The private banking industry is enjoying a golden period. Driven by high market capitalisation growth rates and a strong global economy, the wealth of the world’s rich has increased extraordinarily in recent years. This has boosted demand for private bankers who can advise them on how to preserve this wealth, enhance it and hand it down to the next generation.
According to the latest annual world wealth report from Merrill Lynch and Capgemini, the number of people with more than $1m to invest, the high net world individuals (HNWIs), grew by 8% to 9.5 million last year and the assets they control had swelled to $37,200bn. And undoubtedly today there is an increasing need for professional advice, sparked by the much wider range of products and solutions now available to investors, particularly in the alternative and structured products space.
Moreover, wealthy clients are becoming more sophisticated, international and demanding, which despite posing new challenges for private banks, can also open up exceptional development opportunities.
Optimistic times
Indeed, an incredible optimism pervades the industry. According to the findings from the latest global research carried out by PricewaterhouseCoopers (PwC), chief executive officers at private banks and wealth management firms predict that, on average, the assets under management in their own organisations will increase by 30% annually for the next three years.
With acquisition and retention of new clients understandably high on private banks’ agendas, one of the many challenges they face in striving to achieve their growth targets revolves around being able to increase their ‘share of wallet’, which has emerged as a new key performance indicator.
Fragmented sector
To understand the importance of this indicator, it should be noted that the wealth management private banking industry is still extremely fragmented. According to the recent private banking benchmark study published by London-based think-tank Scorpio Partnership, the top 10 banks in the world manage $6869bn, which despite accounting for 63% of the total $10,800bn of assets managed by the 180 private banks in the study, represents less than 20% of the universe of high net worth assets, as identified by the Merrill Lynch-Capgemini study.
If these concurrent results call into question what is the realistic proportion of the remaining 80% of HNW assets that is within reach of the wealth management industry, the findings also flag up a huge opportunity. Firms are increasingly offering ‘holistic’ or all-encompassing solutions to add value and gain great share of clients’ wallet.
Currently, less than half of wealth managers hold more than 40% of their clients’ investable wealth, according to the PwC survey, but 80% of them believe they will manage more than 40% of their clients’ wealth in three years’ time.
“With open architecture and aggregation, this is entirely possible,” says Bruce Weatherill, global private banking leader at PwC. “Wealth management firms can leverage up dramatically their assets and their profitability without this impacting their customer relationship managers. Moreover, the greater the share of wallet, the more institutionalised the client becomes and is less likely to move to another firm.” Indeed, there is always the risk that the client may transfer his assets to another firm when the leading relationship manager leaves.
Partly as a defence mechanism against this, many major private banks are adopting a team-based advisory approach. This has the primary function of enabling the relationship manager to focus on listening to and understanding the client’s needs, while relying on product specialists to structure solutions. It also has the secondary effect of creating a number of ‘touch points’ for the clients within the organisation. Clients feel they ‘belong’ to the bank rather than just the relationship adviser, which banks hope will increase loyalty.
“The relationship manager is incredibly important, he is like an orchestra conductor with the client, but he is not the only person,” says Declan Sheehan, chief executive of HSBC private bank in the UK. “But if we have increased our share of wallet, we have certainly wrapped a team around the client. There are a number of people who make sure that the client is properly looked after, even if the relationship manager leaves.”
There is also some evidence that the larger the share of wallet held by a bank, the more difficult it tends to be for a client to move his assets to another firm. It is likely that any change would take years to complete, and therefore most valuable clients are likely to stay put.
However, as the size of a client’s assets increases, the number of managers employed tends to grow. “Many private banks would consider that is a part of their role to be a trusted adviser and to be able to service a client across a multitude of needs,” says Mr Sheehan. “But the reality is that most clients have a number of institutions that cover them.”
Besides wanting to diversify their ‘manager risk’, large clients – the so-called ultra-high net worth individuals – tend to use the competition they can create between private banks to ensure a high level of service. Moreover, such investors are increasingly well informed about different managers’ expertise and skills.
The opportunity to grow the share of wallet is there, says Mr Sheehan, but it is imperative that a wealth manager does that “dispassionately”, providing for the needs of clients across all capabilities, thus embracing open architecture and bringing investors best-in-breed solutions.
Industry experts agree that the cost of servicing an existing client (which should lead to increased wallet share) is lower than the cost of acquiring a new one. But in order to service clients successfully, traditional service models need to evolve. “The industry is almost coming out of the dark ages in terms of serving its clients,” says Chris Gant, head of wealth management at consulting firm Capgemini UK, referring to the trend by a growing number of wealth management firms to move towards more dynamic, needs-based client service approaches.
