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Five years ago, venture capitalist Everett Randle (with stints at Founders Fund, Kleiner Perkins, and currently, Benchmark) published Playing Different Games, the defining piece of the ‘19-21 tech boom. In the article, Everett debated the rise of Tiger Global, a hedge fund which had begun to write massive tickets into early- to late-stage start-ups at a staggering pace.
His thesis, back then, was that venture capital would see a “middle squeeze”, splitting the industry into essentially three groups: One, the “low-cost vendors” - players with massive amounts of capital deploying said capital in a somewhat industry-agnostic capacity into relevant opportunities that can absorb the funds in a value-generating way. Two, “luxury retailers” - think specialized (earlier-stage) VCs with perhaps smaller pockets but substantial industry expertise that can access the best deals without requiring the massive check size and speed of the former group. And lastly, the “dead zone” of players in the middle - funds that neither have top-notch industry expertise nor the check size or speed, that would likely face challenges going forward when it comes to winning competitive deals.
Admittedly, Tiger Global (at least by my observation) has not turned out to be the permanent threat as expected. They got hit by 2022’s challenging combination of rising rates and high inflation, and the subsequent consequences to highly valued but not-so-well-positioned start-ups. However, their approach has persisted in the form of other firms that have raised massive amounts of capital (especially for AI research, AI roll-out, and even AI roll-ups), such as Andreessen Horowitz or General Catalyst.
Why am I telling you this? Because with a few years of wealth management experience under my belt, on both sides of the table, I would make a similar argument - that wealth management in Germany will, and is seeing, a massive middle squeeze. The differentiation might not be quite as extreme as low-cost vs. luxury (although the same could be argued for the lower end of the market, as visible in the massive success of the likes of Trade Republic and Scalable Capital). But directionally (as I will explain shortly), it holds true, especially driven by the transfer of wealth and individual wealth-creation to a younger, more educated generation.
What the “Next Gen” wants from their wealth manager
Let’s preface this with what is perhaps an obvious, but important disclaimer - my thoughts on this matter are likely biased by how we do things here at Cape May. Our clients are, to the most part, young(er) affluent investors with a certain affinity for and prior experience in all sorts of investments. Clients of a different background, unsurprisingly, might have other preferences, and in the end, every client is a little bit different. But directionally, I think the ‘trends’ I’m about to outline will only grow in importance, and thus drive how a wealth management firm or private bank should look like in the (near) future.
First of all - clients are still willing to pay for wealth management services. Yes, index funds have fundamentally reshaped (for the better) the way that affluent investors think about liquid portfolio construction. But there are still many related services that they are happy to outsource, ranging from portfolio construction, to selection on the specific instruments, to rebalancing and ongoing monitoring. (To paraphrase one of our clients, “I know how to buy an ETF, but I have a lot of respect for having to buy seven figures of ETFs.”)
But they are not willing to pay for just any type of managed account. They expect something that is clearly thought-through and ‘modern’. No single-stock portfolio of German stocks assembled by a 55-year old advisor according to whatever they read in today’s edition of Handelsblatt. They want a cost- and tax-efficient, diligently assembled portfolio of ETFs in-line with their needs and preferences, and/or select active strategies that can actually generate long-term outperformance after fees. In most cases, that’s not the case for your “best ideas” strategy consisting of 20 of the top 50 MSCI World large cap stocks. Perhaps worth noting for the former point - outperformance is not necessarily the goal. They are happy with a well-designed ETF portfolio that essentially generates benchmark return minus (appropriate) fees, especially if additional services (more on that in a second) add value to them as well.
Which brings us to perhaps the most important point - they are looking for an actual financial advisor. To quote my co-founder Markus (as I often do), they don’t just want someone who asks them if they want a conservative, moderate or aggressive (model) portfolio and then takes them out once a year for a performance review over lunch or dinner. They want an actual sparring partner who can provide holistic advice across all their assets, whether held with said advisor, another bank, or even outside a brokerage account (think private real estate or alternatives). Ideally, this expertise goes beyond just investment-related matters, i.e. into the direction of topics such as financial/estate planning, tax/legal structuring, or support in their entrepreneurial endeavours.
From personal experience at Cape May, but also from my prior experience in the family office space as well as active networking with fellow advisors, I can absolutely confirm that managed accounts (Vermögensverwaltungsmandate) are not a dying business. Especially if you provide the level of service as outlined above.
So what does this look like in practice, also in light of the “middle squeeze”?
