Private banks scheduled for major surgery

Having recovered from the tumult of the post-2008 crisis, private banks are entering pro-active mode, rather than lurching reactively from regulatory-led re-education initiatives to economically-dictated restructuring.

Few are in doubt that they need to change their approach, to match their clients’ increasing demands. But most are asking themselves the following question: is this a time for a fundamental re-engineering of the business model or simply a little light tinkering and window-dressing? And how much investment in technology needs to be made, bearing in mind that losing regular face-time with clients could lead to defections to more attentive managers?

A recent “impact note” from US consultancy Aite Group, also active in Europe, identifies several key trends: a geographical re-focus for global wealth managers, the return of innovation, tackling “big data”, paying much more attention to the “client experience” and identifying online servicing breakthroughs.

A full six years after the commencement of the financial crisis, wealth management firms are finally beginning to turn the corner, believes Aite.

“As clients and regulators continue to pressure wealth management firms to provide better financial advice at a reasonable price point, 2014 will see firms pro-actively re-evaluate their current business models and service offerings with a focus on leveraging technology to improve the client and adviser experience,” reads the note.

This is not necessarily about harsh economic necessity or about regulators’ holding guns to banks’ heads, as they have done in the past. This time, it really is about responding to changing client needs, says Aite.

Superficial change

Some banks are fooled into believing that to respond to customer needs and embrace these key trends, they just need to put a “new coat of paint” on the office walls or a new coat of arms on the door, believes Seb Dovey, co-founder of wealth think-tank Scorpio Partnership.

But they are mistaken. Mr Dovey claims these banks need to undergo a new industrial revolution, commoditising certain parts of their business, through a mechanised, factory mentality, with massive investments in technology, while freeing up the hand of advisers for value added work. At the same time, he is telling institutions – and crucially the fund managers they work with – to rebuild their distribution platforms to make them efficient and cost-effective in a post Retail Distribution Review world.

“The UK is like the ‘Petrie dish’ for the new global order in wealth management,” says Mr Dovey. “Other jurisdictions should be looking very closely at this experiment to see what happens.”

While they could cope with the new regulatory burden and cost structure, many boutique groups are effectively throwing in the towel and cashing in cheques presented by foreign banks with deeper pockets and broader geographical ambitions, he says.

It is no accident that the UK market is now being hotly contested by a host of foreign banks including Julius Baer, Lombard Odier, Société Générale, BNP Paribas and Handelsbanken, many of which had little footprint outside their home markets a decade ago.

“Just because for the last 20 years, business has been done in a particular way, does not mean it is the only way,” adds Mr Dovey, believing the next wave of consolidation will be in private banks higher up the food chain and not just in the UK.

“It’s not just about regulation,” he says. “Private banks have to look at the gradient of increase of revenue from the growth in managed assets. Currently, it’s not sufficiently steep to mitigate increasing costs, particularly of the distribution channel.”

Scorpio calculates an excessive average global cost-income ratio for private banking of 72 per cent, plus an extra 15 per cent in Asian markets. This has lead Société Générale, for instance, to sell its sub-scale Asian wealth management franchise to Singapore’s DBS and consultants expect more such deals to follow.

Private banks, says Mr Dovey, have promised growth in profits to their shareholders and are now getting nervous that they may not be able to deliver.

The answer is to shine spotlights on several key areas of the business, particularly the productivity of distribution staff, who typically account for 60 per cent of private banking costs.

“This is an ideological conversation for our industry,” says Mr Dovey. “Most of our value is currently based around the point of sale and the individual contact between relationship manager and client. Some customers are beginning to adjust to the idea that it may not always be necessary to include a human being.”

Closely monitoring this point of sale could lead to more industrialised commoditisation. “The industry generally believes commoditisation is bad,” he says. “But they can still position intellectual skills of strategic planning as a premium value service,” while commoditising cash management and model portfolio solutions, which clients would not have a problem with. “Clients accept commoditisation and banks should not be afraid of it,” believes Mr Dovey.

He admits however, that few banks are prepared to grasp the nettle and make such radical changes to their shop window, preferring instead a softly-softly approach.

“In principle, we are switching to a more pro-active mode, but it is on a case-by-case basis,” says Adam Horowitz, head of Swiss bank Julius Baer’s UK operation and responsible for integrating much of the business bought from US player Merrill Lynch.

“The industry has been on the back foot. In some parts, it is getting back to business as usual, but it still has a long way to go. We are coming to grips with a set of jurisdictional regulatory requirements, the full implications of which are not yet clear for the industry.”

He praises the slowly-but-surely attitude of the UK regulators which is allowing an international financial services industry to flourish in London and attracting clients and property buyers who previously looked elsewhere.

“The financial authorities in the UK are wise in managing their regulatory framework in a way that allows the financial services industry to operate across borders,” he says, pointing out that the UK office close to St Paul’s shares the same décor as the bank’s Swiss HQ, designed with the help of a Feung Shui master. “This is not a protectionist approach, but allows the service model to reach beyond the UK’s shores.”

Despite the bank’s open architecture mindset, there is an increasing tendency to use the “intellectual capital” of Julius Baer’s fund selection and due diligence process do hone down the number of products which clients deploy in their portfolios. “This is not a supermarket, where you can buy everything off the shelf,” confirms Mr Horowitz. Yet he stops short of defining a changing, more efficient business model embracing some aspects of commoditisation.

“One cannot commoditise clients’ needs and how we meet those needs,” he says pointedly. “There is a trend in [some parts of] the industry towards putting clients in boxes and we disagree with that completely. Every family has their own requirements and they don’t fall comfortably into boxes.”

