Orbium has recently released a new report entitled, 'The wealth management industry is under siege and needs to rebalance'. What types of firms and individuals participated in the survey?
We had a diverse set of participants covering C- level executives of 50 private banks and wealth managers across different models including those within a universal bank model with retail, asset management and investment banks, private banks and wealth manager with an asset management arm, pure-play private banks and newer models such as multi-family offices. They split roughly a third from the UK, Switzerland and Asia.
What were the key findings of the survey?
Profitability remains challenging for many players with pressures on margins and costs only 25% of participants were achieving a gross return on assets of over 80 bps and achieving a cost income of 60% or below – the others had either a cost or margin problem and some had both. They also highlighted that changing demographics and social trends were leading to under-served client needs.
Industry leaders and decision makers identified that since the financial crisis of 2007/8 private banking has gone from 1.0 to 4.0, forced on by successive waves of regulation, consolidation and technological and social change. Each wave brought painful and difficult adjustments, with each succeeding faster than the one before.
It was a crisis that exposed bad financial products and weak banks and prompted global regulators to draft and implement new rules to restore trust. Their aim was to protect customers and stop such devastation and rules were drafted to increase transparency and accountability. For the seven years of private banking 2.0, banks focused on complying with new regulations.
Yet more regulation and new technology thrust private banking into version 3.0. From 2014 onwards, private banks strove to develop new business models, restructuring and repositioning their offerings in response to the UK’s Retail Distribution Review, MiFID II and the various Basel capital adequacy rules, the erosion of banking secrecy and the rise of cross-border regulation.
All the while, the customer base of private banks has been evolving, with newcomers including first generation entrepreneurs and more wealthy women as examples. These new clients are accustomed to high levels of service, transparency and personalisation in every aspect of their lives, and they expect the same from their wealth managers. They want access to their portfolios from anywhere in the world, 24/7. This is forcing the industry to undergo a new permutation, private banking 4.0, as wealth managers put technology to use to tailor their products and services to the increasingly diverse needs of these tribes, as well as new generations of old money.
Data lies at the heart of private banking 4.0. Leveraged effectively, it will help banks sell more, sell better and manage their costs. To do this they need to introduce front-to-back digital technology, and to do it well they may have to specialise in one or just a few client segments.
Yet the pace of transformation is not expected to end there. By 2020 – just two years from now – we expect to see another seismic shift in private banking, driven by demands for transparency from customers and regulators. Private banking 5.0 will be all about outcomes rather than products. It will be about the ability to show fair value, comparable performance, social investing and audit trails. Think accountability.
The report spoke about firms not meeting the needs of their clients. Can you tell us more about what respondents meant by this?
Well, you have to consider that the industry has moved from serving two generations to five with intergenerational shift underway and gender trends mean that women also now have more of the wealth. Social trends also play a part with the rise of more first generation entrepreneurs and the rapid rise of new companies. So we are talking about newer fast-growing segments, rather than the traditional client segments The responses were around how well they were addressing the needs of these segments. 89% reported that the needs of the millennials are not adequately addressed and 78%reported that female investors are significantly underserved. The responses also identified the needs that were not being met, so it’s positive in the sense that these underserved segments provide growth and margin opportunities.
The survey also found a heavy emphasis on the need to transform their business and technology. How are they going to do that?
The issue is that participants felt they had been distracted by having to focus on meeting multiple regulation and compliance requirements over the past few years, but with profitability pressures and changing client needs they would need to transform and future-proof their business models. They will do so in three key areas: client focus and differentiation in the front office, agility and industrialisation in operations and IT and leveraging new capabilities and delivery options including digital and sourcing reflecting that they expected to work with more partners in the future.
With resource constraints and barriers to change, they anticipate they would sequence their improvements to fund improvements. Significant cost efficiencies are expected to come from automation, industrialisation and new delivery options which would include investment in technology and, for some, more business process outsourcing. The savings from these can be reinvested to enhance relationship manager capabilities and adopting more digital interaction offerings for clients
Finally. what about the future. What do the survey's respondents feel the future of wealth management will look like?
The future will look different. Currently, only 58% of participants have a digital offering, in 2020 this will rise to 90%. The C suite expects to become smarter by focussing on changes and innovations that can help them better adapt and develop more balanced business models. Business transformation requires three very specific and inter-related skill sets from the C-suite and the board: the ability to change and transform the business, managing the successes as well as the failures so they can correct course when things go wrong (as they inevitably do); understand new and emerging technologies and how to deploy them for client and business benefit; and the ability to form and work in partnerships and networks of suppliers of products and of services. Digital knowledge and transformation experience are going to be critical competitive levers.
Now is the time for the C- level to get smart or risk getting left behind.
Thank you again to Ian Woodhouse for those thoughts.