“Luxury retailers”: Specialized, independent wealth managers and multi-family offices
Once again, I might be biased here - but let me explain my thinking by paraphrasing the wonderful Matthew Jarvis, and his fantastic book, Delivering Massive Value (a must-read for any (aspiring) wealth manager). You are willing to pay a premium price for many aspects of your life, ranging from the ‘brand name’ product at the supermarket, or a flight with Lufthansa over a Ryanair flight. So why not expect the same level of quality difference in wealth management - with an equal difference in price?
It’s exactly those (independent) wealth managers and multi-family offices out there that command premium prices that I would not have found viable a few years ago, but today understand as absolutely warranted. As outlined in the prior section, they don’t just provide a commoditized investment offering, but bespoke advice on structure, complex products, and all other matters of a client’s life. (One well-known American multi-family office starts at a minimum price of $375,000 a year, with a percentual fee implying a “minimum ticket” of roughly $50-100M in managed assets.)
To justify this price point, specialization is essential. Providers in this category don’t typically offer a service for all type of clients (and if they do, you should be wary of them). They focus on a particular type or size of clients, a certain specific setup, and/or specific asset classes. To name a few:
Large, German multi-family offices such as Kontora or HQ Trust that specialize in complex, often multi-generational fortunes. If you’re a first-generation entrepreneur with a seven-figure fortune, you could probably knock on their door, but chances are that the price they ask for might be too high for your (lower) level of complexity.
Specialized, (sometimes) ‘regional’ wealth managers like Cape May, Schex Wealth Management, or HONORIS Treuhand. Our clients tend to be tech entrepreneurs based primarily in Berlin (although we have clients elsewhere). Our industry peer Daniel Schex and his family’s eponymous wealth management firm focuses on second- and third-generation entrepreneurs in Southern Germany. Our friend Johannes at HONORIS provides outstanding service to charitable foundations and comparable structures.
Small, extremely specialized ‘individual’ advisors. There’s one Honorarberater that only focuses on pilots of a single airline. Or another advisor that I met that only works with former and current actors and their individual needs. And likely many more out there.
I would also highlight the word independent. While not always the case, many if not most players in this category get paid primarily by their client, directly from their account. In other words, they don’t benefit from any retrocessions (Bestandsprovision) or kickbacks, or if they do, offset them against any fees the client might pay elsewhere. They might, however, have strategies of their own (as is the case of us as well!) - but in general, I would expect any top-tier wealth manager in this category to only pick their own products if they feel like they are actually the best choice for their client.
So when is a ‘luxury retailer’ not the right choice for you? The obvious answer would be if you are not part of their target audience. But more importantly, I would argue they are a bad fit if you don’t want to make use of everything they have to offer. We recently spoke to an entrepreneur who was unhappy with the overall setup of their wealth. But besides maybe working with us on liquid investments, they had no interest to really make use of our further capabilities. We told them that we’d be happy to consider working together - but also made it clear that they wouldn’t get the best ‘return’ on our advisory fee if all we would provide is investments.
In that case, you might be better off with another category.
“Low-cost vendors”: International ‘Tier 1’ corporate and private banks
“Low-cost vendors”, admittedly, might be a bit of a misnomer here, because many of the participants we are about to discuss tend to not necessarily have low fees. The banks we work with would likely also not love it if we compare them to the Walmarts or Aldis of the world. 😉
Perhaps the better description might be something along the lines of “one-stop shop”. The banks that we encounter here most frequently can offer affluent investors access to (almost) anything they want, ranging from cash accounts to liquid investments to lending solutions. In other words, if you don’t want someone specializing in one product or solution, and/or to ‘mix and match’, such a one-stop shop is likely the better place than a “luxury retailer”.
To also somewhat close the circle to the original “low-cost vendor” analogy: If you are looking for commoditized products like a cash account, a brokerage account, or a residential mortgage, you likely get it for a better price from a “one-stop shop”. Often, they are the wealth manager and the bank/custodian that can make money off of both parts, whereas an independent wealth manager typically makes no money off of custody (the client pays for this separately) and thus needs to charge you elsewhere. (If a client just wants to buy an ETF outside an account managed by us, we typically just advise them to do this in a self-managed brokerage account so they don’t have to pay us or our custody bank too.)
As outlined in the prior section, let’s substantiate which players we have in mind here:
International, “Tier 1” private banks. Markus’s and my alma mater Goldman Sachs, its American ‘sibling’ JPMorgan, or Swiss wealth management giant UBS. They are global, and can offer access to almost anything, especially on the investment side.
