briefly touched upon this earlier. Roughly speaking, you offer a client a particular product depending on their current portfolio, asset duration, consumer preference profile, risk appetite, life cycle stage, and so on. So we divided all clients into 14 clusters and made personal proposals based on this information about each specific person, with promptly received and analyzed feedback.
This kind of focused gave serious results. When you offer a client something they need exactly when they need it, and through the convenient channel- it would be hard not to be successful. In the secondary market, we can still sell ruble-denominated and currency-denominated securities, particularly as we saw an increased demand after dividend payments. Today I can already announce another interesting ruble issue in the summer.
The Russian market faced subordinated bond write-offs that upset investors. What should a client understand with regards to this type of securities? What risks do you warn them about? What could change the situation not in favor of the investor within the next couple of years?
By all means, we warn the client about all the risks, but a reference to write-offs and ‘miss-selling’ would not be quite appropriate here.
VTB is a state-owned bank with high reliability ratings. Moreover, this is not the first time for us when we issue subordinated bonds. Our currency bond is currently trading at 109% of par and has retained its popularity for a very long time. The reliability and profitability of these instruments is exactly something that explains the interest in them.
WE OFFER INVESTMENT CHECK-UP. AS PART OF THE SERVICE, REGARDLESS OF WHERE THE CLIENT’S ASSETS ARE, WE PROVIDE THEM WITH PROFOUND PROFESSIONAL EXPERTISE, WHICH WAS EARLIER AVAILABLE ONLY TO MAJOR INSTITUTIONAL INVESTORS, PREDICTED PROFITABILITY AND MADE RECOMMENDATIONS FOR PRESERVING AND INCREASING CAPITAL. IN THE CURRENT SITUATION, WHEN THE INFORMATION SPACE ABOUNDS WITH NUMEROUS ‘EXPERTS’ WRITING ABOUT SOMETHING THEY KNOW LITTLE ABOUT, THE VALUE OF RELEVANT EXPERTISE FROM THE BIGGEST INVESTMENT BANK CAN HARDLY BE OVERESTIMATED
One of the most famous Russian multi-family offices is part of your private banking. What makes a banking MFO better or worse than a boutique structure?
The most obvious advantage is that our family office benefits from all the organizational and administrative resources of a large bank and its partners. It is the full embodiment of ‘one-window’ principle: the client’s long-standing trusted relationship with the personal manager gives a clear understanding of investment, tax, legal and life-style - support as well as other services that a Family Office should offer.
At the same time, we have at our disposal the best analysts and portfolio managers, lawyers who know the specifics of certain sectors, tax and foreign exchange specialists, industry experts and many others. If VTB Group does not have sufficient expertise to resolve some highly specific issue, we resort to the capabilities of our partners, the best in this area. It’s fair to say that that we face no shortage of those willing to become partners of VTB’s Private Banking and work with the segment leader and its VIP clients.
What is also very important, our security service carefully checks all our partners to avoid any reputational risks. This means that the solution that we will recommend to a specific client will be verified through comprehensive internal and partner expertise. For a boutique MFO, employing different industry specialists would be too expensive, while outsourcing everything is fraught with diluted confidentiality and responsibility for the accuracy of performing the client’s task.
The terminology of the Family Office concept is also important. In some cases, the client already has an accountant who has dealt with the company’s affairs for a long time – together with the personal ones, and thus enjoys the client’s full trust. Such structures consisting of one or two people are also called family offices. Of course, in reality, these do not have expertise on most highly specialized issues, as well as there is no way to monitor all market, regulatory, technological changes to be able to promptly inform the client.
The bank seems to get more value from the data than boutiques?
When you have a client base with well-established contact, and a prompt feedback system, you can make a particular task scalable. A person addressed MFO with a specific problem, we’ve dealt with it successfully solved it – so, it would be logical to assume that other clients may also have similar challenges. This means that each individual solution can be replicated to a wider audience, with tools for quick adaptation to the specifics of each client.
For example, during the pandemic many decided to reconsider their family relationships. As a result, they thought about bringing some part of the assets beyond the ‘husband-wife’ perimeter, making children, for example, the owners or beneficiaries. As a result, after several inquiries like this, we found a way to develop this approach into a product.
YET INTEREST IN CONTINUITY IS GROWING AND NOT FROM JUST PACKAGING OR AN APPROPRIATE STRUCTURE. PEOPLE WANT TO UNDERSTAND HOW ALL THIS WORKS IN THE LONG-TERM PERSPECTIVE, SO WE LAUNCHED A SPECIAL PROJECT JOINTLY WITH MOSCOW STATE UNIVERSITY AND THE UNIVERSITY OF SINGAPORE. THE CORPORATE GOVERNANCE MODULE THERE IS COMBINED WITH FAMILY CAPITAL MANAGEMENT (FOR US, LINKING THEM TOGETHER WAS FUNDAMENTAL), AND IT CORRESPONDS TO THE PROFILE OF TODAY’S CLIENT, WHO EFFICIENTLY MANAGES FUNDS HIMSELF AND PARTICIPATES IN OPERATIONS. THE FIRST GROUP HAS ALREADY STARTED
What other services do you also provide?
The family office protects against risks of any kinds. These include corporate risks, the regulatory change risks in Russia and abroad, the risks of changed family relations, and the market risks.
We offer investment check-up. As part of the service, regardless of where the client’s assets are, we equip them with a deep professional expertise, which was earlier available only to major institutional investors, predicted profitability and recommendations for preserving and increasing capital. In the current situation, when the information space is abundant with numerous ‘experts’ who write about something they have a poor idea of, the relevant expertise from the largest investment bank can hardly be overestimated. This ensures a steady increase in clients regardless of the market situation.
