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The wealth management industry is under siege and needs to rebalance

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by Orbium
| 08/05/2018 08:36:49

  • Wealth managers are not meeting the needs of their clients
  • Digitisation is expected to radically change the industry by 2020
  • To meet the needs of the next generation they are shifting and rebalancing from a narrow product focus to providing more relevant and digitally enabled advice and solutions

Orbium, a leading global business consulting and technology provider for the wealth management industry, recently held an exclusive roundtable event in Geneva meeting with more than a dozen top-tier wealth managers. The occasion revealed some of the key challenges and opportunities facing the industry in the UK, Europe and Asia.

Ian Woodhouse, Head of Strategy and Change at Orbium, led the panel discussion. Woodhouse, who has been in private banking for 25 years, previously working at institutions such as EY and PWC, started the event by going straight into some of the core issues affecting the industry.

The industry is under siege
Woodhouse said: “Three key messages I’d like to get across. First of all, the industry is under siege. However, the Swiss market has been resilient. Although 25% of wealth managers have gone recently, the good news is this has created some very strong core players, with some doubling AuM, so it’s got scale. Switzerland remains the main hub for private banking across the world. The industry is under siege but companies are looking to rebalance. They have been distracted by regulation, but this is easing and they have seen lighter regulation in the US and have been rebalancing their business structure to cater for the future.

There are some driving themes which we shall discuss later. We shall see an increasing speed of change when we move towards 2020. The first point is that C-Levels agree that they’re not fully meeting client needs. This, however, is good news as there is an opportunity to improve this.  We shall also look at this in more detail.”

Woodhouse went on to talk more about the digital landscape. “Secondly, companies are starting to look towards digital investment management. There was a fear that robo-advisors may take over from the relationship manager but this has not been the case. We have seen digital capabilities working alongside the relationship managers. Digital is a big opportunity for wealth management companies going forward and doesn’t mean the eradication of the relationship manager. However, I must caution, that most people are in early stages of implementing a digital infrastructure.”

Woodhouse said the third main topic rebalancing requirements. “We won’t get every relief from compliance so we may need to look at different ways of doing that. Profitability, it looks good in some respects, but structurally there are challenges. Many wealth managers have a cost income ratios of 80%.

Adapting for the future, it is the speed of change that is crucial. Ten years ago, there were no iPhones! Now we are living in a modern age. The industry has begun to embrace technology and partner with FinTech firms to shift a higher, value added proposition. There is a need to be more active and this is really the steering wheel the client needs for profitability, adaptation.

Here we see and industry with revenue and cost lines. Typically, assets with gross revenue in basis points, ranges from 0-140 on the scale and then you have cost income ratio from 30-100%. What is best is to have a medium between the two of the target performances to give you an indication of where you should be.  For instance, target performance will be cost income at 60 and ROI of 80 basis points.

Some wealth managers are unable to improve, looking at a run off period, this is roughly 19% of the industry and will increase to 25% in 2020. You can do nothing because private banking can be a run off book over a period of time. So, some banks are doing just that and saying this is too difficult and later down the line I’ll look at opportunities to sell out. Some banks have decided that as they have a low margin and weak cost controls, to manage both for some private banks is just too much.

Now we come to margin pressure. This is where you’re achieving a low margin but you have good control of costs. This could be a viable business model. But, you need a lot of scale to make that work. Wealth managers with high margins but are struggling to control costs. Everyone would like to shift towards high performance. with a high margin and good cost control. That’s where everyone is shooting towards, with more solutions personalised.”

Four key areas
“First is attracting new clients organically. Second, deepening the existing client relationships which seem to be very fruitful and under exploited. The third, looking to the future 2020, is providing omni-channel, digital solutions and the fourth being more centralisation of operations over time.

Currently it’s not the best of times. There are lots of things that influence the profit numbers, market sentiment being one, but overall profitability is not in great shape from a structural standpoint. However, the opportunity is clear, moving around the topics we just spoke about. There’s a challenge but there’s also an opportunity. The opportunity is aligning client and advisor digitisation and shifting to higher value for which the clients will pay and making sure that whatever is delivered is operationally efficient. Most wealth managers agree they need to better understand the client journey and to deliver valued services. The majority of the industry is exploring outsourcing non-core activities. Not something to be undertaken lightly as its needs sourcing expertise.

It’s all a work in progress. But, there are four areas that need to work together. The first is optimising the client service proposition, the second a mix of differentiated services, the third offering digital both front and back, and lastly building regulatory compliance from front to back,” said Woodhouse.

