Transformational change sweeps private banks as they reconfigure to face multiple challenges

Singapore, 5 September 2013 - Private banks are facing challenges posed by the economic environment and continuing regulatory pressures, according to a new PwC global report published in June.  PwC’s report, Navigating to tomorrow: serving clients and creating value, includes findings from PwC’s 2013 20th anniversary Global Private Banking and Wealth Management Survey. A separate Asian cut of the survey released today provides further insights on trends in the wealth management industry with a particular focus on Asian players.  Survey participants suggest that the wealth management industry is moving away from simply providing products towards delivering solutions and advice to clients.

“Trust, reputation and brand will all play a greater role in client propositions and clients’ perception of value,” said Dominic Nixon, Asia Pacific Financial Services Leader of PwC.

Despite the resurgence of global wealth to nearly pre-2008 levels, the industry is facing significant margin pressure caused by increasingly stringent and costly regulatory requirements, uneven growth across geographic markets, loss of certain type of fees and subdued client activity. These dynamics are further compounded by shifting demographics and existing challenges around operations, technology, and talent management. Surviving and succeeding in this environment requires changing to a more consultative business model that places a premium on “doing the right thing”.

Key findings include:

  • Compliance is the top risk management concern, as private banks struggle to keep pace with the scale, speed and costs of current and planned regulatory change.
  • Infrastructure transformation will redefine how private banks serve clients.
  • The cost of complying with regulation will continue to rise, with respondents forecasting that risk and regulatory compliance expenses will account for 10 percent of annual revenue in two years, up from seven percent today.
  • Attracting and developing quality client relationship manager (CRM) talent continues to be a critical priority for the private banking industry.

The report, which surveyed 200 institutions from more than 50 countries, found that the wealth management industry is at an inflection point, precipitated by continuing regulatory pressure, a challenging macro-economic environment, margin compression, changing demographics and trust challenges.

PwC’s survey found that the industry faces multiple pressures to change in five key areas:

Risk and Regulation

In this year’s survey, compliance was rated as the top risk concern, as wealth management firms struggle to keep pace with the scale, speed and costs of current and planned regulatory change.

  • Participants cite client and product suitability risk as the second greatest area of concern after compliance both today and two years from now.
  • The cost of regulation will continue to rise, with respondents forecasting that risk and regulatory compliance will account for 10 percent of annual revenue in two years, up from seven percent today.
  • While globally tax information exchange leads the list of specific regulatory concerns, advice and product suitability are staying on the top of agenda of banks in Asia. This is followed closely by areas such as anticipating and managing increasing regulatory requirements, anti money laundering, and client privacy and data protection.

Justin Ong, Asia Pacific Leader, Global Private Banking and Wealth Management at PwC, said:

“Compliance and risk management is here to stay; private banks need to accept this as reality, and that business as usual means doing things the right way, with the right people and right skills. The ability to understand and manage the avalanche of regulatory and risk issues, such as cross border transactions, tax transparency and sales practices will require private banks to continue investing heavily into systems and training to ensure that they are able to do business in a profitable, but compliant way.

There will be a lot of change management happening in private banks globally as they start to build in processes and policies developed in the past few years to deal with the new operating environment.”

Operations and Technology

The quest for operational efficiency and differentiation through technology continues as firms increase investments to streamline processes, improve efficiency/productivity and mitigate risk. In our survey:

  • Respondents pinpointed a superabundance of manual processes as the leading challenge of operations and technology infrastructure by a substantial margin. However, more than half of participants (58%) are optimistic that they will achieve greater automation and consistent processes across the organisation within the next two years - a twofold increase from today (27%).
  • With client service taking on even greater priority, digital interaction projected to double in the next two years, the bulk of technology investments will be earmarked for CRM tool support, adopting systems to meet compliance requirements, enhancing of client data security and protection and digital connectivity.
  • Notably, despite the growing emphasis on digital interaction, less than a quarter of respondents (19%) feel that their IT capability is sufficiently equipped to deliver an effective digital service strategy to clients.

