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Many Asia-Pacific-based private banks are betting the
region’s rising middle class will see them achieve spectacular
gains in client assets and profitability in the future. Yet some
say private banks have ‘sleepwalked’ into their current asset bases
and could be hit with big losses if they fail to get strategies
right. Will Cain reports.
The emerging
affluent and mass affluent segments have been one of the hot topics
in wealth management in 2011.
Almost all of the leading wealth management banks now offer a
package designed for one or both of these sets of individuals,
usually defined as the $20,000 to $100,000 and $100,000 to $2m
segments respectively – with Singapore-based UOB one of the latest
banks to launch services to the “rising rich”.
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By GlobalDataWhile most in the financial
services industry agree an important part of their future
profitability will come from this affluent segment, there remains a
lack of clarity around how best these customers can be acquired and
retained.
“It’s a fair point to note that
while in the retail space all banks are trying to build their
propositions to cater to this segment, not many banks – even those
that have started to look at this segment – have the right
formula,” said one banker spoken to by PBI.
“There’s significant overlap between where the private bank
begins and where the retail banks who want to play in this space
ends. That issue is being defined as we speak.”
Past failures
This
is important because the last boom in interest in affluent-based
wealth management services, in the late 1990s and early 2000s, did
not end happily for a number of well respected businesses and their
executives.
Some racked up hundreds of millions
of dollars of losses through failed initiatives.
One of the biggest failures was at
UK-based Lloyds TSB, the predecessor to Lloyds Banking Group, which
launched an affluent service called Create in 2001.
The proposition included access to
the Goldman Sachs PrimeAccess broking service, which enabled
clients to access Goldman research, equity dealing and market
making, custody and settlement, and gave them access to selected
IPO offerings.
It was a core part of the Lloyds
TSB strategy, and when the service was launched it was projected to
double wealth management pre-tax profits from £300m ($468.7m) to
£600m.
The initiative was eventually
abandoned in 2003 after an estimated £100m of investment. It is not
clear why the service was scrapped although the bank reported
customer take-up had been low and there were concerns Create may
cannibalise other parts of its business, notably its investment and
insurance arm Scottish Widows.
Risky strategy
UBS was another to announce plans
for a mass affluent offering in 1999, only to abandon it a year
later.
Even HSBC, whose Premier service is
now regarded as one of the most successful affluent propositions,
did not achieve success first time around. Its initial attempt at
the affluent market was a 50:50 joint venture with Merrill Lynch
called MLHSBC, launched in April 2000.
HSBC eventually bought out
Merrill’s share in the business for nothing after it ran up losses
of $171m, according to the bank’s 2002 annual report.
Clearly, despite its great
potential, affluent banking comes with risks attached. Failed
strategies, according to the examples above, may be measured in the
hundreds of millions of dollars.
How can banks avoid making such
costly mistakes now that wealth management services for the
affluent have become popular again?
Value of KYC
A
seemingly fundamental but often overlooked component of strategy in
this space is that banks need to know who their customers are and
what they want, according to Seb Dovey, managing partner at Scorpio
Partnership.
Scorpio runs a project called
Future Wealth, founded in 2009 and scheduled to run for a decade,
to engage with affluent and high net worth individuals and monitor
their consumer preferences and general attitudes to wealth.
It then helps private banks build
strategies to deliver the types of products and services these
customers want.
He argues product and service
solutions need to be much more nuanced than the simple segmentation
based on wealth and gender currently offered by most banks.
Customers drive
business
“The idea that one size fits all
for all is antiquated,” he says.
“We’ve got to understand [in the
wealth management industry] that it’s customers that drive
businesses, not the other way round.
This is something that’s well
understood in other industries. The technology and health care
sectors are good examples.
But the financial services industry
still wants to dictate to its customers because it thinks it knows
better than them.”
This sentiment is echoed throughout
the three annual Future Wealth reports and a related analysis of
Asia’s emerging affluent segment called the Future Priority report.
In particular, The Future Priority research, which was published in
January this year, highlights the importance of regional
differences even within areas which banks typically treat with a
fairly homogenous strategy, for example Asia-Pacific.