The advisory board enables clients to make investment decisions. As I mentioned in the beginning of our interview, most of our clients built their business themselves, and got used to managing everything and making their own decisions.
We provide them our expertise and recommendations, explain with the required level of detail why we suggest a certain investment, but the clients make the final decision themselves. The idea perfectly fits the Russian client profile, and the advisory direction is growing at an outstripping pace.
By analogy with investment check-up, we also developed a tax check-up service. We look at the client asset profile, give recommendations on its arrangement, what to revise in due to legislative changes, how to anticipate possible risks and establish the appropriate succession strategies.
The latter is also extremely relevant: if people began to form their own fortune in the 1990s, even in the early 2000s, for many inheritance moves from theory to the practical field. Unfortunately, in Russia it is not common to think about this in advance. The penetration level of insurance services would serve as an indicator: it seems that in Brazil it is around 50%, in the West it approximates 100%. We are not used to touch upon this topic, therefore, so here it is only about 10% - which mainly include people who simply took out a loan that required a compulsory insurance.
Yet the interest in continuity is growing, and not just from packaging or appropriate structure. People want to understand how all this works in distant perspective, so we launched a special project jointly with Moscow State University and the University of Singapore. The corporate governance module there is combined with family capital management (for us, linkinghtem together was fundamental), and it corresponds to today’s client profile, who efficiently manages funds himself and participates in operations. The first group already started and two more groups signed up for the fall course.
You bring both fathers and children to Moscow State University?
Yes, and I see it as the program’s extra advantage as we see differences in their outlook on the item. In most cases, people are more like their time than their parents. And our objective is not only to launch and moderate the dialogue - but also, to prepare the toolkit for resolving common problems - not in theory, but based on the actual practice and Singapore’ live experience. The market hasn’t seen programs of this kind yet, and I hope that we will succeed.
You’ve observed this for many years - can we say that Russian business is not yet ready for the change of generations?
We can’t be affirmative and categorical about this. I’ve known cases when the founding fathers calmly retire and entrust everything to the children, but there are also opposite examples, when people cling to control to the last moment, because they are used to this lifestyle.
In general, there are much more than the two options. One wants to implement the business and transfer the funds under management, another, on the contrary, seeks to acquire a new business during turbulence and to the children the assets unrelated to the main production.
By the way, this is was the reason why we launched our own marketplace together with VTB’s corporate block. It is a place where our clients, by private subscription, can offer a business for sale, and other clients can buy it. It would be more correct, though, to refer to it as a closed club-type platform that connects big businessmen with each other.
What problems are specific for large clients today?
We have already talked about succession. Then there is the question of creating long-term income for the time when you no longer want to deal with business. Everyone wants to keep the usual consumption level, but unfortunately, not everyone thinks about it in advance. Among other, VTB offers subordinated bonds, our closed-end real estate investment funds, or simply the purchase of a particular property to generate rental income.
Other common pains? Of course, many consider restructuring the ownership of a particular business. In this respect, we see a growing interest in family foundations, direct ownership instead of Western trusts. Recently, I’ve flew to Kaliningrad, and we signed a cooperation agreement with the local offshore zone on Oktyabrsky Island.
On average, Russian businessmen have more partner conflicts than in Europe and the United States. What is the reason?
Again, I think, everything is because these is no desire to reach an agreement amicably, it is not common in our country - the business is too young, and there’s still not enough time for the established culture. You can often hear: “I’ve known him for 100 years, we have been friends since the first grade at school, we can sit down and agree any time”. They won’t - because we cannot look at the world through the eyes of someone else, but we can discuss in advance and secure all possible alternatives. You cannot protect yourself from partner conflicts in any other way.
One of my clients, after having divided up his business with a long-standing and trusted partner answered when I asked him why? : “Dima, even in Christ’s team, one rejected him, another one did not believe, and the third betrayed, so what do you want from me?”
All conditions need to be recorded as early as possible, but it will also be useful to do this right now, though already this is fraught with conflict. Tell your partner or your wife about such an agreement and start counting the skeletons that will immediately fall out of the closet. Still, it is better to provoke this conflict now than clear the consequences after you have invested too much of your money, effort and time.
WE LAUNCHED OUR OWN MARKETPLACE TOGETHER WITH VTB’S CORPORATE BLOCK. IT IS A PLACE WHERE OUR CLIENTS MAY, BY PRIVATE SUBSCRIPTION, OFFER A BUSINESS FOR SALE, AND OTHER CLIENTS CAN BUY IT. IT WOULD BE MORE CORRECT, THOUGH, TO REFER TO IT AS A CLOSED CLUB-TYPE PLATFORM LINKING BIG BUSINESSMEN WITH ONE ANOTHER
One well-known banker said that a Russian and a Brazilian billionaire have much more in common than a Russian millionaire and a Russian billionaire, just because the level of an ultra-high net makes him a global, while a high net still remains local. Can this be argued?
It’s not a question of being global, although partly it also is. From the global business perspective, correct, but there is also the question of forming capital. In this respect, a Russian, by virtue of the common history, will be more easily understood by another Russian than by a Brazilian. The rate at which Russian super-large states emerged in the 1990s is unique in many ways. 10 years before that, we did not have billionaires, we only had members of the Komsomol, and here we cannot be compared either with Brazil or South Africa. China may have experienced something similar, but there is a different social structure and a totally different culture.
So I will reiterate, a Russian billionaire has a lot in common with the Russian millionaire. But a Brazilian billionaire most probably has more in common with a South African billionaire, than with a millionaire from his home country. However, this is my own little conclusion. As I said, I don’t really like generalizations. Any analogies are imprecise, they are always approximate.