European corporate banks. Deutsche Bank, BNP Paribas, and the likes. While their offering can sometimes be a bit limited, they offer something that the prior group typically doesn’t: corporate banking services, such as cash accounts for day-to-day operations, lending offerings such as residential and commercial mortgages, as well as related services for clients operating businesses.
Independent private banks. ODDO BHF, Berenberg, and their Swiss siblings, for example. Family-owned and -operated, and around for decades, we often see them favored by second- or third-generation families that like the idea of a banking partner that thinks as long-term as they do.
To go back to the end of our prior section - we think that the “one-stop shop” is a great option if you are very clear on what you are looking for from your banking partner, and want to get that specific offering (whether its products, lending, or something else) at the best achievable price. For example, if you are a very self-driven investor, and/or don’t have a high level of complexity in your wealth.
But we think they are not a good fit - or might even be a bad choice - if you don’t know yet what you actually want. As we mentioned earlier, they might ask you if you want a conservative, moderate, or aggressive portfolio, and might have a decent implementation to go along with it. But if you don’t bring the eight or nine figures in investable capital to get the truly bespoke service that they can offer, we would doubt whether they take the necessary amount of time for the questions that you should ask yourself before you think about your asset allocation, let alone specific investments. (For further reading, check out Defining Your Investment Objectives, and our “fan favorite”, The Aspirational Investor Framework. Or reach out to us if you’re looking for personalized support.)
Stuck in the middle: Neither specialized nor low-cost
We have many client relationships in which we work with advisors at companies mentioned here - and while we’d of course like to manage all assets that a client has, it often makes more sense to split their (liquid) assets across someone like us as “luxury retailer” and a “one-stop shop” bank to really get the best of both worlds. But with that in mind, there are also cases where we tell clients to consider consolidating their assets, whether that’s with us or the “one-stop shop”. Which brings us to the third and last category: the unfortunate private banks and wealth managers that are “stuck in the middle” when it comes to working with affluent individuals.
Importantly, I want to highlight the word affluent. Some of the groups mentioned here might provide phenomenal service for the ‘mass affluent’, and/or their corporate clients. But providing good service here doesn’t mean that it also translates into a ‘right to play’ in the (U)HNW space. So with that in mind, let’s be more specific:
Small, local banks. They have often been with their client from day 1 of their entrepreneurial journey, opening their first bank account or financing their first piece of real estate. For that, they have been great partners - but many of the clients that come to us with such relationships have unfortunately outgrown them. With cash rates far below what they can get at other banks (let alone a money market fund), or simple (and often expensive) investment solutions, they simply don’t operate at the level required for a seven- or eight-figure fortune. Luckily, they often provide services that we nor the one-stop shops can offer, such as real estate lending (especially for real estate outside large German cities) or corporate banking services.
“Old-fashioned” advisors (no matter if independent or bank). The world of investing is in perpetual change, and anyone looking to build a lasting career in the industry needs to stay on top of the trend. Unfortunately, we often encounter market participants who refuse to do so. They still sell overpriced active funds, focus heavily on their local geography (i.e. the German wealth manager investing 20%+ of a client’s portfolio into German stocks), and see no benefit in advising clients on topics outside their portfolio. Unlike the small, local banks, we rarely see a path forward here to cooperate - clients can often get equal, if not better performance through products offered by the “one-stop shops”.
Certain (European) private banks. As I mentioned in the prior section, some families like the idea of working with a firm that is in itself a family business, especially if their service offering allows them to be counted in the “one-stop shop” category. But unfortunately, that is not the case for all of them. Whether they failed to evolve, simply focused on their family brand over actual service, or another reason - they simply are “stuck in the middle”. Sometimes, a case can be made for Swiss custody, but clients should still consider whether they can get the same protection at lower cost from a larger Swiss bank or broker.
It’s important to highlight here that none of those players have to stay “stuck in the middle”. There are more and more examples of large and small players in Germany (and elsewhere in Europe) that manage to (slowly) make their way into either category - through some combination of M&A, cultural change, and of course sheer force of will.
Or, in the case of independent advisors, a generational change. From what are perhaps more ‘traditional’ owners and advisors, to the next generation, looking to take established firms into a bright future.
Not sure which type of wealth management setup is right for your situation - or whether your current banking relationships are serving your wealth? We’re happy to offer you a second opinion. Don’t hesitate to reach out to us.