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How well is the wealth management sector servicing the needs of high net worth investors? Cap Gemini Ernst & Young provides some answers with the results of three surveys focusing on the use of technology, customer relationship management and financial planning tools. Adam Courtenay reports. Private banking technology Private banking and wealth management surveys tend to focus almost exclusively on the relationship between manager and client. Little has been reported on the technology underpinning the relationship, which in many cases determines the effectiveness of the relationship. Recent global surveys of high net worth individuals (HNWIs) – a segment that appears to be growing despite recession – have tended to focus on customer satisfaction levels. These surveys almost invariably conclude that customer relationship management (CRM) is in crisis. Banks are not always capable of balancing their own needs to produce as much profit as possible from each HNWI – with the client’s needs to be treated individually – and achieve high performance levels. Three-pronged approach Cap Gemini Ernst & Young’s Private Banking Systems Survey 2002 follows a central theme, endeavouring to deconstruct private banking relationships from a technology perspective. The first part of the survey is a general section on private banking system selection, based on answers provided by 11 major private banking systems vendors, almost all capable of providing full front-end to back-end systems. Linked to this soon to be released survey is another looking at financial planning tools, an area which vendors do not well provide for and to which banks, for the most part, have not yet subscribed. The second part of the private banking research questioned the private banks to ascertain their strengths in both supporting and enhancing CRM. If CRM is in crisis, as many wealth management surveys purport, how can the systems and methods be tailored to improve performance? The end result is the first major research project to explore the power of technology on private banks/ customer relationships. Systems solutions The survey concludes that each system has its strengths and no single solution can be used to satisfy all the needs of any one private bank. The aim of the survey is to isolate the factors which determine success. For example, a bank which has an older system that has worked perfectly does not necessarily need to upgrade to a newer, untried system. And a system that is already being used to collate customer data effectively may have a weak regional reach and may need to be extended to allow the customer more choice of products from more countries. “Once investment vehicle support becomes more regional, it becomes more difficult to support,” says Patrick Neuwirth, senior management consultant at Cap Gemini Ernst & Young Financial Services in Utrecht, The Netherlands, and author of the survey. “If a private bank wants to be able to use a pan-European funds supermarket, the basic starting point is whether you can support a number of funds from different countries. Then you can focus on selection.” The survey found, for instance, that multiple systems solutions tend to have advanced functionality and allow the banks to switch parts of the system’s architecture at a low cost. There is also, by definition, less dependence on any single system vendor. At the same time, implementation and maintenance of a multi-system solution can be complicated, creating a number of databases and possibly inconsistent data. Vendors also have to co-operate during implementation: the more inconsistent the system, the greater the possibility of operational risks. The single system approach has its own pros and cons: transaction flows have no need for multiple interfaces and reporting of single transactions tends to be easier to handle. However, functionality requirements tend not to be fully covered and specialised systems may need to be built which may fall outside the immediate transaction zone. The portfolio management systems of most vendors displayed high coverage of different asset classes and good functionality. This came as no surprise because portfolio management is the hub of private banking. According to Cap Gemini Ernst & Young criteria, the average functionality of the 11 systems surveyed was around 88 per cent and the asset class coverage, which was fuelled by the growth of internet usage and fund supermarkets, was around 75 per cent. Fund administration effectiveness was also strong: three of the 11 vendors were rated as “totally functional”. However, when it came to regional coverage – for instance, the ability to administer AV-plans in Germany or TAK23 in Belgium or individual savings accounts (ISAs) in the UK – the systems showed their weaknesses. Only about 30-35 per cent of systems could handle the regional funds whereas, predictably, the ability to manage non-regional mutual funds, unit trusts and investment trusts was much higher. Despite the highest percentage of systems surveyed tending to be from between six and 10 years old, the type of technology on which the system is based may prove to be a more important criterion for selection. “It is not a problem that many systems are somewhat older,” says Mr Neuwirth. “It may be that the system’s functionality is very good or the vendor’s position very strong because they have a lot of clients.” The criteria include scalability, flexibility, how open the system is and the ease of integrating it with other software, he says. The systems survey also investigated capacity to maintain and evolve. A private bank in need of system support is buying a development process in which both current and future needs must be considered. “The vendor and the vendor’s research and development are as important as the current state of the product,” the report states. “First, corporations need to know that support for their system will be available for a considerable time. Second, the research and development efforts of the vendor will affect the buyer’s situation. Third, corporations have an interest in being able to influence vendor’s choice of directions for enhancement of functionality and development of new modules,” says the report. What about the current market for vendors? Christof Domeisen, who is responsible for Cap Gemini Ernst & Young’s Central European Financial Services practice, including the important Swiss private banking market, says: “The general growth and interest of the HNWI market in the last five years has led to an increased demand for private banking systems improvements and upgrades.” Worldwide recession has not greatly disturbed growth levels. “It could be the case the market is flattening out – but if we talk to vendors they say they have three forecasts, based on whether the market will go lower, remain static or increase,” says Mr Domeisen. “In just about all cases, the vendors say there is good evidence the private banking systems market is still strong.”