Taking the traditional and rigid way of segmenting clients on the basis of investable assets a step further, wealth managers are focusing on groups of investors with common needs. They are now taking into account factors such as sources of wealth, investment goals and behaviour, and how involved clients want to be with their investments.
Segmentation approach
“By segmenting clients based on different criteria, wealth managers will be able to respond in a much more proactive way to serving them,” says Mr Gant.
One subscriber to this concept is Nick Tucker, head of Merrill Lynch’s global private client group in the UK and Ireland. Considering, for example, the source of wealth generation as a relevant factor for developing solutions that are commonly needed by a particular segment, at Merrill Lynch there are teams who specialise in those HNWIs who sell their businesses through the stock market. Advisers have to be knowledgeable on specific issues, such as those relating to the wealth implication of holding assets in a concentrated security, hedging capabilities and tax implications, explains Mr Tucker.
Some teams specialise in entrepreneurs; others focus on niches, which can be geographic or cultural, such as the NRI (non-resident Indian) community, says Mr Tucker. “Clients are segmented in many different ways. We do our segmentation artistically rather than scientifically, so that you don’t create barriers that can be very unfriendly to clients.” He also emphasises that segmentation does not have to get in the way of what clients want.
If teams are a good way to retain clients, losing a whole team can pose a huge problem for a bank, especially in an environment where poaching is the norm.
Private advisers, attracted by lucrative packages and multi-year guaranteed bonuses (which are an effective retention method only until the day bonuses are paid), seem to be on a merry-go-round from one firm to another.
Industry consultants believe that this war for talent, which is pushing up salaries for the whole industry, is fuelled by what clients’ advisers can bring with them, something that private banks tend to deny. Advisers would be poached mainly because they fit in with the firm’s culture, are able to deal with existing clients and bring in the right sort of new clients, they say.
“If you only hire people for the assets they are going to bring in from the competition, you will be disappointed,” says Mr Tucker, adding that the three teams of advisers Merrill recently hired from the competition have brought a new skills set into the business and have added value.
Retention problems
For whatever reasons private banks poach advisers, recruiting and retaining quality relationship managers has become a real challenge in the industry.
In some cases, hiring private client relationship managers from within the organisation and training them can prove a successful way of mitigating the issue. For example, KBC, whose private bank is integrated with the universal bank and whose HNW clients are mainly upgraded from KBC’s retail branches, primarily recruits private client advisers from other parts of the group, in particular the retail banking arm.
“A relationship manager coming from another part of the bank already has a special bond with the firm, so there is an immediate cultural fit,” says Ronny Goossens, head of private banking at KBC in Belgium. He adds that a regular benchmarking of remuneration packages and career development plans for bank advisers are also key to retaining them.
To strengthen their existing talent pools, many private banks are bringing in advisers from other related businesses, such as investment banking, accountancy or legal professions. They are also recruiting from such sectors as sports or media, interested in leveraging the networks and expertise that a person who has had a career in these fields has developed. The challenge is then to train them to be private bankers.
Major players, such as HSBC private bank, are also investing heavily in developing a constant pipeline, setting up global training programmes through which it will put the best people identified, for example, among the summer interns. “This will not solve the capacity issue today, but it will in two or three years. Those are tomorrow’s relationship managers,” says Mr Sheehan.
Business adaption
However, the well-documented shortage of talented staff – plus discouraging PwC research findings that only 26% of private bank CEOs are confident of recruiting enough relationship managers over the next three years to support their growth plans – highlights the necessity for wealth managers to change or adapt existing business models. A new emphasis has to be placed on investment in technology, which can equip advisers to be more efficient and effective, say industry consultants.
“Many private banks have heavily underinvested in technology in the past five years,” says Mr Gant at Capgemini. “That critical point now has been reached where private banks need to go through a cycle of really embracing technology to give them that step change in the way they do business.”
Sally Tennant, CEO of Lombard Odier Darier Hentsch in London, says the need to understand wealth management in the global marketplace has brought additional challenges, both in terms of communication platforms between different offices but also in terms of integrating a global IT platform. Advisers need to be modelling in real time, to talk to a client and at the same time to be able to calculate performance of their portfolios in any currency and estimate implications on a tax perspective, for example. Automating such administrative jobs makes advisers more effective, says Ms Tennant.
People first
But private banking is, and will remain, a people business. “Our most precious capital remains in the people,” says Alexander Classen, head of private wealth management for Europe at Morgan Stanley. “That does not mean that we will stop investing in technology, but you will never take away the preciousness of dialogue with a client, which can only come from highly skilled and trained individuals.”
