A new survey reveals that many private bank clients are dissatisfied with the services they receive, mainly due to middle and back office failures. If the banks do not act quickly not only could they lose custom but service providers could also suffer mandate losses. Roxane McMeeken investigates.
It is no secret that disenchantment has set in among the customers of
the world’s private banks. But the problem is not just financial; it is
at least partly due to failures in banks’ middle and back-office
processes. Frequently these processes are not the responsibility of the
banks themselves but of the securities services provider to which they
have outsourced.
The falling value of investment portfolios has undoubtedly left swathes
of high net worth clients unhappy with their banks. However,
information company Reuters and global management consultants Booz
Allen Hamilton say in a new report that many serious grievances of
private bank clientele are rooted in administrative issues. These
issues have been incorrectly addressed, says the report, Defining
Excellence in Private Banking 2003, being first masked by bull markets
and then blamed wrongly on the current bear market. Reuters and Booz
Allen spoke on an anonymous basis to staff and clients of 27 private
banks operating in Switzerland, Germany and the UK. The median wealth
of customers was E4.7m.
Getting basics wrong
Steve Lipper, global director of Reuters Private Client Services,
warns that, performance issues aside, many private banking customers
are disappointed with the service they receive and feel that their bank
is not getting the basics right. If in the end, a client’s
dissatisfaction leads them to leave the private bank, the back-office
provider must also risk the loss of its mandate.
Five problem areas relating to the back and middle office emerge from
the research: the client’s point of access to the bank; the accuracy of
investment transactions; the legibility of reports sent to clients; the
efficiency of data capture (ie, retention of fundamental information
such as contact details); and the provision of investment ideas.
Clients’ bugbears
Mr Lipper says that a significant proportion of private bank
customers complained that they did not have access to a reliable point
of contact and that phone calls were not returned within a reasonable
amount of time. “Reasonable”, as defined by the client’s subjective
view, was usually around 24 hours. Call centres – which are frequently
outsourced to securities services providers – were a particular
bugbear, says Mr Lipper. “Many wealthy clients resent being shifted off
to call centres. This leads us to question whether they have any role
to play at all,” he adds.
One disgruntled customer quoted in the report, says: “My family have
been important clients at that bank for over 200 years. Yet now, when I
call them I get to a call centre where no-one knows who I am or who I
want, they have no authority to do anything and everything seems
impossible.”
Another major client gripe was the failure of banks to get investment
transactions 100% correct. The clients surveyed claimed that money was
going missing and, worse, that it was not always recoverable. Complex
requests, such as transfers to the developing world, were a key area of
concern. Mr Lipper says these problems are due to weak back-office
processes, system errors, message transmission faults and poor
discipline among staff.
Reporting not up to scratch
The client sample also complained that reporting from their private
banks was difficult to understand. “Reporting needs to be simple, short
and arrive in an easy-to-store format,” explains Mr Lipper. But it
should also go into the level of detail required by the individual
client. “Clients want to hold a report in their hands which has been
written to their level of knowledge – many of these clients are not
financially trained,” he says.
Clients also found fault with the data capture capacities of private
banks. Reuters and Booz Allen discovered that customers were being
asked for the same information every time they contacted their bank.
One client said: “I know it’s not a big thing, but after three years,
and despite telling them countless times, they still can’t spell my
name right. You wonder what other, more serious things they are getting
wrong.”
Lack of ideas
Another issue was the failure of private banks to provide their
clients with new investment ideas without prompting. Clients want their
private banks to act as “trusted advisers” says Mr Lipper, and the
banks in turn want to be seen as such. To an extent, it is up to
private bankers to know their customers’ portfolios of stocks and bonds
as well as their risk profiles. However, securities services providers
can boost these efforts by providing technology that monitors the
client portfolio and alerts the relationship manager when something
relevant happens within it. This enables the private banker to be more
proactive, calling the clients with investment suggestions rather than
waiting for them to telephone.