The questionnaire Cap Gemini Ernst & Young invited 14 systems providers to answer its questionnaire and 11 responded. The 42-page questionnaire requested information on the global nature of the system (including multi-currency, multi-lingual, multi-channel and multi-company facilities), the system’s target markets (which may be private banks, advisory brokerages and execution brokerages) and the average time it takes to implement the system, from request for proposal to the finished package. Flexibility and scalability were important criteria. Questions included how a system would support the addition of new financial instruments, how it would support the redesign of processes and process flows, plus highly technical matters such as the use of extra fields and third party modules. Questions on the customer relationship management functions included: Does the system provide customer segmentation analysis? Does it allow online access to a client mailbox to view client correspondence? Can it drill down on the profitability of clients? Can it offer a consolidated view of any one client’s assets? The various systems’ ability to manage portfolios took up a large part of the questionnaire, including the systems’ ability to store information related to equities, equity-related instruments, bonds and foreign exchange. Questions included: Does the system allow for short-selling and can it support “liquidity planning”; and can the system sweep cash in a portfolio bank account into a pooled cash vehicle? What about corporate actions? For instance, is there an event diary covering all corporate events/actions which can be defined by the user? The questionnaire also dealt with funds administration, transaction management, reporting processes and e-advice. Risk management and compliance were also covered in detail. The following systems vendors were surveyed: Avaloq evolution ag (avaloq banking system); Callatay & Wouters (Thaler); ERI Bancaire (Luxembourg) SA (OLYMPIC Banking System); FinancE Technology (IBBA); I-flex solutions limited (FLEXCUBE Universal Banking Solution); Milvus Software Ltd (G3); Odyssey Asset Management Systems (Triple’A Advantage); Orbitech Solutions Ltd, India (Private Banker Service System); Profidata AG (AMIS Asset Management & Information System); SAGE (PROSPERO); Temenos (Temenos Globus).

Customer relationship management Customer relationship management (CRM) is becoming the new buzzword among private bankers. Surveys abound which tell the market that the demands of high net worth individuals (HNWIs) are growing by degrees – their demand for web-enabled communication and information shows no signs of abating; their use of higher risk and alternative investment instruments will continue indefinitely; and their appetite for higher risk/higher returns is insatiable. Banks need to incorporate all of these demands at an affordable price. At the other end of the spectrum are the banks themselves, asked to deliver more services via a greater number of channels, yet somehow maintain profitability in an increasingly competitive marketplace. Can both sides’ needs – the clients’ and the banks’ – be met? Cap Gemini Ernst & Young’s survey of customer relationship management, which was conducted by Arnoud Kuiper, a senior Netherlands-based management consultant at the firm, questioned 16 financial institutions active in the European market. It found that, despite the CRM imperative, implementation must be conducted in phases to properly co-ordinate knowledge and skills throughout the process. Engineering choice CRM is a broad area: it can include provision of services in such diverse areas as data interactive voice response instruments or it can be simply the provision of greater choice for the customer. One significant example is the growing use of wealth portals and fund supermarkets, where technology has enabled greater choice for customers. As Patrick Neuwirth, a senior management consultant at Cap Gemini Ernst & Young, says: “If you want to enter the wealth management arena, a wealth portal or wealth management solution which the customer and his/her adviser at the financial institution can share is a vital step towards the total offering of wealth management support.” Service efficiency The survey report contends that, despite the diverse needs of customers, proper management should result in better customer relationships and lower costs for the banks. “One of the interesting comparisons we made was to compare the banks which have a big CRM capability with those which didn’t or which put little emphasis on it,” says Mr Neuwirth. To prove this, the survey made a direct comparison of banks which had specifically invested in CRM solutions against those that had not. The relationship managers which had invested in CRM were able, on average, to service around 120 clients. Those that had not invested in CRM averaged around 70 while providing the same level of service. “Properly implemented, modern CRM solutions facilitate the daily life of the relationship manager, letting him/her spend quality time with their clients,” says Lars Weigl, Cap Gemini Ernst & Young’s global solution team leader for wealth management. The conclusion is that CRM solutions have increased the