An understanding of the needs of client groups with common interests can be as important as an appreciation of national nuances for private banks and wealth managers, writes Paul Golden.
The Roland Berger Strategy Consultants report Wealth Management in New Realities published in August 2013 describes the requirement to play in all growth regions and wealth management segments to ensure lasting, profitable growth as a myth.
Instead, it recommends analysing regional clusters with similar market structures and mechanics and says private banks need to offer a suitable value proposition and an appropriate business model for different clusters in specific regions.
Go deeper with GlobalData
The report also refers to continued demand for offshore banking driven by high service levels offered by financial hubs, political instability and clients asking to diversify across locations and rejects the theory that growth is only achievable through mergers and acquisitions.
"Innovative transfers and partnerships continue to grow in importance and will allow for growth without the complexity and uncertainty associated with M&A transactions. Several remarkable deals took place in the private banking industry over the last three years, but these were in line with the long term average for M&A deals in the market."
Brand values
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAccording to Sebastian Dovey, managing partner Scorpio Partnership, the greatest obstacle to developing a private banking/wealth management brand in a new market is overcoming the internal view that brand does not matter.
"It has always been hard to grow wealth management revenues outside a bank’s local market. The local market will typically constitute more than 80% of all the revenues generated by a private bank – there are only a few exceptions to this revenue distribution. In addition, regulatory costs are now estimated at approximately 10% of total operating costs, compared to half that figure a decade ago."
Dovey says there is no evidence to suggest that the choice between pure-play wealth managers and universal banks is a consistent issue among clients or that clients have become less loyal since the global financial crisis.
"However, there is a clear evidential trend toward a primary advisor, who will typically have influence over between 40% and 55% of the total asset base. Also, regulation is forcing institutions to reconsider the client experience in the context of information gathering and engagement."
Private bank advisor David Maude agrees that it has never been easy to grow wealth management revenues overseas, referencing the number of banks who identified Asia as a growth area for expansion only to find that profitability has proved elusive.
"The cost of regulatory compliance has increased dramatically in recent years. Indirect costs are probably most significant, both upfront (relationship manager training, general management distraction from commercial activities during implementation) and of course foregone revenue, such as retrocessions. Impact depends partly on scale – with smaller players at a disadvantage- and business model and less so on geography, as a lot of the new regulations have a global dimension, although focus and precise implementation vary across regions."
Universal appeal
Maude believes universal banks are well placed to serve client segments such as entrepreneurs and UHNWIs who value qualities such as lending capacity, solution structuring capabilities and global reach that many pure play wealth managers struggle to offer.
"Client loyalty has become less of an issue, although the bigger and more complex the client, the more fragmented the associated relationships with financial institutions tend to be. More generally, relationship fragmentation is driven in some cases by the desire to preserve financial confidentiality, but also by the basic principle of not putting all your eggs in one basket."
He adds that regulatory changes have had unintended consequences on the wealth management client experience. "For example, the extent that relationship managers now spend more time chasing down client documentation, form filling and general compliance issues reduces the time they are able to spend actually advising clients. Also, in many cases relationship manager client loadings have had to increase, partly to offset the regulatory cost burden."
This final point is particularly significant given Maude’s observation that wealth management client acquisition is driven by the quality and reputation of the individual manager. "You can put on star-spangled events, organise insight-packed seminars and demonstrate superior investment performance. But in the end, for many clients the choice comes down to soft issues such as personal rapport and fit with the relationship manager."
Other options
Entering a completely new market is advisable only after other approaches to expansion have been considered, suggests Clientific CEO JP Nicols, who describes dealing with the increased cost and complexity of this era of ‘re-regulation’ as one of the biggest challenges facing wealth managers.
"New regulations have made the offshore model less attractive. From the erosion of some tax benefits to the increased cost of compliance and reporting to the skyrocketing cost of non-compliance, smaller to mid-sized firms have been impacted the most. It is harder to spread those increased costs across smaller asset bases and the resulting thinner margins can be the death knell for firms without sufficient critical mass."
He agrees that the perception of universal banks’ potential conflict of interest with investment banking influences the average client less than the pure-play wealth managers would like. "In fact, it cuts both ways – for every client wondering if they were sold an investment in a company or product mainly because their wealth manager’s firm had a stake in it, there is probably another client hoping to ‘get in on a good deal’. Nonetheless, the demand for more transparency and disclosure will likely not abate any time soon."
Nicols says the number of client defections since 2008 has been lower than expected because wealth managers were pretty much equally affected across the board and that as the recovery has widened, client satisfaction levels have improved, although they have also deleveraged and for the most part embraced lower risk portfolios.
"Our industry was used to being the gatekeeper of asymmetric information and our value chain was built with that dynamic at its core," he concludes. "That makes client acquisition -now more than ever – about offering a unique value proposition and most firms are really not very good at that. Whether it is specialised advice or a niche market focus or a unique service delivery model, the firms that cannot win with sheer scale have to win with better focus."
Roland Berger principal Peppi Schnieper describes tailoring the operating model to specific markets as a vital consideration when attempting to develop a private banking/wealth management brand in a new market.
Local issues
"You have to consider whether it is more appropriate to open a representative office or apply for a full banking licence with its own booking centre, for example, and whether you are able to meet the demands of compliance with local regulations, which has become more onerous in recent years."
According to Schnieper, banks and wealth managers typically don’t underestimate the work involved in entering a new market, although some banks who paid a lot of money to acquire relationship management teams in Asia failed to generate a return on their investment. One reason for that is different client needs impacting the level of fees charged in that market.
He expects further industry consolidation, although that is more likely to take the form of banks withdrawing from specific markets rather than fully merging with other institutions and there will always be banks that can effectively service a global market.
"We see a clear trend in the Middle East for local banks to build up their private banking/wealth management practice to capitalise on clients who want at least some of their wealth managed in the region. However, the quality of advice available to clients in the Middle East still differs from that of other markets and wealthy individuals continue to see greater opportunities for banking privacy (as distinct from non-compliance) in other jurisdictions."
Stefan Jaecklin, head of Oliver Wyman’s wealth & asset management practice in EMEA, says it has become more challenging for new market entrants to gain the trust of potential clients, even though the reputation of many established banks has been damaged by the events of the last 5-6 years.
On the issue of whether the absence of any potential conflict of interest with investment banking gives pure-play wealth managers an advantage over universal banks, he observes that clients are generally seeking greater engagement with their bank.
"There is a substantial group that want a dialogue around trading and investment and are less concerned about potential conflicts of interest"
The global clampdown on tax avoidance has reduced the number of relationships maintained by the average wealthy client, but these clients are also more likely to play banks off against each other to get the best service, he concludes. "There is also an argument for not putting all your eggs in one basket in the event that there was an issue with a particular financial institution."
