Wealth managers not focusing enough on intergenerational wealth: PwC

2011 Global Private Banking and Wealth Management Survey

TORONTO, September 26, 2011 — Two leading wealth management specialists were at The National Club this morning in a PwC client meeting to discuss evolving changes in global private banking. One of the dramatic findings of a recent survey by the presenters is that wealth managers are not focusing enough on the relationships they have with the children of their key clients. Without client attention second generation families have only a 50 percent loyalty rate in North American and in Asia this falls to 20 percent, says Steve Crosby, Managing PwC America’s Wealth Leader. “Competitors are going after the sons and daughters of your clients,” he says.

The impact of new regulations and more demanding client expectations are forcing private banks and wealth managers to change their client service infrastructures and the way they operate, says a PwC survey on Global Private Banking and Wealth Management. Companies who are able to master change will be in a position to win increased market share and lead the industry, says Crosby.

Some of the major highlights state:

• Today’s client is cautious, smart, less loyal and expects excellent service and clear value
• Regulation has become the not-so-invisible hand, increasing the cost of operations
• Greater operational efficiency and effectiveness are required, not just to compete but to survive
• Standing still is no longer an option and institutions must now quickly adapt or face being left behind

PwC’s survey breaks down the industry pressures into five key areas.

1. Performance and Change

“The DNA of the wealthy investor has been transformed as a result of the global financial crisis and recent scandals,” says Raj Kothari, a PwC partner and national Asset Management practice leader. “The result is higher expectations of service and value. Clients are more active in managing their affairs and they are paying increased attention to reputation, regulatory compliance and risk management.”

He adds, “With clients taking a much more active interest, wealth managers now have to work harder to earn their long-term loyalty and trust. Delivering the clear value that clients want is contingent on understanding and anticipating their changing needs, circumstances and perceptions.”

The survey indicates that:

• Wealth managers’ average cost-to-income ratio remains stubbornly high, as 28 percent of respondents reported cost-to-income ratios of less than 60 percent, while only nine percent also achieved revenue growth in excess of 10 percent
• Only 13 percent of organizations rated themselves as high performing in terms of transformative change; however, fully 42 percent aspire to higher levels of performance in the coming years
• Respondents see new competitors emerging and more than 30 percent expect significant consolidation over the coming two years

2. Clients

The survey indicates shifting patterns of world wealth which present challenges and opportunities:

• Clients are more aware of risk and 35 percent of clients now demand controls reports, and 39 percent demand evidence of compliant performance track records
• Fifty percent of client assets leave the firm on intergenerational wealth transfers in many markets
• Respondents cited referrals from existing clients as the biggest source of new clients and, yet, only 37 percent of CEOs believe existing clients would recommend them to new potential clients

3. Client Relationship Managers and Human Capital

Says Crosby: “The shortage of talent is one of the biggest barriers to future growth. Top quality people are becoming more valuable, more difficult to source and more expensive to train. However, the industry is getting better at institutionalizing client relationships with organizations. Links between performance and pay are becoming critical. New strategies, incentives and support are needed to attract and retain qualified professionals.”

The survey also found that:

• Forty percent of respondents rated their client relationship managers (CRM) as only average or below in terms of their ability to meet client needs
• While 81 percent of respondents think their firm’s relationship managers greatly understand clients’ investment objectives, only 56 percent agree that they have a full grasp of clients’ overall financial goals, retirement income planning needs (34 percent) or extended family issues (26 percent)
• Only 17 percent of respondents said their CRMs currently have an established relationship with the likely heirs of their clients, and intergenerational relationships will be key to institutionalizing assets
• Poaching talent from competing firms remains the top means of recruiting CRMs; however, given increasing institutionalization of clients, this is now less about acquiring the CRM client assets and more about acquiring the experience they have
• Only 23 percent of CRMs bring more than 40 percent of client assets with them when changing jobs
• 32 percent of respondents said the main reason CRMs left their organization in the last two years was that they were encouraged to leave because of underperformance
• The most profitable firms have, on average, far lower ratios of clients per CRM. In the wealth band between US $5 million and $10 million, there are 54 clients per CRM on average, but for those institutions with the lowest cost-to-income ratios there are only 26 clients per CRM

4. Operations and Technology

Respondents are at different stages of their operational evolution. Many continue to run legacy systems and manual processes. Technology budgets are being directed to better support client relationship managers and the front-end client experience.

The findings also show:

• Only 17 percent of participants rated their front-office systems as excellent
• Sixty percent of respondents say their technology budgets have risen in the past two years, and 42 percent of respondents have increased their operational budgets
• The infrastructure requirements of regulatory compliance create opportunities for technology firms and outsource service providers

Comments Kothari: “Transformation of the wealth manager business model is overdue, and this year’s report shows new urgency for change from an industry that has not needed, nor been able, to adapt swiftly in the past. We found nearly universal acceptance by senior wealth management executives that standing still is no longer an option and that there is a need for wholesale changes in the way their organizations deliver value. Those that are ahead are looking beyond the pressures of today to address operational, cultural and technology issues that are standing in the way of future growth.”

5. Risk Management and Regulation

Kothari believes that risk management systems and processes are being upgraded to provide integrated approaches to better align risk and value. The global wealth management industry is now at the forefront of regulatory change. Cross-border standards, customer protection and transparency are anticipated to impact the front-end client experience and increase costs. For example:

• Increased regulation, and associated cost, was cited as the No.1 challenge to business growth
• Thirty percent of participants indicated that the regulatory environment will have a significant impact on their operating costs
• Reputational risk was viewed as the top risk to the organization, ahead of market, credit and operational risk
• Forty-one percent of CRMs were rated as having average or below average ability to meet client risk -management and regulatory requirements
• Seventy-one percent of respondents have reviewed their risk-management frameworks within the past six months
• Despite the adverse financial impact, 57 percent of CEOs surveyed believe the new regulations are beneficial

Participants responses indicate that the centre of gravity for wealth management is moving, and established centres are under pressure from emerging markets. In reaction to increased regulatory pressures, the report indidates that respondents see Switzerland, London and, to a lesser extent, New York, all being challenged by the rise of Singapore and Hong Kong in the coming two years.