The implications of the survey for private banks and their back-office
providers are grave. “Many people we spoke to were pretty close to the
last straw,” says Mr Lipper. Of the unhappy clients, those who were not
on the point of leaving their banks were adamant that they would not
recommend the bank to friends and family.
Mr Lipper says that banks that get their back-office systems right have
immense opportunities for winning new customers. The opportunities are
there by extension, for back-office providers that offer the best
securities services.
Outsourcing outlook
A growing number of banks are set to outsource, according to
financial research and consulting firm Celent, which believes this
should improve their services. Octavio Marenzi, Celent’s managing
director, says: “With the shift towards outsourcing, European banks
will have to develop better skills in vendor selection, in the
management of multi-vendor projects and in creating IT architectures
that allow external software to be integrated more readily.”
Meanwhile, he says, banks in the US have continued to increase their IT
budgets, even while many other industries are holding back. “Banks are
also increasingly viewing technology as a competitive differentiator,
as a tool with which to wrest market share from their competition,” he
says.
The back and middle-office system providers are quick to defend
themselves. Anne Tangen, head of State Street’s wealth manager
services, says that her firm is able to provide private banks with a
comprehensive service, encompassing accounting, custody, client
reporting and portfolio analytics, but does not provide the personnel
to staff call centres. State Street then endeavours to stamp out
transaction failures and errors by introducing end-to-end automation to
its clients’ transaction processing system. But Ms Tangen admits that
it is an uphill struggle. “Constant reinvestment in technology is
needed. Many clients have old technology that needs to be upgraded.
They also often use bundled products, where one system does everything
but not that well.”
Customised data
State Street’s reporting service is highly flexible, says Ms
Tangen. “We feed the data into a reporting engine and slice it the way
the client wants it. The first thing is to satisfy the regulatory
environment but after that we are able to customise by client. However,
we tend to offer clients a few different methods of presentation and
they choose which they send to their customers. A limitless choice is
too much for some clients.”
The message is similar from The Bank of New York (BNY). Charles van der
Merwe, managing director of BNY subsidiary Pershing, says that BNY is
poised to roll out a new client portfolio monitoring tool. This will
improve the analysis of risks and opportunities within client
portfolios.
Mr van der Mewe says that a key strain on the back and middle offices
of private banks occurs when customers demand new or unconventional
products, such as exchange traded funds and single stock futures. He
claims that larger securities services houses are better placed to deal
with this pressure because they have sufficient scale to make the
necessary investment.
Twin challenges
At UBS, the world’s largest private bank, Mike McLoughlin, chief
operating officer, Wealth Management London, says: “The two main
challenges facing the back/middle office functions are changing
legislation and costs.”
Changing legislation, he says, impacts at multiple levels, from the
opening of an account, to ensuring “know your client” documentation is
in order, to the tax treatment of clients. “But it also affects both
client and statutory reporting requiring changes to the reporting
systems employed.”
Additionally, he says, improved straight-through processing (STP) rates
are being sought. “Though, as the world becomes smaller, more exotic
products and locations impact on the ability to provide a seamless and
cost-efficient service – as does the changing legislation.” To face
these challenges, he says UBS invests heavily in technology and
outsources certain functions, including global custody for all
non-Swiss branches.
Mr McLoughlin also reveals that the bank’s New York operation is
currently migrating to an outsourced business model for its data
processing centre while the London, Hong Kong and Singapore operations
outsource transaction processing to a certain degree to the investment
banking division, which already has the infrastructure; strict
compliance and Chinese walls are in place, he stresses.
“In Wealth Management London, we outsource the printing of client
reports, archiving of documents and desktop technical support. Certain
products are also currently managed on a centralised basis to provide a
more cost-efficient solution, such as funds in Luxembourg and MAP
[managed portfolio products] in London.”
Mandates at risk
The Reuters/Booz Allen research findings clearly suggest that
customers across the board are displeased with their banks – and much
of their ire can be traced to shortcomings in the back and middle
offices.
At worst, private banks could lose valuable clients if tangible
improvements are not made quickly. If that happens, they will not be
the only ones to pay the price. Outsourcing mandates, if not heads,
will surely roll.