Meeting client’s needs
Woodhouse observed that there are many gaps, with people being underserved. “Most female investors and next generation clients are being underserved, mainly caused by a drive in entrepreneurs. These are currently being largely underserved. Millennials are more adequately addressed, the only issue is they don’t have that much money but that’s not to say they won’t in the future. First generation entrepreneurs are also lacking the service they require. Huge opportunity here, with some I’ve just mentioned, is to cater to the needs of these groups. They will continue to grow considerably over the next five years. First, higher value solutions in terms of clients, people have told us. Secondly, socially responsible investing and third regulatory driven, greater price transparency.

The rise in digital interaction is getting quite significant. With millennials, some wealth managers are looking to or are using robo advice. Once they pass the threshold and fall into the HNW bracket they will be appointed a relationship manager. The industry is behind in terms of digital when it comes to other areas of financial services. Some of the main concerns for wealth managers are onboarding, challenges of new information and regulation. For example, MiFID, which is expensive if you try to do this manually. Investment transactions are also a concern, these are mainly securities transactions. Securities is probably the most advanced when it comes to digital as it is easy to do. However, the incentive is to enable cost effective automated delivery.

Digital will allow the relationship managers to free up time to become a lot more productive and come up with better ideas for clients going forward.”

The future, 2020
“Client needs met by 2020. Let’s go into the future. Wealth managers will have to go towards aggregated wealth, the same thing is happening on the asset management side. It’s the idea that aggregation and looking at the assets away from the institution to improve performance. For some, those with banking capabilities, will be able to improve the asset and liability offering. The second is that by 2020 there will be a much better understanding of goals and risk tolerances going forward. In Europe, this will be affected by MiFID but what you must think about is that suitability is now coming into Asia. One area we’re looking at is suitability in Asia compared to Europe. Third, we’ll get the costs down by getting customers to self-serve and the banks to focus on high value activities.

The theme private banks struggle with is the provision of customer identification. Difficult from a data point of view and regulatory stand point and a social aspect from the rise of a social element/privacy. This identification and information needs to be addressed. Digital is making this easier with information being stored, biometrics, digital signatures etc. This has to be done in the right way and in line with how you operate,” Woodhouse observed.

Balanced business model
Will be a mix of internal and external products, using third party providers, Woodhouse stated: “One of the things that has come out quite significantly is the fact that going forward there’s going to be more of an ecosystem and partnership approach moving forwards and working together. There are still a lot of people out there with core legacy banking systems, secondly, they’re new to omni-channel and digital and thirdly, inefficient when it comes to regulation. By 2020 it’s going to change completely. We can see three main areas of investment. By then most people would have invested in core banking, more omni-channel and digital. CRM will also evolve and capabilities to react swiftly to regulation. Also, CRM in regard to marketing and personalisation, using social media as new ways of marketing. So, these investments will become more important.

We will also witness a move towards core partner ecosystems. So, core banking, in-house applications, ITO and business process outsourcing and digital. The two key areas will be business differentiating in-house and digital infrastructure. The others will be non-differentiating processes, which will be more industrialised or standardised as they will have no competitive advantage.”

Time for action!
The industry is going to change rapidly. The biggest challenges are three-fold. The first are the capabilities of the RMs, product solution specialists. Second, integration of systems, especially data. Third adapting at a sufficient speed. Integration and digitisation is more and more real-time for the customer and the portfolio,” Woodhouse commented.

“The ideal future model is client focus and differentiation at the front. Industrialised, standardised, very agile in operations with IT in the back. Lastly leveraging new capabilities, mainly digitisation with the advisors.”

C-levels participant, who remained anonymous due to it being a private event, where then asked for their opinions and questions. One CEO asked: “What differs from today compared to a few years back?”
Woodhouse replied: “To be candid I believe a few years back everyone was distracted, regulation was a big distraction. No private bank had enough resources for regulation. So firstly, it was distracted from its’ main focus, its’ clients and also innovation. The difference now is that the industry is focussing back on clients. One senior CEO I spoke to said they weren’t serving the needs of their clients as well as they should have been, from first to second generation. He mentioned from two to five, meaning they are now servicing different generations. Most of their clients were over 60 but this would be passed down and new younger investors will start onboarding. He realised they weren’t serving the needs of clients as well as they would like to. Private banking 4.0 will be much more client focussed. The gentleman said regulation had done us a favour. Although they had spent hundreds of millions of pounds on regulatory requirements, the regulators encourage joining up with FinTech’s with innovation incubators, which forced the company to focus on the client and innovation.  So, what’s different now is that people are moving away from focussing heavily on regulation and back to the clients and innovation and I believe that is the way of the future for the industry. Many people thought private banking was or could become fully automated ‘that Netflix moment’ with just robo-advisors. This hasn’t happened. So, the big opportunity is to get digital working with RMs in harmony together to deliver higher value advice.”

