Private banking business models are set for a wake-up call sooner rather than later, writes Michael Benz on finews.first, threatening an overhaul for the industry as a whole.
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Private banking is facing one of its toughest ever times as an industry. This is due to the combination of four key challenges, which render the past growth strategies ineffective: ultra-low interest rates, high regulation, technology innovation and changing client expectations towards more tailored product and service offerings, based on past investment activities.
Yet the number of institutions in Asia which seem capable of adapting and evolving their business model to tackle mounting challenges are few and far between. As a result, 2016 is likely to be a year of reckoning for private banking.
It has become starkly obvious to all players that chasing net new money (NNM) simply for the sake of increasing the asset base doesn’t pay the bills. This is based on the assumption of many industry insiders that private banks, on average, will see percentage drops in revenue in the region of the high teens to 20s over the course of this year.
«This will lead to the redundancy of more and more product, middle- and back-office functions»
More than ever, therefore, the challenge for the industry is managing its cost base. And this will remain the case for at least as long as ultra-low rates persist and make it unavoidable for banks to lower their fee levels.
As part of this cost crackdown, any non-client-facing role, and potentially even any non-relationship-manager (RM) roles in general, will come under intense scrutiny. Where possible, they will be streamlined, automated and outsourced. This is one of the big opportunities which technology innovation and digitisation offer to private banking businesses – the fundamental reassessment and redesign of front-to-back processes.
This will lead to the redundancy of more and more product, middle- and back-office functions, either because of automation or outsourcing to specialist service providers. The focus, more than ever, will now be on the RMs, especially their high investment skills – or their lack thereof. Entrepreneurial behavior and networking skills are just prerequesites for RMs today.
«This is essentially a back-to-basics approach in today’s technology-driven world»
Ultimately only those private banks which eventually get the client proposition right will manage to attract additional funds from clients. This means that management needs to keep a sharper eye on achieving the financial goals of its clients, at the heart of which lies investment performance. High-quality NNM is not easy to get any longer. Banks have to earn it by delivering proof they are helping clients achieve their financial goals.
However such proof, which in essence means achieving investment targets, can only be delivered if there is an explicit agreement between RMs and clients on the latter’s financial goals. This is essentially a back-to-basics approach in today’s technology-driven world. But technology is the great facilitator.
«It is essential to deliver experiences similar to what anybody can get when shopping online»
Digitization is not only helping to reduce spending and make the cost base of banks more flexible, it plays another very important role: use of technology to create more exciting and tailored client experiences.
Over the medium term, and with increasingly younger people getting their hands around the wealth of their parents, it is essential for private banks to deliver experiences which are more similar to what anybody today can get when shopping online. Many clients will enjoy the new empowerment offered by digital channels, and the more relevant investment ideas suggested to them through digital channels. In turn, this will lead to more activities for the bank and will free up RM capacity.
Despite all those challenges, clients are increasingly realizing – in the very challenging investment environment – that longer-term, portfolio investment approaches and fee-based compensation of banks are more successful than short-term, transactional ones.
«This requires any bank to fully leverage the power of digitization»
Indeed, an obvious and much talked about way for private banks to create a more sustainable and predictable revenue stream would be to make fee-for-advice more prominent as part of their offering. But this seems a distant dream for many institutions. It's not only the low interest rate environment, the single biggest challenge for the industry overall, which makes the prospect of charging clients an advisory fee less of a reality than before.
Further, it would seem that if advisors had a clearer understanding of what their clients wanted to achieve with their financial assets, it would help satisfy some of the regulatory scrutiny in Hong Kong, in particular, over the suitability of products and appropriateness of fee levels.
At the same time, one of the areas where the private banking industry has indeed made progress since 2008, is in the relation to the fairness and transparency of fees.
Ultimately, only those private banks which eventually get the client proposition right will manage to attract additional funds from clients. This requires any bank to fully leverage the power of digitization to rethink of their core processes and the creation of more exciting and relevant client experiences. This needs to happen while every bit of management attention is given to achieving a client’s financial goals.
(This essay is published in cooperation with Hubbis.)
Michael Benz spent over twenty years in Private Banking, Asset Management and Treasury. In his latest role until end of 2015, he was Global Head of Private Banking in Standard Chartered Bank (SCB). Before joining SCB, he was the designated Chairman for Asia at Julius Baer and Asia Pacific CEO of BOA/Merrill Lynch Wealth Management. In these roles he was instrumental to the successful sale and integration of the business from Merrill Lynch into Julius Baer in 2013.
Between 2003 and 2010 he acted as regional head of Products & Services in UBS Wealth Management in Asia Pacific. Prior to that he held various regional roles in UBS Asset Management and Treasury. He holds a Masters degree in Business from St.Gallen Business School and a PhD in Financial Economics from University of St. Gallen. He lives in Hong Kong.
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