Delivering profits is as important as delivering good client service
The volume of assets managed by the world’s top private banks was up around 15 per cent in 2003, a significant turnaround from 8 per cent decreases in 2002 and 2001, when the performance of the industry had become rickety.
While this current growth rate of assets under management mirrors the heady days of 1998 and 1999, one can only hope that this time it will be sustainable. This will depend on more than continuingly favourable equity markets – the abilities to meet customer needs and control costs are now the touchstones of success in the high net worth wealth management arena.
GREATER FEE REVENUE
The world’s largest private banks now manage some $4600bn of assets for their high net worth clients. These are the individuals able to put at least $1m equivalent into accounts on which the banks generally earn management fees rather than transaction-based commissions.
Higher assets under management do bring greater fee revenue potential. But it remains to be seen how long it will take for the increases that the private banks have achieved during the latest assets accumulation phase to work their way through into revenues. Judging by past experience, this should happen over the next six to 12 months.
Higher revenues should in turn translate into higher profits within 12 to 24 months, provided that market conditions remain benign. However, if the banks continue to accumulate assets at the current rate, doubts may arise over whether they have the resources to service these higher levels and take advantage of their potential for the bottom line. Some of the larger institutions do, but there will be those that find they have failed to re-position themselves appropriately during the latest downturn.
What is now abundantly clear is that private banking success is not judged simply by the level of assets under management. Of course there are a number of behemoths in the market, but they have not had an easier time over the past few years. Private banking is a quirky business – biggest is not necessarily best. When you examine banks by other measures such as profitability, the big players do not necessarily come out in front.
FRONTLINE PERSONNEL
One area that is crucial to get right is personnel. Private banking is an expensive business. While private banks have been better over the last two to three years at linking employee costs to performance, they have also significantly reduced their numbers of professional relationship managers.
Paradoxically, while the banks may believe they have been successful in cutting staff – and perhaps their overheads – the industry relies on these frontline people. A bank cannot cut too close to the bone or it has no one left who can deal with clients.
In 2002, the rate of headcount reduction was 4 per cent and in 2003 it slowed to some 2 per cent. This hints that there is little capacity for further downsizing and in certain markets, private banks are starting to hire again. The challenge these institutions now face is to achieve an equilibrium that delivers profits and client service in equal measures.
The vital thing about private banking is that it depends greatly on high touch, high level relationship management. Certain extremely wealthy clients will choose to go to a smaller institution because it can guarantee a better level of contact with individual relationship managers. At a larger bank, these clients often feel like just one account of many.
Sebastian Dovey is managing partner at wealth management strategy think-tank Scorpio Partnership