efficiency of banks in reaching and servicing customers, as the administrative workload is lowered and the collation of data is streamlined. According to Mr Neuwirth, one of the major failings of private banks is their management of what is termed “soft data” (subjective data). The survey found that many private bankers used a number of different applications, created ad hoc, that contained specific client information. Many of these applications were not compatible with each other. The tendency among relationship managers was to create personalised systems of storing and retrieving information, which their colleagues could not access in their absence. “If a senior relationship manager leaves, he may take many of his clients and his knowledge of those clients with him,” says Mr Neuwirth. “A bank should be able to access this kind of subjective and personal data, which the manager has accumulated by knowing the customer personally. A new manager should be able to access that data and there is software which can perform this.” The CRM survey found that customer segmentation was of major importance in the CRM process, using a number of variables. It found that no bank segmented prospects and customers based on risk profile, lifestyle and needs; just 47 per cent segmented clients and potential clients based on personal (and potential) wealth; and that just over half (53 per cent) used a combination of these criteria to segment prospects and service customers. Cap Gemini Ernst & Young contends that service to a client will improve when all client information can be obtained from a single source. “In general, available client data is fragmented and stored in several databases. The ideal situation is that all information, no matter where it originates from, is presented as a total client view,” says the survey report. The survey found that only 38 per cent of relationship managers have online access to information from a single source. Around 60 per cent of the banks were able to offer a meaningful client profile but it had to be built by combining information from a number of databases. Only one bank was able to provide the relationship manager with customer data on his screen automatically when prompted. Banks’ communications channels with their clients were also studied. The difference between clients who used the banks’ discretionary services and those who used just advisory services was not vast, but distinguishable. For both client groups, e-mail is not a preferred means of receiving reports although 45 per cent of advice-based clients used the web. Between both groups, post, telephone and personal visits remained the major means of accessing reports, although discretionary clients also had a high fax use (83 per cent). Banks also revealed a lack of knowledge of the clients’ use of the internet and the costs involved in using it. Less than 30 per cent of banks knew anything about their clients’ use of electronic channels; and more than 70 per cent of relationship managers had no idea how easy (or difficult) it was for a client to reach them by telephone; none knew how expensive the telephone calls were nor the telephone’s cost-effectiveness compared with internet channels. Cost to the bank is a major focus of the CRM survey. Are the banks able to calculate total customer value and the net profitability of each or a segment of their clients? Banks that could ascertain the exact profitability per client were few (just 6 per cent). Developing models for calculation and/or projection of customer profitability “would add a new perspective for segmenting the customer base”, Cap Gemini Ernst & Young contends. “Therefore it is aimed at raising the retention rate for customers that are profitable; redefining the relationship with customers that are not, as well as delivering the information that is indispensable to decide on the marketing strategy for attracting new customers that meet predefined criteria,” says the report. When the systems vendors (as opposed to the private banks) were questioned about CRM and the use of integrated channels in the systems survey, many said they had incorporated CRM as a concept into their systems. Among the 11 private banking systems vendors questioned, the coverage of CRM function was around 75 per cent. Most of the systems (around 80 per cent) were able to support customer profitability analyses and segmentation analysis, which in turn helped the private bank to assess its cost-effectiveness. Investment, product and client profiling capability were also high among the vendors. “Retaining and servicing well your profitable and loyal clients and attracting new clients that meet predefined criteria is what it is all about in this current difficult marketplace,” concludes Lars Weigl.

The questionnaire Interviews among the private banks were conducted with senior management responsible for marketing and/or relationship management. The questions included topics such as management attention to CRM, client segmentation, collection of client information, client profitability, satisfaction of clients towards provided service, communications channels, the ability to access client information and the aspects that play a role when implementing a CRM solution.