Another CEO, replied: “Interesting. I know that innovation has created a lot of benefits but has also pushed some of the private banks out of the market.”
Woodhouse responded by delving into competition: “Competition is interesting. Traditional players are getting stronger, we have seen a large amount of consolidation. On the right hand side you have new models, for example robo advisors, hybrids like private investment offices which cater for the UHNW etc. There is this feeling of a shift happening. Speed of change is paramount to the success of a private bank or wealth manager. Two large banks posted results recently for their wealth divisions. One was negative and the other positive. The global private bank which posted strong results had been quick to adapt to change. One of the things private banking is noted for is a lack of speed when it comes to change and this needs to be addressed. It is inherently a concern for the industry. To succeed in the future, it has to be a combination of business and technology. The speed of that change can be fast, but its not without risk, for example cybersecurity. But, the industry has been remarkably resilient and some are doing well. There’s an opportunity for others to move into this space. My sense is that it’s a time for optimism. The big challenge for CEOs is making the right decisions.”

Another CEO asked: “Which clients are going to segment, does it it make sense to invest? Is there a certain limit for C-Levels to invest in technology, below a certain threshold?”
Woodhouse answered the question by raising the issue of segmentation: “Segmentation is obviously a big issue. Some banks have decided to focus on one area, for instance UHNWIs and that’s what they’re going to do. Now those tend to be ones that have an institutional asset management arm or bigger players with an investment bank offering corporate finance and an international network. So, they are some who are going to focus on UHNW and get rid of the HNWs. There are other approaches, for instance some companies who will focus on HNW and exit UNHW and some may focus on the mass affluent. So, segmentation is becoming much more important and within that is sub-segmentation. For instance, how do I deal with the needs of UHNW women and are they different to male counterparts. So, gender, generation and social type segmentation to cater to the needs of next generation and peer groups. Sentiment for social has changed over the last six months.”

Another C-Level participant spoke frankly: “I liked the way you spoke about digital and the way you positioned it. Financially from a banker’s perspective you are either interested in tracking new clients or making more money with existing clients. I’m not aware of any of our important clients asking whether we had a good digital platform. This is not what they’re interested in, because I believe it’s a given that everyone will have a digital platform within the next two years. So, by 2020 a digital platform will be a commodity. We are supposed to have it but it’s not a differentiator. We are in the middle of our digital programme and we can make money out of this from the existing clients because we can leverage that platform to introduce a more efficient structure. To get new clients we have a programme called NextGen. Whereby we asked next generation clients, millennials, what’s important to them. Their responses were identical to their parents. We were very surprised. At the end, there was a specific question on digital, and the response was ‘we expect that’. The reason they go to a bank is performance, finance, trust. Digital is a given. So, the same values as their families. We are managing existing clients more actively, underserved segments currently stand at 80%, with managed at 20%. We are changing this.”
“I think digital has moved on, thinking more along the lines of where can I create value for the client, which I believe is most important. What can I do with the client that the investor would value from digitisation, rather than just offering them digital. The second big area is how can I better enable the RMs to avoid spending too much time on regulatory compliance tasks and onboarding, which digital can help do. Also, leveraging the information that’s in the advisor’s head, for instance always focussing on the top 20 because he likes them, and having a systematic approach to leveraging the data. So, if we could do that and think about productivity. One person told me they’ve done a pilot and 20% of the RMs time is freed up due to digital. This meant he could grow the business without having to hire additional RMs. We are still in the early stages and when we spoke to 50 C-Level’s in our survey they said they were not happy with the progress they had made in regard to digital but had taken steps to introduce the offering, testing certain aspects out and making sure they have the right system in place. I asked how the traditional advisor, 50+ had taken to digitisation and he said they had segregated the traditional RMs with the younger RMs, who were more up to speed and used to the digital arena. They then had to coach the older RMs. Again, we come back to speed, what we call twin speed management. Coaching the older generation and pushing the younger further. Twin speed is rather challenging, to be more agile you may need to go on this twin track, “Woodhouse replied.

“We spoke about RMs. We are looking at more investment counsellors, where they will be a huge investment. However, we are not segmenting our RMs as they own the relationship, said another participant.
Woodhouse answered: “It’s really been a difficult challenge to make sure RMs are not spending all their time doing KYCs and other documents. So, it’s more about simplifying and trying to be as efficient as possible. A team notion is something we have seen with our clients, some more proactive to technology and some less so but still working as a team, allowing them to capture the knowledge not just from one person but a group of RMs. So, with a team formation they need to share the information about that client.

