Redefining the Way to Deliver Trusted Advice

15 July 2009 — Private banks and wealth managers have seen their profits plummet in the wake of unprecedented financial turmoil, investment scandals and decline in world wealth, according to a new report published today by PricewaterhouseCoopers (PwC).

Damage has been done to the critical element of trust at the heart of the relationship between high net worth clients and their wealth managers. With increasing demand for transparency around all aspects of the investment process and performance, a growing regulatory compliance burden and the need to control costs, wealth managers face enormous challenges as they try to redefine their role and regain “trusted advisor” status.

The report, entitled “A New Era: Redefining the Way to Deliver Trusted Advice”, identifies significant changes affecting wealth managers, how they are responding with changes in their business and what senior private bankers and wealth managers see happening in the industry in the future as well as the qualitative impacts of the financial crisis over the first quarter 2009.

Clients have raised the bar and are now demanding more from their wealth managers, including peace of mind. More than half (53%) of high net worth clients surveyed say that their primary source of financial advice is now their own research capabilities and independent knowledge, an indication of their scepticism about the quality of the advice they actually have been getting.

Jeremy Jensen, EMEA private banking and wealth management leader, PricewaterhouseCoopers, said:

“Transparency is the new gold standard of wealth management. How clients are kept informed around not just performance of their assets but also the integrity, financial health and processing status from their wealth managers and underlying service providers and counterparties will be brand differentiating.”

Client Relationship Managers (CRMs) are integral to meeting this raised bar of client demand. However, according to survey results, 20% of CRMs admit to not fully understanding their clients’ needs. This is juxtaposed against CRMs’ claims that while they are spending more time with their clients (41% of their time allocation versus 30% in 2007), 65% of them admit this amount of time is insufficient to provide an adequate level of service.

The survey highlights that wealth managers identify the three most common areas of weakness for CRMs as an inability to adapt to change, lack of client relationship skills and poor appreciation of risk. Although CRMs realise they have shortcomings, identifying client relationship skills and taxation as the two areas where they would most like to receive additional training, the same view was expressed in our 2007 survey. This is a real threat in such a client-driven market and wealth managers must review and action renewed training programmes. Furthermore, only 20% of CEOs consider their CRMs of high calibre in meeting the needs of clients yet, acquisition and retention of talent has fallen from being CEOs’ number two priority in 2007 to seventh today, a concerning fall.

Highlights from the 2009 survey

Boutiques and smaller client ratios will play a significant role. PricewaterhouseCoopers found no direct link between size and profitability in terms of cost/income ratios, making small well run boutique firms particularly well positioned to thrive. Client service and brand differentiation now trumps history and brand awareness. The days of simply pushing product alone are over, and quality of advice is now the new differentiator. The focus has shifted from client acquisition to client retention through increased interaction and better relationship building. The most profitable wealth managers were found to have significantly lower ratios of clients per client relationship manager across all wealth segments allowing them to better understand clients’ needs and increase share of wallet.

Clients demand transparency. High net worth clients now want much more transparent product offerings, product suitability, robust due diligence and real-time customized reporting with proactive risk/reward analysis versus a point-in-time snapshot of their wealth and holdings, and how these are being transacted, processed and managed. Private clients want their wealth managers to “…treat my money as though it were your own”. They are looking for answers about the integrity surrounding their wealth and personal data, as well as the soundness of the institutions and processing counterparties who serve them.

Stick to the core segment. Nearly half (46%) of wealth managers provide services across all levels of wealth, a reflection of an opportunistic catch-all strategy of client segmentation. But profitability among the various segments of wealth varies widely. The affluent (less than $500,000), the very high net worth (over $20 million) clients and ultra high net worth (over $50 million) clients have proven less profitable in the current environment, and wealth managers seeking to operate in these segments must have the necessary scale, systems, product mix, together with appropriate CRM skills to do so profitably.

Opportunities exist to capture inter-generational wealth transfers. 87% of wealth managers say they regard inter-generational products and services as a priority. There is clearly room for improvement in capturing inter-generational wealth transfers, since just 38% of wealth managers surveyed are able to retain more than 50% of their clients’ assets when faced with an inter-generational transfer event. A significant factor in delivering this is improving the skills of CRMs. CRMs themselves state that inter-generational wealth transfers is the third highest area in which they would like additional training.

Further consolidation and a period of inorganic growth appear inevitable. Industry consolidation appears inevitable. Some 88% of wealth managers surveyed expect further consolidation in the sector in the next two years, with 34% expecting substantial consolidation. Sixty-three% regard acquisitions as crucial to their own growth strategy, more than double the projected rate of acquisition just two years ago. No doubt the burden of keeping abreast of changing regulations across different jurisdictions is one reason why only 32% of CEOs say they will open up operations in new countries over the next two years, compared with 52% in 2007. Of those that do plan to open new operations in the next two years they say their top markets for global expansion are the Middle East and Asia, in particular India, Hong Kong, Singapore and China.

A ruthless drive for operational efficiency and cost reduction. While enabling growth is the top priority for Chief Operating Officers (COOs), short-term cost-cutting is their second-highest priority. 36% of CEOs believe there is room to eliminate 10% to 20% of their costs, and another 18% believe they can cut costs by more than 20%. Clearly techniques that include transformational change, including from outside of financial services, are key to securing the kind of process improvements and cost reductions predicted.

Wealth managers need to invest in advanced technology to survive. The CEOs of wealth managers regard the use of technology as the weakest element of their organizational capabilities, and 63% expect to increase their IT spend in the next two years, including 82% who plan to undertake some form of major core system upgrade. COOs predict that online client service platforms will become a top-five operational priority over the next two years. Those able to provide innovative online client interfaces through, for example, handheld devices, will be able to increase client loyalty and importantly, free their CRMs to focus on higher-value client interactions. Clients are demanding aggregated reporting and access to information across multiple providers.

The era of absolute banking secrecy is over. Through international pressure for increased transparency, the era of absolute banking secrecy has evolved into a new world of “compliant confidentiality”. The private banking and wealth management world will continue to become more transparent and more regulated in the years ahead. While onshore centres will manage more private wealth than they do today, International Private Banking Centres (IPBCs) that choose to focus their offerings and complement onshore services will continue to play an important role. A fast-changing international regulatory framework will lead to a new generation of treaties between IPBCs and large economies, as well as the probable emergence of expanded regulatory regimes within the EU and elsewhere. Wealth managers will not want to impact their reputations by operating in ‘non-transparent’ or ‘non-cooperative’ jurisdictions. To emerge as leaders, private banks and wealth managers will need to ensure that they plan for the new world and focus on the value proposition of IPBCs and how their chosen centres deliver their clients’ needs.

Note for editors:

1. The PricewaterhouseCoopers Global Wealth Survey was first conducted in 1993 and continues to be one of PwC’s most widely read publications. The survey conducted between December 2008 and March 2009, included participation from nearly 240 private bank and wealth management firms. It is one of the largest surveys in the industry, including views from senior management and client facing relationship managers from global banks, private client groups at leading broker dealers, family offices, boutiques and individual wealthy investors. The survey is not sponsored by any firm or vendor and is part of PricewaterhouseCoopers thought leadership as a service to the financial services industry.
2. For additional information, please, refer to Anna Aristova, PR Assistant Manager.
3. PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.