Calling the shots

PWM: What are the key growth drivers and challenges for private banking in your region and how should institutions take advantage of growth opportunities?

Jane Fraser: Geopolitics has taken centre stage. We anticipate very challenging market conditions as politics drives outcomes. How Europe plays out will be a very big juncture. For the industry it is about continuing to regain client trust. There may be a pickup in competition globally. In the US, there will be more pressure on the broker model. In Europe it's good to be an American bank. And in Asia we will see a lot of the Swiss banks rallying to build market share as they are losing out to the US and local banks at the moment.

Many private banks are in the process of getting their footprints built in Asia. We’re already there. For us, it is about the flows. It is about the network and the connectivity, rather than getting the footprint itself built.

Andre Cronje: With fewer wealth creation opportunities globally and within the UK, wealth managers need to become more structured in their approach to generating new business. For UBS in the UK, not only do we look at clients in terms of the size of wealth and their level of sophistication, but we also consider their source of wealth. By segmenting in this way we have created a number of teams focusing on specific areas of wealth, such as biotech, private equity, hedge funds, oil and gas, media, professional partners, women, sports and entertainment and technology. We believe this client-centric approach results in teams who understand all the nuances of their sector and know how to meet the specific needs of those clients. Regional business in the UK also presents a huge opportunity.

Nicolas Debaig: There is an increased need for advice and services amongst high net worth individuals (HNWs) regarding the transition of wealth to the next generation, especially in emerging markets due to the newness of wealth there. Also, in developed economies, the major challenge post the financial crisis was regaining the trust of private banking clients. We see this as a key opportunity to support our clients, through focusing on long-term relationships generation after generation.

We also see clients continuing to be disappointed with traditional investment approaches and looking for alternative options, including property, art, wine and philanthropy. They can benefit from ‘impact investing’, a type of investment with the aim to solve social or environmental challenges while also generating financial return, for example investing in business sectors that address and expand basic needs (agriculture, water, and housing) and basic services (education, healthcare, energy and financial services) for underprivileged populations, typically in the developing world.

András Takács: Before the financial crisis of 2008, Central and Eastern Europe’s (CEE) banking sector showed by far the best performance in terms of shareholder return. After the crisis, CEE has lost its leading global position, mainly due to the deteriorating macroeconomic environment and its close links to Western Europe. Institutions staying on top after the crisis generally have well known brands and strong focus on classic banking with balanced business models and large domestic distribution networks. Since the biggest local wealth managers are operating as a division of a larger banking group, the performance and market position of their mother institution has a strong impact on the private banking operation.

Migration from retail pools of universal banks is a more important growth factor than in mature markets. In the CEE region, the first generation of wealth generators are dominating, mainly focusing on capital investments rather than portfolio investments. However after 15-20 years of privatisation, more and more owners are selling businesses to generate money for portfolio investments. We are also witnessing flows returning from abroad, due to the developing service quality and value propositions of the local wealth market players.

Jana Schreuder: One noteworthy growth trend is driven by demography. As affluent ‘baby boomers’ approach retirement age, many are spending time on wealth transfer plans. This year presents a potentially unique opportunity, as estate, gift, and generation-skipping transfer tax exemptions and rates are set to expire. Banks must work closely with families on customised education and governance programmes to create an approach that resonates across generations.

João De Medeiros: Wealth creation and clients’ increasing sophistication and demand for access to global markets will drive organic growth opportunities in Latin America. Moreover, the withdrawal of traditional global players from the region opens a window of opportunity for inorganic growth initiatives. Players that differentiate through a complete offering tailored to clients’ requirements and leverage other businesses provided by their local structures will be well positioned to take advantage of such growth opportunities.

Shayne Nelson: As Europe and the US continue to struggle, Asia has emerged as a key source of growth for almost every single private bank in the world; it is now the second largest region in terms of HNW assets and the growth story will remain powered by high savings rates, increased domestic consumption and beneficial demographics.

While there are lucrative opportunities, there are also challenges to building a sustainable growth. Cost-to-income ratios (CIRs) in Asia, for example, are higher than in Europe. Revenues remain challenged due to lower asset levels and lower returns on managed assets. Faced with highly volatile markets, clients have become more risk averse and less active in the market. Many have de-leveraged their portfolios and have been shifting towards simpler products that yield lower margins for banks.

At the same time, new regulations are negatively affecting revenues while driving up the cost of business. Basel III as a regulatory example will further reduce the ability of banks to use their balance sheets to generating profits. Adhering to a stricter regulatory environment is costly and the war for talent in the hotly contested Asian market has further increased.

