Frequently over the past months we have heard about private banks and wealth managers considering divestment of parts of their businesses (e.g. Asian markets for Barclays, Societe Generale and ABN AMRO private banking) or (considering) selling off their wealth management arms (e.g. ANZ Wealth, MLC) to name a few. Although ‘divesting’ is not the only way to increase profitability of the broader ‘enterprise’ it outlines the challenges the industry is currently facing to realise profit.
While there are clear differences between regions, most of the drivers of these challenges are pretty similar on a global scale. I outline key areas of focus, which are not completely ‘mutually exclusive’, but can be looked at from a variety of angles.
1. Regulatory scrutiny will not reduce
- A resounding call for transparency in advice, price/fees, risks, cross border exchange of investment transaction history, reporting etc.
- Inappropriate financial advice receives attention across regions globally. This also puts increased, negative, pressure on the financial service sector in general as it directly relates to the end-client
- KYC, client onboarding and risk profiling regulation and strategies are being modified consistently
- Financial literacy of clients and education of clients received increasing attention from regulators and is becoming a hygiene factor in client services.
2. Competition will continue to intensify and put pressure on margins
- New low cost and more cost effective market entrants across the wealth management value chain
- Intensified competition with incumbents
- FinTechs will specialise in specific components of the wealth management value chain. Wealth managers should consider competing, buying these capabilities or partnering with these fintech to leverage their capabilities as part of their service delivery model. Call it a collaboration model!
- The scalability question will drive consolidation of the market and selling off of wealth arms by incumbent firms
3. Customers will drive change
- Changing demographics of the client base (e.g. through the intergenerational wealth transfer, which starts and continues for 15-20 years) will force the industry to align to different client needs and priorities
- Focus shift from growing wealth to wealth protection and wealth utilisation, through increased awareness of volatility, planning for the future and increasing needs based services
- The changing definition of value and willingness to pay for it will drive a new basis for pricing – one of quality in service, solution and performance rather, than pricing based simply on products. Did you know that over 50% of what clients perceive as value is not product or price related?
- Increasing entrepreneurial nature of HNWIs, particularly in Asia, will require different conversations and services to be meaningfully value-adding to them. It also provides opportunities to link private banking and business banking services.
- Experiences will be core to driving satisfaction and great experiences will be what keeps your clients close to you and develops trust and loyalty.
- Misalignment between clients and wealth managers about interaction channels and interaction preferences – clients say digital will be their primary channel for receiving advice (60%) compared to face-to-face (26%) in the next two to three years, while wealth managers see the split as 34% digital versus 66% face to face (source: EY Global Wealth Research)
4. Technology implications are broad
- Automation of standardised and non-value add activities to drive operational efficiencies and improve customer experiences due to faster turnaround times of standard and basic queries. Customers don’t want always to be delighted, but just want to ‘get the stuff done’
- Digitisation of client interactions and service delivery to enable more self-service by clients and enable clients to engage with you when they have the time and need to engage with your firm 24/7 wherever they are in the world
- Connected financial advisers – leverage technology as enabler to focus on delivering value added activities faster, more insightful, targeted and by leveraging specialist knowledge and skillsets from the firm that become easier accessible through e.g. internal knowledge sharing platforms
- Automated advice offers in different forms that enable wealth managers to deliver advice in a way that suits individual client needs. These automated advice offers do not replace existing financial advisers, but enable them to focus time on clients that need and appreciate their specialist knowledge and time (as it has to be acknowledged that not all of your clients in your portfolio need 3-5 face to face visits a year!)
With the industry developments in mind, most incumbent wealth managers and private banks potentially acknowledge (or should acknowledge) that their current strategic client focus, operating structure, employees and profitability on the longer term are not equipped to address this changing environment. Profitability challenges for wealth arms (we all read the profit warnings and/or challenges as outlined in the annual/half yearly/quarterly financial year updates.
As such, key focus areas for private banks and wealth managers could be:
1. Changing business models on both revenue and cost sides
- New ways of pricing – Given the paradigm shift in the wealth industry, the true essence of value revolves around the trade-off between the perceived benefits a client receives beyond product and price. Wealth managers have typically focussed on a product driven pricing structure. With transaction based fees and “kick-backs” to product providers, wealth managers have often been less transparent around prices passed on to their clients. To remain competitive with new entrants and the search towards a new sustainable business model, wealth managers must find new opportunities to add value via transparent, engaging and simplified service experiences. Pricing than will be determined by parameters as Products selected, Services used, contact frequency, channels used, customer lifetime value, relationship structure (e.g. families, trusts), AUM, financial literacy and transaction frequency. As an example; a client that wants to meet a financial adviser once a year and engaged through digital and self service channels for the remainder of the interactions potentially should pay a lower fee than a client that requires a face to face advice meeting 5 times a year and who picks up the phone for different questions. As such, pricing will be based on the end to end service delivery and not based on transactions, product frequency and AUM.
- Realise a significantly lower cost to serve and cost to operate through automation of high volume, low value and repetitive activities. The core banking environment and back office functions will become faster and less human intensive
- Provision of self service capabilities to a client base which will enable clients to take more control of their finances and manage those and/or respond to queries when it suits them at any point in time (as outlined earlier).
2. Changing role of financial advisers
- Connected advisers through technology, client interaction tools, social media
- Becoming connectors for your clients, especially as they become increasingly of the entrepreneurial kind. This will deliver value, without selling a product, by connecting different clients with mutual interests, specific individuals and/or entrepreneurial needs
- Balance of digital and human interactions (‘hybrid’) because one will not replace the other
- Changing remuneration models for financial advisers from product and sales to satisfaction and performance driven, measured of different time periods
- Leverage front office analytics for better targeted advice and offers through propensity modelling and on the spot inputs into client conversations
- Optimisation of knowledge exchange within the firms to provide better and faster responses to clients
- “Time is the new currency” (a quote used by Lee Hutton, CEO of UBank). This outlines the fact that clients are time poor, they see online, self service and seamless interactions as hygiene factors
3. Paths to growth
- Addressing the retention challenge (as in over 50% of situations of intergenerational wealth transfer, wealth is leaving the firm) by focussing on intergenerational wealth transfers, which will also provide an acquisition opportunity
- Need for new or different products and services based on changing needs. Geographical differences show, for example, that Asian wealth managers could target estate planning services, because 85% of upcoming intergenerational wealth transfers will be transferred for the first time to a new generation, while in Europe wealth has been transferred to a new generation multiple times already. An example is that in Australia, clients through their superfunds have been focussed on savings for retirement, but struggle to manage their finances during retirement, (risking instances where they might run out of money), presenting a need for retirement income products. Etc.
- Big data and analytics are game changers in transforming the wealth industry landscape given innovative alternatives to acquiring, managing, engaging and retaining customers and potential risks
- Client engagement and client satisfaction drives loyalty and loyalty drives longer term business growth. As such continuously identification and reaffirming if service delivery to client is up to their expectations is critical. Annual client satisfaction measurement is not a correct representation of a clients happiness. More actively tracking and aligning to individual client interactions provides much better insight into what clients appreciate and what not.
The above outlines a perspective on the changing way wealth managers and private banks will have to operate to remain relevant in the market and profitable. Obviously there are many more factors driving this, but I hope the above provides a helpful summary for some of you.