Sixty per cent of Asia’s private banks suffered client asset attrition of more than 20 per cent in the last 12 months, but 90 per cent expect to grow their client asset base by almost 30 per cent per annum over the next two years, according to PricewaterhouseCoopers (PwC).
Singapore, September 8, 2009 – Asia’s private bankers are optimistic about growth prospects in the next two years, based on the latest Asia cut of the PwC 2009 global private banking survey “A New Era: Redefining the Way to Deliver Trusted Advice”.1 A-fifth of the 40 private banks from Asia surveyed lost more than a quarter of their clients to competitors in the flight to quality in the last 12 months but believe they could recover from the asset attrition within the next two years2.
Justin Ong, Asia-Pacific Private Banking Leader, PwC LLP says:
“Optimism about private banking growth is largely driven by the region’s economic dynamism. Growth will be pursued but the sustainability of existing revenue model bears close examination.”
“The crisis has changed the rules of the game for private bankers in Asia. In particular, the reaction of both Singapore and Hong Kong, as key international financial centres in the region, to global pressure and business sustainability and risks challenges will also determine the course of the future for the private banking industry here.”
Change - but in what strategic direction?
Ninety-four per cent of Asia’s private bankers surveyed say that their clients spend the most time with them discussing investment performance, followed by financial planning matters (87 per cent). The top three frequently stated reasons why clients leave a private bank are: (1) poor investment performance, (2) following key staff to other organisation and (3) dissatisfaction with the service or advice received. Yet, the survey reveals that focusing on improving investment performance is not in the top strategic priorities identified by its CEOs.
“Based on what the private bankers are revealing about what their clients are telling them – they are recognising a tension between what is being done and knowing what ought to be done”
“When the good times end, clients might have felt that they had picked the shorter end of the straw. During the boom years, many private banks paid more attention to sales-led volume-driven activities and not enough attention to strategies that could improve investment performance or move clients into higher end offerings.”
Currently, transaction-driven growth contributes to 41 per cent of total revenue for most of Asian private banks. Net investment management fees and net interest income each form a quarter of the total fee structure. The transaction-based model is defined by commissions largely driven by per-usage basis. It encourages short-termism and runs counter to efforts to build client stickiness and loyalty. This model is backed by remuneration strategies and the top key performance measure criteria of the private banks surveyed are growth of Asset under Management (AuM), meeting revenue targets and acquiring new clients. Says Justin:
“Whilst commissions based on per-usage benefits from being more transparent, clients become less vested in the longer term or to a more strategic approach to wealth creation.”
There is a trend for wealth managers to move from transaction-drive to advice-driven businesses, with a likely associated shift from commission-based revenues to fees. Seventy-four per cent of the CEOs of private banks surveyed anticipate moving to an advice-led model with a full open architecture for externally sourced products within the next two years, compared to only 21 per cent intend to model business around a dual producer-distributor role. However, open architecture tends to increase commoditisation and drive down fees. Justin says:
“Customer centricity needs to be built into the advice-led model. Clients clearly want their bank to ‘…treat my money as though it were your own’. With superior investment performance, and in current times, wealth preservation strategies being most important to client, building a track record in client profitability will still be the most important brand differentiator.”
Asia’s private banking opportunities
Respondents are saying that their clients’ expectations and needs have shifted. The next two years will see increasing importance of opportunities in tax and estate planning, trust and fiduciary services and new investment alternatives and family office.
As global wealth shifts eastwards, Asia’s high net worth, comprising largely entrepreneurs, will demand service offerings in areas like philanthropy (68 per cent), information aggregating and reporting (64 per cent) and real estate management (52 per cent). This will impact how banks service their clients. Notes Justin:
“If Asia’s private banks are to be successful with their most profitable segments - the ultra-high net worth individuals (UHNWI) holding investible assets of more than US$50 million and the affluent with assets between US$100,000 and US$500,000, they need to re-think and re-define their client proposition around the needs of these segments to provide an edge against competition.”
For instance, globally, 87 per cent of all respondents regard inter-generation wealth transfer (IGWT) as a priority. There is clearly room for improvement in capturing inter-generational wealth transfers, since just 38 per cent of all respondents are able to retain more than 50 per cent of their clients’ assets when faced with an inter-generational transfer event.
Re-skilling to succeed
The private banks have been seeing a stronger need to build business around an advice-led model. Says Justin:
“If the plan is to evolve and scale-back on reliance on transaction, aggressive volumes-driven model which has been the main contributor to revenue over the last years, Asia’s private bankers will need to strategise more to build sustainable fee-based avenues.”
An advice-led model with an open architecture approach requires disciplined client segmentation to deliver the right service and allow private banks differentiate against competitors. It requires a re-orientation of skill-sets and remuneration incentives for relationship managers. Forty-five per cent of relationship managers surveyed in Asia are confident to advise on taxation, 48 per cent on IGWT concerns and 33 per cent on philanthropic agenda. Notes Justin:
“There has been a mismatch of skills to respond to client demands. If clients are most concerned about investment performance, this has not been a key performance indicator for remuneration.”
Currently, relationship managers are rewarded for performance for, in order of importance, (1) growing assets under management, (2) meeting revenue targets and (3) acquiring new clients. The sales-driven culture has not prepared relationship managers well to give good advice to clients during the financial crisis. Mis-selling and inappropriate advice on product suitability are two of the biggest on-going risks that private bankers need to address in the next two years.
Charting the course of the private banking future for Asia
According to private bankers, not just in Asia but across all 40 countries surveyed, the top three most successful International Financial Centres (IFCs) over the next five years are: (1) Singapore, (2) Switzerland and (3) Hong Kong. With CEOs targeting new clients from Middle-East (62 per cent of CEOs), Singapore (57 per cent), Hong Kong (56 per cent), India (48 per cent) and China (47 per cent), local regulators need to address issues such as know-your-customer, transfer pricing, cross-border remuneration, service permanent establishment, amongst others, and for the private banking industry to deal more effectively with these issues. Comments Justin:
“The IFCs have come under close global scrutiny as governments are concerned about cross-border private banking activities. Countries that have not dealt effectively to integrate with international laws, those local regulators will need to face up to the debate of offshore banking in light of recent pressures around tax transparency and secrecy laws.”
“The financial crisis has exposed the soft underbelly of strong private banking brands that had taken decades to build. Asian players will be even more challenged to protect profitability and protect their reputation as ‘trusted advisors’. Private bankers will find both their clients and regulators demanding greater transparency and disclosure around products and services.”
“The future of private banking in the Asian context will depend on how the business is being defined. Success in the long term will depend on the strategic direction that these banks will take. Private banks that focus on the real and longer term needs of clients will be well-positioned to succeed.”
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