Risk Latte - Marked to market “Wealth Accounts” - the future of Consumer Banking

Marked to market “Wealth Accounts” - the future of Consumer Banking

Rahul Bhattacharya
July 30, 2007


Imagine that you are a high net worth individual and you own assets and have liabilities. Your assets are the money (cash) in your savings and time deposit account, your share certificates, car, the real estate that you own (apartment, bungalow or a piece of land), the investment in hedge funds, etc. And your liabilities are your credit card payables, the loan that you took out to buy the vacation home in St. Tropez, your other borrowings, etc. Then on top of that you have contingent claims such as your insurance policies, the numerous financial derivatives that you have bought and sold through your private banker in the form of structured notes and financial derivatives.

Now imagine that you have one single bank account which holds all your "assets" and "liabilities", including "contingent liabilities". Say, this account will hold the illiquid assets such as buildings, vehicles, and other intangible assets, as well as stocks, bonds, cash and other securities. This account will also hold all your liabilities and financial claims (contingent liabilities).

Now imagine that computers can continuously keep track of all these assets and liabilities in your account and can mark to market them constantly on a real time basis such that the arithmetic sum of the market value of the assets and the market value of the liabilities is the net worth of the account, i.e. your wealth at any given time.

Further, assume that you get "wealth cards" just like an ATM / debit card which can tap into your wealth account instantly check your wealth - the dollar (monetary) value of your wealth. And say, you want to buy an painting in a gallery which is worth more than the liquid cash that you have in your account, but then through your wealth card you can immediately pay for it by drawing on part of the wealth residing in your apartment building. After the purchase, your wealth in the account is accordingly adjusted.

Your wealth account will also facilitate the processing of credit. Instant credit will be available to you secured with the current mark to market value of your wealth in the wealth account.

Today all this may seem quite feasible and indeed consumer banking has already started moving towards such a system. Big banks are already offering their customers premier and integrated accounts whereby a lot is bundled together (you get your bank account which shows your mutual fund positions, insurance policies, provident fund savings, etc. besides your regular savings and checking account balances).

In 1993, however, such as scenario was not imaginable; but one man had the vision to see all this happening and a new world unfolding before us in the next two to three decades. In 1993 Charles S. Sanford, Jr., the Chairman of Bankers Trust gave a speech titled Financial Markets in 2020 . It was an important speech and contained a couple of seminal ideas. One of them was the notion of a Particle Finance Theory . The concept of Wealth Accounts was first introduced in that speech.

Hidden in the notion of the wealth accounts was another very important concept; that of having one uniform wealth account for all and sundry. Your wealth could be a billion dollars and my wealth could be ten thousand dollars; you may have hundreds of different types of assets and complex liabilities and I am simply have cash and credit cards but since any and all assets and liabilities in a wealth account are constantly marked to market a single type of wealth account can hold your wealth and mine too.

Charles Sanford went ahead and further proposed in that speech that wealth accounts will provide the holder of the account automated analytics to analyze their risk/reward and "suggest appropriate actions to achieve those targets". He suggested that wealth accounts will "provide customized investment management" which could be much better than what mutual funds can offer, thereby effectively making the holder of the wealth account his own mutual fund manager.


Reference: "Financial Markets in 2020" by Charles S Sanford, CEO Bankers Trust (1993)

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