There is no single strategy success. Instead, financial institutions should focus on asking several strategic questions. First, decide on the markets you want to cover and the clients you want to serve. Casting a wide net puts significant strain on a bank’s often scarce investment resources. It is equally important to decide what and where not to target.

Second, develop a deep understanding of your clients. In Asia, where more than 60 per cent of clients are entrepreneurs, knowing that their personal and business wealth needs are often interchangeable will have an impact on the bank’s operating model and client servicing approach.

Third, enhance operational efficiencies. Economies of scale give banks the upper hand when it comes to managing costs. A survey conducted in 2010 by Scorpio Partnership showed an average cost income ratio for larger banks of 75 per cent, versus 85 per cent for smaller banks.

Finally, maintain a sharp focus on front line profitability. Understand the cost of servicing clients as well as the drivers of relationship manager (RM) productivity. Actively managing small “tail” clients significantly increases RM capacity, allowing them to serve and focus on more profitable clients.

PWM: How can banks adapt portfolio management/asset allocation/product strategy to meet investors' changing needs and attitude to risk in your region?

Nicolas Debaig: We see more focus on wealth preservation among clients and therefore increased sensitivity to risks. There is significant opportunity for wealth managers to provide services and products which deliver value while at the same time managing the risks. We have a product approval process in place that is focusing on bottom-up requests and recognition of client needs. We conduct fund size monitoring in order to make sure that client risks with respect to liquidity are properly managed in this respect. Structured products are offered only as tailored solutions to specific client requests. We review client portfolios at least quarterly and we circulate our market comments and recommendations.

András Takács: During the crisis years investors’ attitude has been sharply changed from two aspects. On one hand, investors have less risk appetite parallel to global trends. However in some countries within the region, on the contrary to developed countries, high nominal interest rate levels with positive real interest rates as an additional factor supports this low or no risk taking trend.

On the other hand, investors do not prefer models and products based on strategic asset allocation. They have been preferring products and solutions implementing more flexible asset allocation approaches. It is underpinned by the current figures of the CEE fund markets, where the only factor of growth is generated by the absolute/total return and low risk money market and short-term bond funds. Banks also start offering solutions containing more tactical asset allocation elements in both discretionary and non-discretionary mandates.

Jana Schreudeer: Since 2008, clients have changed their definition of risk. Rather than being concerned about “missing out” on upside potential, they have become more focused on protecting and preserving wealth. Clients are asking the basic question: ‘Do I have enough?’ That is, enough to achieve their financial goals. We believe that a client’s unique needs and goals should drive portfolio construction, not the other way around. Our disciplined and intentional approach to matching assets with liabilities provides clients with a clear understanding of the rationale supporting our asset allocation recommendations. Being more connected to their portfolios in this important way increases clients’ confidence in achieving their goals and it is this confidence that enables them to persevere during periods of adverse financial market conditions.

João De Medeiros: Increased proximity of sales and investment teams to clients is a key factor to capture and translate their needs into proper solutions, especially in a scenario of commoditisation of offering. Banks must not only pursue sales discipline, client segmentation and adherence to suitability, but also develop communication processes that leverage on this proximity to make it easy for clients to understand in detail all recommended products and their risk-return implications.

Shayne Nelson: Determining what clients need requires consideration of a holistic set of information with regard to their financial status, circumstances, lifestyle, and priorities. This depth of understanding can only be achieved through active dialogue. In some cases, there can be a gap between what clients think they need and what they truly need. It is our job to identify this and to review our clients’ needs regularly in case of change.

The popular opinion is that Asian HNWs take on more risk than elsewhere. However, recent surveys indicate that on a broad asset class level, the asset allocation of Asian investors is not too different from other HNWs. Asian investors do tend to hold more cash, equity, and real estate in their portfolio and tend to showcase a strong intra-Asia bias. Private banks need to be able to balance clients’ both local and global needs.

PWM: Reporting quality, transparency and education or the lack of them are factors that can drive clients into the arms of competitors. What improvements should banks make in these and other areas to improve services and restore client trust?

Jane Fraser: Clients realised the price of not knowing what they were invested in and exposed to, so there is certainly a greater emphasis around transparency and more easily managing what they have. Either you’re distribution for your asset management business or a trusted, independent adviser. We’ve chosen the latter and moved to an open architecture platform three years ago.

Nicolas Debaig: The financial crisis has lowered customer confidence and encouraged a more cynical behaviour among clients, leading to them spread their portfolio over an increasing number of banks. Decreased customer loyalty coupled with regulatory reforms, such as the introduction of MiFiD II (Markets in Financial Instruments Directive), has led to the tightening of revenue margins for most of the private banks. The importance of reducing client attrition through better client servicing has now increased manifold, which earlier used to take a backseat to new customer acquisition, due to the relative costs.

