Complete Сheck-up for a Millionaire

Russian private banking is often compared with European or American. How do Russia and other developing countries compare in this sense – in terms of numbers, business models and 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 was only in the 1990s and 2000s that wealth began to be made here, so all our money is relatively ‘young’.

In this sense, we stand closer to the USSR’s former republics in both the ‘age’ of the money and the transitional toolkit, which in many respects, determines the client’s profile. Basically, these are ‘first wave’ businessmen, still actively involved in running their companies, and often they do not even draw a rigid line between the business and their personal money.

The involvement of Russian clients in their business increases the risks of liability for company matters and family assets merging. Fedresurs statistics show that, in 2020, 39% of controlling persons (of the total claims filed) were brought to subsidiary liability for corporate debt. Furthermore, a full understanding of the rate of return on investment in your own business as an asset generating the client’s main income largely determines the conservative way personal savings are invested.

Also, compared to other emerging markets, Russia has some distinctive features with regards to succession strategies. According to surveys, not many of our businessmen would like to leave their businesses to their children. This is partly because they would like to leave the children greater freedom of choice in further development, which is expressed in a desire to run their own business and leave the funds to their heirs.

In many ways, however, this also makes us markedly different from our BRICS fellows, due to strong personification of Russian business. Business is greatly dependent on the personality of the founder, their personal connections, the established collaboration with partners and state authorities – all things that would be very hard to inherit.

As you can see, all the differences are primarily explained by the historically different development of economies and corresponding institutions, rather than the mentioned ge‘mentality’. I don’t really like this word in general and attempts to use it to Complete Сheck-up for a Millionaire explain our ‘specialness’ – which is a rather dangerous trend when discussing the ‘national specifics’. As Benjamin Disraeli said, “all generalisations are false, including this one”. You need to be very careful in attempting to identify any common features in specific groups of people. And we do not work with groups, but with each specific client.

It may be that the reluctance to follow the principle of typification in your work is explained by professional activities. Work with VIP clients, first of all, requires an individual approach to each of them. Due to technology, Big Data and CRM, the individual approach is gradually infiltrating mass segments, showingthat the development vector is already largely determined. Everyone is different, which is very simple yet 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 last year, many bankers started talking about a powerful shift in their clients’ sentiments. Even the most conservative ones were ready to seize the moment, take on greater 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 irredeemable subordinated currency bonds. Why them specifically?

In April, a ‘powerful investment shift’ occurred in what those who run after the steam locomotive talked about. Clearly, there was a correction in March and, naturally, we recommended that clients strengthen their positions in stock due to their rapid recovery. First of all, we then recommended ‘growth shares’ in technology and IT companies, the main beneficiaries of the upcoming pandemic – our clients were, indeed, able to make good money. Yet, to be fair, I must say that it was not in April 2020 that the interest arose in.

In 2018–19, we systematically increased our share in investment products, but the products were different. So this is probably not a question of a ‘powerful shift’; rather, the need to suggest to our VIP clients, in a timely fashion, a market situation responsive product, 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 a trillion roubles of wealthy clients’ funds to our investment products.

Incidentally, this applies not just to the Russian market. VTB Capital has its own expertise on western and emerging markets. Speaking of last year, for us it was notable, with a record volume of investment in foreign investment and securities, primarily shares.

This is easily explained: the offer of technology and software company securities on the Russian market is limited to only a 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 metals industry companies, which have already grown well since the beginning of the year, but we still observe a great growth potential. I think we’ll show 20–25% this year.

Now, talking about the second aspect of the matter. VTB’s subordinated bonds are intended primarily for quite conservative investors. This is rather a substitute product, approximated to deposits. But aggressive investors demonstrated an interest 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 for eurobonds.

This helped us 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.

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

More than two-thirds of the issue was sold through private banking. Is that what you predicted, or was the success unexpected?

To be honest, we predicted a much 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, promptly received and analysed the feedback.

This kind of focus produced serious results. When you offer a client something they need precisely when they need it and through a convenient channel, it would be hard not to be successful. On the secondary market, we can still sell rouble-denominated and currency-denominated securities, particularly as have seen an increased demand after dividend payments. Today, I can already announce another interesting rouble issue in the summer.

The Russian market faced subordinated bond write-offs that upset investors. What should a client understand about this type of securities? What risks do you warn them about? What could change the situation to the investor’s detriment within the next couple of years?

By all means, we warn the client about all the risks but 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 we have 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 what explains the interest in them.

One of the most famous Russian family offices is part of your private banking. What makes a banking FO better or worse than a boutique structure?

The most obvious advantage is that our family office benefits from all the organisational and administrative resources of a big bank and its partners. It is the complete embodiment of the ‘one-stop-shop’ principle: the client’s long-standing trusted relationship with their 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 inthis area. It is fair to say that that we face no shortage of those willing to become VTB

Private Banking partners and work with the segment leader and its VIP clients.

