Private banking clients in Hong Kong have been accustomed to free advice, despite significant and growing investments made into market research, product selection and a myriad of platforms.
By Richard Otsuki, Senior Contributor for finews.asia
Rather than wait for the regulatory clock to run out or take small victories against first movers via price, the industry should make a concerted effort to charge for their work. But complacency and short-termism place the long-term regional sustainability of banks at risk.
Myriad factors are already causing ongoing pressures on volumes and margins such as lower execution fees charged due to the emergence of online trading platforms and higher costs incurred from regulatory hurdles.
More Headwinds
And more headwinds are looming for transactional income in Hong Kong. The Securities and Futures Commission's (SFC) new rules on complex products – a requirement for distributors and advisors to classify the sales of all products as «complex» or «non-complex» – will come into effect on July 6.
Many in the industry believe the move will mark the end of execution-only transactions. This is due to the new need to classify all products for sale, even at the request of an experienced and sophisticated investor. Effectively, without a large enough order, banks are simply unwilling to entertain a single trade to onboard a one-off product.
Limited Incentive to be a Pioneer
«At the bank level, being a first mover is difficult especially if you are not part of a large universal bank,» says an unnamed regional head of investment products at a Swiss pure play, citing scalability issues with regards to the cost of compliance, technology and, especially for UHNWIs, client-facing investment and product specialists.
While a more nuanced approach to identifying individual accounts for conversion is judicious, the source notes that even at the relationship manager level, there is «limited incentive to be a pioneer.»
Reluctant to Rock Boat
«Given how little time relationship managers tend to serve at each bank, why would a relationship manager take this risk? The bank may pay for it in the long-term but in the short-term, a relationship manager can generate much higher RoA (return on assets) by focusing on the traditional approach,» the source said.
When combined with an estimated average trailer fee income of 10 percent – another issue of contention currently lurking in the industry due to the potential cannibalization when pitting advisory mandates against traditional fund distribution – 45 percent of revenue is at risk of disruption and front offices are understandably reluctant to rock the boat.
Tailored and High-End
But unlike traditional retail businesses, private banking by nature cannot be reliant on competing based on scale or price because its proposition is to be tailored and high-end. Chasing transactional revenue in the short-term may create a buffer for the time being but fractures occur in times of severe market stress.
In the long term, the perceived value of a trusted advisor, akin to that of other professionals that charge for their advice such as lawyers or doctors, may be at risk due to the lack of an explicit price. Although the ultimate goal of aligning interests with clients is imminent the course taken will determine the size and value of the private banking industry.
Premium Advisory
A handful of private banks are already making placing a greater emphasis on advisory mandates. UBS and Credit Suisse have in recent years launched UBS Advice and CS Invest respectively, which leverage technology platforms to provide their clients with tailored advice.
Deutsche Bank Wealth Management reportedly made a senior hire to lead its efforts to develop an advisory offering for the region. Large universal banks aside, UBP also launched a new tier within its advisory offering, a «Premium Advisory» mandate, in late 2018 to cater to the different needs of specific clients.