The challenge of how to operate more cost-efficiently is a trend still “working its way through the industry” with no easy answers, “especially in an environment that requires so much oversight and supervision,” adds Mr Horowitz.

While acknowledging there are particular client segments which prefer an on-line, hands-off marriage with their banker, there is a stubborn reluctance from him to give up any shred of a customer relationship to a technology-driven process. “Technology responds to a need and we need to make sure we are operating efficiently,” he says. “But we will fight tooth and nail not to give up advice and conversations with clients on an ongoing basis.”

Across town in swanky Mayfair, competing Swiss bank Lombard Odier is taking a slightly different approach to expanding its business, based less on pure allocation and advice and more on bringing institutional technology of investment management to its private client base.

“Post crisis, everyone was looking at their business model and getting a little nervous,” suggests Dominic Tremlett, the bank’s London CEO. “Now there is a certain confidence returning and smart businesses are ready this time to adapt to the 2014 environment.”

The new wave of innovation, he believes, is very much driven by demand from the client base, with a huge shift to the accurate risk management of private portfolios.

“Clients are much keener today to understand the downside risks as well as the upside potential of their portfolio,” says Mr Tremlett, who has helped introduce the asset management techniques pioneered to manage the Swiss bank’s exclusive pension scheme after it fell into deficit, into the private banking mainstream. The bank has doubled its presence in London to 130 people over the last three years.

To increase efficiency, rather than offering the risk-based portfolio to each client separately, the techniques have been honed into a set of Vantage mutual funds, with much lower equity allocations than many multi-asset portfolios, and “the potential to go to pure cash” in a crisis.

These techniques are particularly favoured by large families soon to pass the bulk of assets on to the next generation and reluctant to take undue risks, says Mr Tremlett.

He is also a big fan of direct client contact to discuss these concepts. “You can’t beat a face to face discussion,” he says, with digitalisation more suited to reporting – including a new series of private banking apps for mobile devices – than client interaction.

“Rich clients want to be able to look into the eyes of those managing their wealth,” he says. “The internet has more of a place in the consumer industry, where you can purchase something online, but wealth management has to be more bespoke than that.”

Rather than scrimping on customer contact, Lombard Odier, he says, has kept its costs down by tailoring an efficient IT system to the bank’s niche audience.

“We built our own in-house system when the trend was to outsource to third parties,” says the affable Mr Tremlett with a broad smile. “This is one of the few private wealth management systems developed solely with asset management in mind, rather than retail banking. Other private banks have a lot of legacy systems in different jurisdictions, which they need to talk to each other to produce a coherent report for the client, which is not easy and very expensive.”

Total reboot

At Citi, however, one of the world’s leading wealth management brands, there has been a much deeper root and branch review of the entire client experience, in a two-year process called “Project Sheen”, explains the private bank’s chief operating officer Dena Brumpton.

“We looked at every touchpoint, the whole soup to nuts experience,” she explains about the transformation, which has been rolled out in Europe, Asia and the US.

The idea was to get rid of all the old vestiges associated with the wood-panelled pre-crisis private banking world. Central to the thoughts of her strategy team was the notion that the majority of assets would soon be transferred from older to younger generations, so the new channels of communication would have to appeal to both audiences.

The initial stage involved full renovation of offices where client meetings are held. But following this came the real nitty gritty of updates to data management and
processing, involving substantial technology investment.

“Coming out of the crisis, there was a huge amount of distrust in the industry,” admits Ms Brumpton. “Banks just had to change how they presented services to clients. This change needed to be fundamental and radical, not just nuanced.”

Citi’s Inview system now allows direct transactions onscreen plus video conversations with advisers or product specialists and is particularly targeted at the 65 per cent of Citi clients who were engaged, frequent users of the bank’s web services.

The final stage of the transition will involve setting up an online private banking club, allowing members to share their experiences with each other and to aggregate asset allocations and investment preferences “big data” style, to allow demonstrations to clients of fund flows and behavioural trends.

“We had hunches that clients wanted to listen to other people like them and to know what their peer group is investing in,” says Ms Brumpton. “Five years ago, the idea of following recommendations from people you had never met seemed crazy, but it is just as relevant in investment management as in the consumer world. Clients are interested in people who have the same risk tolerance and investment needs.”

Although this increased digital component of the point of sale broadly falls into Mr Dovey’s controversial commoditisation philosophy, Ms Brumpton tries to insist that face time will not be cut back.

“We are not trying to replace banker and client time, but to supplement the banker and client time,” she says. “The service is digital, but bespoke digital.”

By making storage of data and access to it much more efficient, the value of the initial building of a relationship with a personal banker is intensely magnified, she claims.

“The on-boarding process is a painful one, often taking between 30 to 60 days to bring in a new client, including detailed anti-money-laundering checks and tax concerns,” she says. “This has become more difficult over time. But we are trying to turn the pain-point into a value-added service.”

Although this concept may seem somewhat fanciful, it is confirmed by Aite Group’s consultant and report co-author Stephen Wall. “The experience firms deliver during on-boarding can make or break a relationship,” he says. “We expect firms will now be in a better position to finally manage and improve the on-boarding process to meet clients’ business and regulatory objectives. In addition, we expect firms to incorporate mobile and online capabilities into the on-boarding process to improve client data and document capture.”

It is clear from both consultants and banks that some combination of human and machine will define the brave new private banking world. But just how that combination can be adjusted and implemented for each customer segment may yet prove the trickiest challenge of all.