The conclusion is reached through
the creation of a set of archetypes for consumers in countries
across Asia which reflects their attitudes to a range of topics
including wealth, spending habits, personal values and family and
social life.
The four archetypes created in the
analysis show how differently consumers’ attitudes, values and
expectations vary across markets in Asia.
Archetyping
clients
It shows, for example, that
prospective private banking clients in South Korea value status
highly and also tend to be more ostentatious with their wealth.
From a private bank perspective,
this means they are more likely to respond to private banking
offers which offer some element of prestige, for example exclusive
bank cards or associations with high-end brands.
It also shows South Koreans are
likely to be more willing to talk about wealth and their wealth
requirements, meaning the provision of financial advice becomes an
easier process.
However, they are less likely, on
average, to be persuaded to sign up for offers where specific
benefits are available, for example value-based services and
discounts.
It shows, arguably – and the
archetypes are not definitive – that South Korean consumers may
also be less price sensitive in an investment context.
If the South Korean archetypes are
compared with a market like Hong Kong, it becomes clear how
important a more detailed approach to private banking is required
in different markets.
The very archetype that is least
likely to prevail in South Korea, a benefit/value-based
proposition, is the most important type of offering based on the
preferences of Hong Kong-based affluent and high net worth
individuals.
Core markets
The research bears out a subtle
shift which is already underway in private banking – the revision
of typical Asia-Pacific-based structures to an emphasis on a
smaller number of core markets.
Banks including Credit Suisse, BNP
Paribas and Coutts have all been involved in this process during
2011, reflecting to an extent that a ‘build it and they will come’
approach to private banking offices in emerging markets is not the
best approach.
“If you’re simply opportunistic,
where you sign up whoever you meet as a client or even a candidate,
you just don’t necessarily get the right level of intellectual
capital. [You can not] grow and be relevant in the countries that
you want to be in,” says one private banker spoken to by
PBI.
Sleepwalking into asset
bases
Dovey puts it more strongly. “Many private banks in Asia, as
much as worldwide, have kind of sleepwalked into asset bases and
don’t know how they got there,” he says.
Now, as the global economy teeters
and purse strings start to tighten once more, Asian private banks
are trying to rationalise and find ways to generate a return on the
investment many have received from their parent institutions.
Cost-income ratios in Asian private
banks are among the highest in the world, a situation which has
been allowed to persist because of the growth anticipated in the
region.
Affluent wealth management is
likely to be one of the key means of achieving this projected
growth but is likely to require private banks to overcome their
aversion to technology and meet the demands of affluent customers
for accessibility and convenience.
In addition, for investment
services to be provided on a more industrial scale, advisers need
to be given access to better tools.
Utilising technology for
financial services
This has not been the strong-suit
of private banks in the past. Dovey says private banking clients
regularly tell him they get a better and more convenient investment
service through their HSBC Premier accounts than they do through
their private bank.
“I’ve never accepted the argument
that once you become rich you’re no longer interested in utilising
technology for your financial services,” says Dovey.
He adds there is resistance from
private banks to implement technology because either their customer
bases are too small or because they say they know what their
clients’ needs are, and that this doesn’t include technology
platforms.
One common argument, particularly
for banks serving the ultra high net worth segment, is that their
clients do not need a day-by-day or minute-by-minute update on
their total net worth.
They say many of their requirements
can be resolved with a quick telephone call to their private
banker.
Technology generating
higher margins
In this respect, the level of
technology required at private banks appears to be differentiated.
A pure play private bank with 2,000 clients all with assets in
excess of $10m has lower technological requirements than a bank
with 2m clients with assets of between $50,000 and $1m.
However, it leaves the banks with
smaller, wealthier client bases with the same problem – high cost
income ratios and low margins.
On the other hand, banks with
broader customer bases can use technology to increase their share
of affluent customers, generating higher wealth management margins
and lower cost-income ratios.
“I would always tend to look at the
institutions which have big distribution networks and say: ‘You’ve
got the game to win in this market.’. Priority [emerging affluent]
is probably where there’s biggest growth.”
But, as others have found out in the past, realising this is no
straightforward task.
The Global Mass Affluent – VRL report
