Goldman Sachs is reportedly considering rewarding employees who refer clients to the business’s private bank.
According to the Financial Times, the US bank is proposing to incentivise bankers to leverage their networks to bring in new clients, potentially accelerating the growth of the private bank’s customer base.
UBS was also said to be drawing up plans for a similar scheme to give bonuses to employees who introduce their clients to private banking services, although they have reportedly been shelved, due, partly, to the complexity of the policy.
Credit Suisse explored similar referral schemes with its single global currency (SGC) where the bank’s employees could make cross-divisional client referrals under the global SGC framework.
But while the concept of referral bonuses for bankers who introduce clients to private banking is appealing in theory, the practical implementation, from regulatory constraints to risk management and the intrinsic complexities of integrating diverse banking services. Spear’s Top Recommended advisers and wealth management industry observers give their verdict.
Would banker referral schemes work?
When investment bankers, who already have established trust and relationships with clients, refer these clients to the private bank, it has the potential to lay the foundation for long-term, valuable relationships. However, despite the benefits, the implementation of referral initiatives has significant hurdles including regulatory constraints, risk management and the complexities of integrating diverse banking services.
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‘Using the network effect of any organisation must be a good idea…The starting point is difficult to argue against,’ Paul Kearney, managing director of ARC tells Spear’s.
‘But it’s not as simple as perhaps it appears at first,’ he adds.
He says many major with private banks have tried initiatives like this, but ‘I don’t know of any that have been hugely successful.’
‘I can’t foresee this as a stroll in the park so I applaud the ambition, but sometimes it’s easier said than done,’ he adds.
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Why have there been few successful referral schemes?
One major obstacle is the complex regulatory environment, points out Kearney. The complexity of a referral bonus was given as one reason why UBS shelved its proposed scheme.
The requirements of financial regulators, such as the UK’s Financial Conduct Authority (FCA), complicate the idea of referral bonus schemes, which must account for different product profitability, client engagement levels, and long-term relationship potential. The diversity of products a private bank offers—ranging from deposits to advisory accounts and lending solutions— adds further layers of complexity to any referral bonus structure.
‘Any plan that’s put in place will have to meet the various different dimensions that a bonus scheme will have to balance rather than it just being about you introducing the client, and them depositing assets of X,’ Kearney says.
Kearney adds: ‘If you’re suddenly getting the bonus from another part of the organisation one assumes you’re also going to have to apply your risk and compliance score as well, which will reduce that if you have other issues impacting the outcome of a balanced scorecard. So there are all manner of moderation issues, and do you have to take into account issues regarding the type of client introduced to the private bank.’
Personal v corporate
While there is an intrinsic need for wealthy executives and entrepreneurs to access private banking services, the integration of personal and corporate banking needs is fraught with challenges. Introducing a personal banking dimension into a corporate relationship can create tension and complicate matters. For instance, issues can arise if a high-risk client’s profitability diminishes, forcing the bank to reconsider the relationship. This scenario can lead to awkward situations, particularly if the client holds a significant corporate relationship with the bank.
A significant deterrent for investment bankers in referring clients to private banks is the perceived risk versus reward balance. The revenue generated from a private client portfolio often pales in comparison to the substantial fees earned from corporate advisory services. The potential downside risk of something going wrong with the referral—and thereby jeopardising a lucrative corporate relationship—often outweighs the perceived benefits.
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Kearney says: ‘It might be that even for a very wealthy executive, the revenue earned on their private client portfolio is extraordinarily modest in comparison to the value of the corporate advisory fees for the firm that you might be putting at risk were things not to work according to plan.’
‘It tends to be that people look at the downside risk and protect the revenue stream that they have. And that’s probably one of the reasons for the degree of inertia in introducing a personal dimension into a corporate relationship.’
Is there a need for such a scheme?
Despite the headlines, in reality banks work closely together already, Spear’s Top Recommended recruitment consultant, Exeter Partners‘ Nick Dogilewski, tells Spear’s.
Goldman Sachs, with its OneGS approach, spearheaded by CEO David Soloman, has managed to foster internal referrals more effectively, leveraging their strong internal communication and cohesive strategy.
‘There’s always a connection between investment banking and markets and the wealth management wing in most places, and normally business does filter across because you have people on the wealth management side who actively – either because it’s their job or they take it upon themselves, to pair up with areas on both sides of the business – always looking for leads,’ Dogilewski says.
He says the idea of a bonus might entice some people, but ‘I dont think it’s an incentive that’s really needed because you’ve got the wealth managers that are already chasing up every contact they can do within the investment bank. So it would, in one way, be paying money for old rope. That business is going to come across anyway.’
The better referrals, he says, are the wealth management division taking business to the investment, he says.
‘A family business owner company who wants to sell their company or refile it, they need the investment bank to do it, and not the wealth management division. And that’s where the brownie points come, and the extra kicker. ‘
‘The Credit Suisse SGC meant private bankers and brought business to the investment bank, in any area, you got a ring fence percentage payout on the revenue stream.
‘It made some people a seven figure payout at Credit Suisse over the years so I can see this incentivising the wealth guys, more than the IB guys.’
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Different jurisdictions
The impact of referral bonuses might also vary significantly across different regions. In the US, wealth managers get a monthly payout based on a percentage of their revenue, whereas in Europe, they receive annual bonuses. This difference in compensation structures could mean that the referral bonus initiative has varying levels of appeal and effectiveness across regions, Dogilewski suggests.