Another interesting point that came out is the notion of moving towards more connected business models. One idea of connected business models is that you connect to peer group communities but you do run the risk of some clients doing it themselves, like family offices. So, you connect to outsource suppliers but you also connect to product providers. I spoke to JP Morgan recently at an open discussion, who told me that they’re at a stage where they’re jointly developing products. What they do is go to Blackrock and try to develop a product for JP Morgan and its UHNW investors and Blackrock has the sophisticated risk and asset management to do this and so they connect. By connecting these models both parties benefit. Connectivity is happening because technology is allowing private banks to do so much more. It’s not easy as you have governance considerations because you can’t outsource everything as you have responsibilities around products etc but you have this notion that private banks are becoming more connected and this brings us back into digital because if you connect to develop a product you can produce the product faster. You could get Blackrock and say, ‘I want this within in a week’ and then you could put it into the hands of the advisors with digital and they could target the right kind of clients. You get the connectivity and the speed together, then you’re really value added.

Asset managers are required to report which segments their products are tailored for, so their connections between the private banks have to be much deeper to meet your suitability and MiFID obligations. The asset manager is going to have to evidence it’s selling to the right segment as well as the private bank. Connectivity is moving faster and covers a broader range of areas than in previous years. The issue then is what is the core differentiator of the private bank and who do you partner with. Or indeed, you may partner to get additional specialism and different differentiation. Thereby, going back to the P and L, you would change the revenue and the cost profile would go down with a connected model and revenue could go up because you could be charging for higher value services through connections. So, you’re playing both sides which could help tremendously to get those 80% cost incomes down that we spoke about.”

One aspect raised was RMs and having a digital offering. A CEO said: “Your point to get the RMs more productive, you mentioned investment management. Our RMs spend a large amount of time to get a new mandate contract signed. It’s a legal entity so you need to get all beneficial owners signing it, if it’s a cross structure you need additional signatures. Everybody is traveling, limited time. So, all these account management aspects are time consuming and not generating revenue. This is something we are starting to think about. For instance, a digital platform, what kind of document signature is needed for example. Not necessarily an account opening document, not difficult to do, whereas annual revenues, trust structures are much more frequent events. If we would digitise some of this we could really help bring in money.”
Woodhouse responded by saying that digitisation will free up time for the RM, allowing them to come up with better investment ideas. “This will help with the aspects you’ve just mentioned. Well I did mention the shift to digitisation in regard to some aspects of advice earlier today, but you have to be careful in Switzerland with the terms advice and advisory mandates. The Swiss industry is slightly different in private banking terms. In the UK, there has been a shift towards broader financial planning advice driven by UK specific RDR regulations. So, the big shift in the UK, especially with MiFID is the banks will move further towards financial advice and the core products and services. It’s more of a structured approach and it’s uncovering opportunities that might not be apparent. Often you find your clients that come in and have several million, not many RMs will ask too many questions. What you may find is that he or she has several million but £20 million elsewhere. What you’re going to get is more advice as a whole, looking more at the client’s overall assets and liabilities. You’ll be looking to get the assets that are held away. The most powerful thing with data and PSD is that it opens up this data sharing, so you get to know what the banking patterns are. So, you have the opportunity to have an intelligent conversation about performing against a certain level of risk in your portfolio and if you compare with these other portfolios you can analyse what the client is currently doing with their portfolio. But also, you’re opening up a conversation about the assets and also the liabilities. If you look at US banks they’re driven up the pre-tax margin by eight or nine %, as the wealth managers focus mainly on the investment side and not on the banking element and are structured that way. So just by integrating the assets with the liabilities they almost doubled the margin. You can see that with Morgan Stanley which is now more of a wealth manager than an investment bank. You can aggregate the wealth of all clients within the bank.”

“We are being told that all you have to do is onboard clients. We have high performance but our risk I would say is relatively high.”, said another C-Level present.
Woodhouse said: “In answering your question I’ll just come back to the regulators. It may be that they have shifted the game for us, because what the regulators are now focussed on is the client risk as well as performance. What has happened to private banking is clients have focussed on performance and not necessarily on risk. Evidence of that is the fall out of portfolios in the financial crisis. The most important aspect is the shift to higher value and how much can you tolerate losing. In the past, this has not been very clear but when you look at what’s happened in the institutionalisation of the asset management industry its been a lot more around performance and risk and I believe the private banking industry will head much further in this direction. Then it becomes a lot more interesting when you look at consolidation opportunities. For instance, I might shift between two private banks with different risk profiles. The banks that are really taking up aggregation are in the Far East, but then remember they’re more product focussed.”


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