Clients demanding more from adviser relationships

In the post-crisis environment, private banks need to deliver a higher degree of responsiveness and flexibility than in the past and the enterprise value approach could be an especially important differentiator for firms, according to this year’s World Wealth report by Merrill Lynch GWM and CapGegmini.

High net worth individuals have become more conservative and vigilant and take nothing for granted, yet advisers acknowledge many of their clients are largely under-satisfied in all the areas that are the most important to the client-adviser relationship, or “value levers”. Clients demand cross-enterprise expert advice teams, unique investment opportunities through the investment bank, preferred financing for entrepreneurs and advice/expertise from the private bank and the investment bank during the wealth creation process.

Incentivising co-operation across units, using applications targeted to popular technologies to appeal to their tech-savvy clients to develop and give access to this broader and more integrated set of capabilities is more important than ever, as wealth management profit margins have been declining and the cost of regulation and for recruiting and retaining staff has gone up.

Moreover, investors remain heavily invested in conservative instruments that generate limited fees. Private banks must demonstrate a value proposition for which their clients are willing to pay.

“It is the reality check, and there is scope for improvement” says Adam Horowitz, head of UK, Ireland and Israel at Merrill Lynch Wealth Management in reference to the need to maximise enterprise value.

The challenge is the scale of the bank and coverage of the client, he says, taking the example of Bank of America. “They have 300,000 employees, so where does the client touch the bank and where does their business touch the bank? It could involve five different jurisdictions, and 40 people in the bank. How do you coordinate that?”

But more importantly, he says, there is an unresolved tension with regulatory requirements on investors’ protection. Many organisations’ products are suitable only for professionals or institutions, which typically enjoy less protection than private investors. “For those who can be classified as professional clients, those with wealth in excess of $30m (E21m), which is less than 1 per cent of total adult population, we find that relatively simple.”

For private investors though, it is another story. “The idea of trading on the institutional platform may be seductive for a private investor, but that is a professional market-making environment, it may be very dangerous, because they don’t have access to the tools, experience or knowledge in that particular discipline.

“We’d rather do it carefully and meticulously and take three to four years to meet clients’ needs properly, than to just plug somebody in, because that’s where we are missing our obligations with the clients,” says Mr Horowitz.

Pull-through revenue does exist and even already well-connected institutions identified opportunities for revenue growth by increasing the efficiency of organisational interconnectivity, according to PwC’s 2011 Global Private Banking and Wealth Management Survey. Among other factors, the manual systems that many firms still use are often a major hurdle, says Jeremy Jensen, PwC Global Private Banking and Wealth Management, Emea leader.

There will be clear winners and losers emerging by the middle of the decade, he predicts, and the ones to lead the pack will be those who can adapt to the evolving client agenda and regulation. Those institutions who can deal with the legacy systems infrastructure and become leaner and operationally more effective will also be the winners, says Mr Jensen.

“Technology in this sector has been underinvested much more so than other areas of financial services,” he explains.

“Private clients have traditionally been relatively easy to manage, but the financial crisis and recent scandals have awakened the sleeping giant. Clients demand clear value added and the firm’s success comes back to quality and focus. I don’t think scale for scale’s sake is an appropriate strategy.