Financial planning tools Financial planning based on one-to-one consultation has always been a major tenet of wealth management. However, the idea that a system can be constructed to assist in managing a client’s future wealth is still in its infancy and ideas on the subject are only just beginning to take shape. Tools designed to manage the wealth objectives of an ageing population have become more of an imperative, says Cap Gemini Ernst & Young. The reasons for this are manifold. The number of mass affluent investors is growing and in need of advice. This segment of wealth creators is undoubtedly the most significant: they tend to be more active, using a larger and more sophisticated array of financial instruments. However, in many cases the products they have chosen are short term in range, tending to focus on immediate investment returns. Added to this is the reorganisation of government pensions schemes, which have prompted investors to take greater responsibility for their own retirement, education and health care. A combination of demographics, changing investment styles and the volatility of markets, has prompted the design of streamlined systems to assist long-term planning. Research indicates that the demand for high quality, holistic advice will be one of the major growth areas of wealth management in the next decade. “If you are looking at financial planning capabilities of private banking systems, they are very poor or low,” says Patrick Neuwirth, a senior management consultant at Cap Gemini Ernst & Young in The Netherlands. “The market itself is still immature. We believe it will be a growing issue in the next few years and a challenge for the banks to meet.” The Cap Gemini Ernst & Young survey on financial planning tools, conducted by Johan Carlson, also a senior management consultant in Stockholm, based its findings on 16 vendors of financial planning systems in the northern European market because it was deemed an area of high Internet and technology use. However, the trends identified in the Nordic region and Benelux can be extended to other markets in mainland Europe and the US, where it has identified a similar trend among banks, brokerages and life insurance companies. The demand emanates from three areas:

• Advisers at private banks who offer advice to HNWIs and affluent clients
• Advisers in retail branch offices guiding newly affluent customers
• End-customers asking for do-it-yourself planning tools to be integrated with their overall Internet banking packages. Market inconsistency The survey found that customers no longer maintain loyalty to any one provider. A sample of Swedish clients found that around 15 per cent of the Swedish population use more banks today than three years ago and that those in the 30-45 age bracket (with a higher education and high income) switch banks more often than the national average. Of those that changed bank over the period, 25 per cent moved all their assets, 39 per cent moved their salary account, 26 per cent moved their savings account and 18 per cent changed mortgage providers. The study concluded: “Few customers state a specific reason for moving their business but rather a growing discontent over time. This emphasises the importance of a continuous dialogue with the customer.” Surveying the systems providers, it was found that many offered some of the building blocks which could be used in financial planning but none offered a total solution. A provider may have systems to deal with retirement and tax planning but may lack a complete risk management solution, or lack a holistic approach. The survey also found that start-up firms with more advanced financial planning products tended to lack market presence, whereas the more established financial software houses had not yet concentrated on financial planning tools, despite having a range of financial software. Another characteristic was the national nature of retirement planning. One system offered by CDS was deemed the “most focused” and highly adapted to Sweden. But, generally, many of the vendors tended to have a limited scope due to tax and regulatory differences between regions. The survey concluded that an immature market forces companies to focus on their home market to build business. Despite the inconsistencies in the market, Cap Gemini Ernst & Young is adamant that the market will grow strongly in the next 18 months. The target mass affluent sector has a large proportion of “validators and soloists” (those who are more active in choosing their financial products). “Also, in the UK market, which has a longer tradition in wealth advisory services with its strong corps of independent financial advisers, we see a very strong demand for financial planning systems” says Ian Shaw, who leads Cap Gemini Ernst & Young’s investment management practice in UK and Ireland. “The affluent segment is more familiar with the new ways of distribution and we see a strong interest in solutions where face-to-face advice can be supplemented by new technology, where the planning process is shared and executed on-line between the adviser and his/her client,” he says. What are the benefits to the customer and the institution? According to Cap Gemini Ernst & Young, there are several advantages for both parties. These include formalising the advice process to make firms less dependent on any one individual adviser and which allows easier knowledge transfer between advisers. Customer data can be retrievable from a single place and format and enables data mining and better overall knowledge of customers. It also protects against customer complaints, especially in areas such as audit trails. For the customers, the benefits will result in improved relationships and a continuous dialogue, making it easier to spot new demands. The customer gets a holistic view of wealth and a long-term strategy for management. According to the research: “A 5 per cent improvement in customer retention can result in a 75 per cent increase in profitability.”