It is also very important that our security service carefully checks all our partners to avoid any reputational risks. This means that the solution recommended to a specific client will be verified through comprehensive internal and partner expertise. For a boutique MFO, it would be too expensive to engage different industry specialists, while outsourcing everything is fraught with diluted confidentiality and liability for the accuracy with which the client’s task is performed.

The terminology of the Family Office concept is also important. In some cases, the client already has an accountant who has, for a long time, dealt with the company’s affairs, together with personal ones, so enjoys the client’s full trust. Such structures consisting of one or two people are also called family offices. In reality, of course, these do not have expertise on the most highly specialised issues, plus there is no way to monitor all market, regulatory and technological changes in order to inform the client promptly.

The bank seems to get more value from the data than boutiques?

When you have a client base with well-established contacts and prompt feedback, you can make a particular task scalable. A person addresses the FO with a specific problem, we woudeal with it and successfully solve it – so it would be logical to assume that other clients might also face similar challenges. This means that each individual solution can be rolled out to a wider audience, with tools for quickly tailoring it 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 outside the ‘husband-wife’ perimeter, making children, for example, the owners or beneficiaries. As a result, after several enquiries 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 provide?

The Family Office protects against risks of any kind. These include corporate risks, the regulatory change risks in Russia and abroad, the risks of changed family relations, and market risks.

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, predict profitability and recommendations for preserving and increasing capital. In the current situation, when the information space abounds with numerous ‘experts’ who write about something they know little about, the value of relevant expertise from the biggest investment bank can hardly be overestimated. This ensures a steady increase in clients irrespective of the market situation.

The advisory board enables clients to make investment decisions. As I mentioned at the beginning of our interview, most of our clients built up their business themselves and are used to managing everything and making their own decisions.

We provide them with our expertise and recommendations, explain in the requisite detail why we suggest a certain investment, but the clients make the final decision themselves. This idea fits perfectly the Russian client profile, and the advisory direction is growing apace.

By analogy with investment check-up, we also developed a tax check-up service. We look at the client’s asset profile, give recommendations on how to structure it, what to revise due to legislative changes, how to anticipate possible risks and establish appropriate succession strategies.

The latter is also extremely relevant: if people began to form their own fortune in the 1990s or even 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 touching on this topic, so here it is only about 10% — which mainly include people who simply took out a loan that required compulsory insurance.

Yet the interest in continuity is growing, and not just from packaging or an appropriate structure. People want to understand how all this works in the long term 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 basic), and it corresponds to the profile of today’s client, who manages funds efficiently himself and participates in operations. The first group has already started and two more groups have signed up for the autumn course.

You bring both fathers and children to Moscow State University?

Yes, and I see it as an additional advantage of the programme as we see differences in their outlook. In most cases, people are more like their own 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 actual practice and the Singapore live experience. The market hasn’t seen programmes 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 their children, but there are also opposite examples, when people cling on 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 pass on to their children assets unrelated to the main production.

By the way, this was the reason that 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.

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

What problems are specific to big 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 maintain their usual consumption level but, unfortunately, not everyone thinks about it in advance. Among other things, VTB offers subordinated bonds, our closed-end real estate investment funds, or simply 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-style trusts. Recently, I 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. Why?

Again, I think, everything is because there is no desire to reach an agreement amicably; this is not common in our country — business is too young, and there hasn’t been enough time yet for the culture to become established. You often hear: “I’ve known him for 100 years, we have been friends since primary 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. There is no other way to protect yourself against partner conflicts.

One of my clients, after having split up his business with a long-standing and trusted partner, answered when I asked him why?: “Dima, even on Christ’s team, one rejected him, another did not believe, and the third betrayed him, so what do you want from me?”

All conditions need to be recorded as early as possible, but it would also be useful to do this right now, though this is already 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 try to clear up the consequences after you have already invested too much of your money, effort and time.

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 ultra-high net worth makes him global, while high net worth remains local. Can this be argued?

It’s not a question of being global, although partly it also is this. From the global business perspective, correct, but there is also the question of forming capital. In this respect, a Russian, by virtue of common history, will be more easily understood by another Russian than a Brazilian. The rate at which Russian super-large estates emerged in the 1990s is unique in many ways.

Ten years before that, we did not have billionaires, we only had members of the Komsomol, and here we cannot be compared either to Brazil or South Africa. China may have experienced something similar but there is a different social structure and a totally different culture.

So let me say it once more: a Russian billionaire has a lot in common with a 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 how I see it. As I said, I don’t really like generalisations. Any analogies are imprecise; they are always approximate.