Firms should be investing in sophisticated CRM (customer relationship management) systems, which should be actively used by relationship managers to record client information, contact instances and preferences. They can also be used to track and trace customer complaint management and ensure a smooth resolution as well as manage financial planning goals and targets. A single unresolved complaint for a client can mean they take their business elsewhere, and a comprehensive CRM system with different levels of escalation would ensure maximum client satisfaction.

András Takács: Transparency is supported by MiFID regulations, but this is certainly not enough. After the financial crisis, client demand for more transparent and liquid products has increased. Therefore it is essential to provide solutions that people are familiar with, simple and easy to understand.

Within the CEE region, penetration of discretionary portfolio management is quite low compared to Western European averages (9 per cent against 20-25 per cent). At the same time, the fee structure applied in some of the countries is not necessarily AUM-based, which is occasionally not helping transparency.

Taking into consideration the profitability pressure of the business lines, it is important that the development of reporting systems should not only focus on increasing service levels and client experience but supporting the everyday work of client advisers and through this aspect increasing banking efficiency. Through this approach, additional revenue (or cost savings) from the increase in efficiency can offset the extra cost of developing more sophisticated systems.

Jana Schreuder: We believe in pricing transparency. Clients need to understand the value they’re receiving in exchange for fees.

João De Medeiros: Clients increasingly require greater transparency, information quality and improved advisory services. In order to meet such expectations and regain clients’ confidence, private banks must reassess their business processes, especially the communication processes, positioning themselves as trusted partners of their clients. Areas that require further development are: client education, sales and advisory teams’ education, communication material’s availability and clarity, products’ detailed description, investment risk-return communication.

Shayne Nelson: In our latest FuturePriority Report, conducted by Scorpio Partnership, education was among three key themes that emerged as being important for the future. Almost 90 per cent of those surveyed expected their financial services provider to deliver education on investments and strategies. Quality of reporting was also identified as a key factor in determining great client experience.

Rebuilding trust with clients – reassuming the role of trusted adviser – should be the number one priority for any bank wishing to serve Asia’s wealthy. This requires banks to focus more on service and the quality of the advisory process, rather than on products. Above all, it means getting the basics of good banking right and putting client needs in the centre.

PWM: As many investors are still reeling from mis-selling scandals, questions of education, training and due diligence take centre stage. Are you convinced by the improvements which banks in your region are making in these areas?

Jane Fraser: Time will tell. Regaining client trust across the industry will be a multi-year process.

Andre Cronje: The UK’s Retail Distribution Review (RDR) aims to ensure consumers are offered a transparent and fair charging system for the advice they receive, consumers are clear about the service they receive, and consumers receive advice from highly respected professionals. We view RDR as an opportunity to improve how we do things and the service we provide to clients, not just a regulatory requirement. We believe the principles of higher qualifications and transparent, professional advice, are central to what we do, and we consciously made the decision to embrace the principles of the RDR early on.

Nicolas Debaig: In Europe, a host of regulatory initiatives – including MiFID2 – have been implemented to protect banks’ customers. However, banks have to work hard to win back the trust of their clients. The most significant way to impact this is training and educating the relationship managers with both product knowledge, and the necessary corporate values of transparency, honesty and open communication with clients.

We have partnered with Insead, a global business school. Insead will facilitate the programme for all of our 500+ Private Banking RMs worldwide. Regulatory knowledge and the trends emerging after the recent crisis, along with soft skills training were found to be extremely useful by the attendees.

We also educate our RMs on the moral framework we follow for individual product approvals to check whether a product is really fair, value added and transparent for our clients. Furthermore, as many of our clients are not just dealing with their personal, but also their family wealth, we help them to connect these. For children of our ultra high net worth (UHNW) clients, we offer an extensive educational programme through the Generation Next Academy. The programme covers masterclasses and subjects such as innovation, fixed income, and succession planning.

András Takács: I think the only efficient way of avoiding mis-selling and to align client interests with that of the bank and RMs is not using any income or specific product targets as key performance indicators in RMs’ incentive schemes. This approach is not a common understanding in the industry, but I believe this is the only rewarding one in the longer run, creating the necessary platform for long-term partnership with the clients.

Education is the most critical issue both on the client and the CRM side. Wealth management and private banking have only existed for 10-15 years in this region, it has no tradition, it has never been taught as a profession nor has a tradition in clients’ minds.

The average sophistication and experience of private banking RMs in the region is improving but still lagging behind the matured European standards. Education of the clientele is crucial as well, since the wealth market is much younger and the clientele has lack of investment knowledge and experience. If you want to be a successful wealth market player in the region you must pay extra attention to this.

Shayne Nelson: Banks have made considerable improvements since the global financial crisis on these matters. Countries such as Singapore have made significant strides to put professional qualifications in place with the industry establishing a code of conduct in conjunction with the Monetary Authority of Singapore. However, banks have to take responsibility for implementing appropriate educational training.

PWM: The majority of banks deal with social media inadequately, while the latest generation of UHNWs is increasingly digital savvy and present on social networks. How should wealth managers embrace the digital revolution?

Jane Fraser: With $5tn (€3.9tn) in wealth being transferred during the next 10 years across generations, those clients want the convenience of technology. The way we interact with clients will be dramatically different – a move away from wood-panelled offices. The principles of private banking will remain and trust will be at the core, but the experience will change. Ideas and innovation will be key, and banks will have to look to talent outside of their firms for those.

At the moment we’re focused on using technology and mobile access with our clients privately. In addition to account and research access on mobile devices, we’ve built a secure online social network for our clients’ children.

Nicolas Debaig: Clients and entrepreneurs are becoming more mobile, thus applications that put investors in touch with their accounts anywhere, anytime are becoming ever more important. We expect firms to expand the role of client portals and to open up web-based business applications to investors, particularly financial planning applications, in order to improve advisor productivity and investor engagement in the process.

Although we interact on all major platforms, such as Facebook, Twitter and LinkedIn through a dedicated social media team, we are yet to see significant demand for private banking presence in social media, hence our focus on adoption of new technologies for research and reporting with clear attention on security and confidentiality.

András Takács: We know the majority of our clients are in their mid 50s, with children in their teens or twenties, who are very familiar with social media. The new generation seldom reads traditional printed media but they spend many hours online, which means information now often flows from the younger generation to the older.

It is hard to avoid social media, therefore we have to build a presence which is not necessarily focusing on HNW customers yet, but acceptable to them and their children too. Targeted daily investment news with useful information about new or existing investment products may serve as the starting point. There is reason to believe that clients are looking for individually customised information which means that we must forget about “carpet bombing”, while banking secrecy is of utmost significance, no leaks or breaches are acceptable.

Besides social media, wealth managers still have a lot to do in using traditional internet-based banking tools, especially in terms of adapting and dedicating it to private client needs.

Jana Schreuder: Banks comply with significant regulatory and compliance restrictions when it comes to social media. That said, we’re investing in communication tools and technology to meet and anticipate the digital demands of our clients. For example, more than half of our clients prefer to be contacted electronically, and we’ve taken steps to align our communication methods with their evolving preferences.

While we emphasise one-to-one contact with clients, some clients have indicated they value communications via a social media component as well. Our corporate Twitter handle is followed by a mix of people, including clients, employees and journalists. We use LinkedIn to reach out to clients and professional contacts.

João De Medeiros: Private banking clients require above-average access to their financial institutions, through not only their relationship managers but also other channels in order to track account activity, download reports and obtain other information. Social media is an evolving technology and its impact on the improvement of client experience and efficiency of the traditional private banking offering is still a process in the making. On the other hand, establishing mobile devices as supplementary vehicles in support of existing channels is a less disruptive way for wealth managers to join the digital revolution.

Shayne Nelson: Today’s clients take for granted that they can communicate with their bank through multiple channels – both digital and traditional. Furthermore, HNWs are often characterised by their international mobility. Communicating effectively with clients means integrating all digital channels, including social media, into your client experience. Those who will succeed will be those who work out how best to use each channel to communicate relevant and timely information to their clients.

PARTICIPANTS

Andre Cronje

Post: CEO

Bank: UBS Wealth Management

Base: London, UK

Nicolas Debaig

Post: Head of Strategy & Business Development

Bank: ABN Amro Private Banking International

Base: Amsterdam, The Netherlands

João De Medeiros

Post: CEO

Bank: Itaú Private Bank International

Base: São Paulo, Brazil

Jane Fraser

Post: Global CEO

Bank: Citi Private Bank

Base: London, UK

Shayne Nelson

Post: Global Head, High Value Client Coverage and CEO

Bank: Standard Chartered Private Bank

Base: Singapore

Jana Schreuder

Post: President, Personal Financial Services

Bank: Northern Trust

Base: Chicago, US

András Takács

Post: Managing Director, Wealth and Investment Management

Bank: OTP Bank

Base: Budapest, Hungary