Mark Jansen, Partner – Risk Assurance, PwC Singapore said: 

“The wealthy by every demographic are more technology enabled than ever before. They tend to be part of connected digital communities who share their ideas and opinions. They are willing to do more of the background research and investigation on their own.  Their relationships with their advisors have taken on a hybrid or multi-media characteristic blending the trusted advisor with advanced technology tools analytics and social media. This impacts the core technology infrastructure of wealth managers. Distinct from traditional transaction processing, which must absolutely be done correctly and profitably, technology budgets are increasingly focused on data analytics.

Today wealth managers need to be able to provide data for clients who want it anytime, anywhere and on any device.”

Products and Services

As value chain dynamics and client priorities change, firms are aiming to combat commoditisation by shifting their focus to value-added financial planning services and reconsidering how they develop products. In our survey:

  • Only one third of firms plan to engage in revenue sharing and retrocessions during the next two years as compared to half today.
  • With commission revenues dwindling, 68 percent of senior wealth management executives expect that, two years from now, their business model will encompass broader financial and wealth planning solutions, up from 57 percent. In addition, the firms in Asia are putting more emphasis on promoting discretionary management model and sixty percent of respondents will expand these services in the next two years.
  • Fewer products will be manufactured in-house in future as firms continue to transition to a hybrid approach that combines proprietary and third party strategies (88 percent will use a hybrid approach in the next two years versus 76 percent today).

Justin Ong, Asia Pacific Leader, Global Private Banking and Wealth Management at PwC, said:

“Our respondents are struggling with transformational change. The products and services the wealthy are seeking today are far different from those of the past. Clients are demanding best of breed products with fee structures they can readily understand and evaluate on their own. More importantly, they are now looking for something extra from their wealth managers. Today the wealthy seek guidance and direction on investments, family, philanthropy, retirement and long term health care.

This is more sophisticated financial planning and less transaction focused. Increasingly this part of the customer experience is becoming digital with new tools and capabilities.”

Human Capital

In light of aggressive competition and unprecedented trust erosion, attracting and developing quality client relationship manager (CRM) talent continues to be a critical priority for the wealth management industry in Asia. Setting the tone from the top and aligning rewards and incentives with ethical behaviour is integral to rebuilding reputational equity and reclaiming “trusted advisor” status. In our survey:

  • Hiring experienced CRMs and improving overall skill levels is one of the top strategic considerations for senior leaders in the next two years.
  • With remuneration reported as the second most important cause of attrition (68 percent), firms are reconsidering reward and incentive structures in an effort to balance talent goals and stringent new rules around variable compensation. However, notably in Asia, private banks have taken measures to re-evaluate the non-performing CRMs, which was reported by 80 percent of the participants as the top reason for CRMs leaving the organisations.
  • The key attributes for successful CRMs are evolving in tandem with new client demands and business priorities. Most notably, specialised product knowledge and cross-selling will take substantially more prominence in the next two years.
  • CRM objectives are changing dramatically with findings indicating that revenue growth will replace both net new money growth and gross return in Assets under management (AUM) as the leading performance metric in the next two years.

Justin Ong, Asia Pacific Leader, Global Private Banking and Wealth Management at PwC, said:

“The required attributes of a successful CRM are different today - the bar is rising as business models evolve – requiring CRMs to have more specialised and detailed product knowledge. Communication and other soft skills have become increasingly important.

Wealth managers need to be courageous and proactive if they are to improve external public perception and engender higher levels of client confidence. CRMs will play a critical role as the industry seeks to rebuild trust.”

Markets and Clients

With more new and innovative entrants in the field, an in-depth understanding of an increasingly diverse and disparate client base is essential to retaining a competitive edge. The industry should become more agile in using data analytics and other resources to pinpoint what clients really value and how much that value is worth to them. Findings from the survey include:

  • Newly emerging wealth markets are set to outpace established emerging markets while traditional sources of wealth such as North America and Western Europe will experience lower growth.
  • Women represent a significant but underleveraged growth opportunity. Though they currently comprise one third of the client base, only 14 percent of firms surveyed focus on gender in their segmentation approach.
  • Generation Y has unique characteristics not shared by their predecessors that must be understood and addressed to attract new and preserve existing relationships. Respondents noted that on average they are able to keep 56 percent of a client’s wealth assets once the assets are transferred to next generation, indicating a need to build more relevance for this segment. This aligns with survey findings indicating that wealth managers are not confident that their talent management strategy is conducive to meeting the needs of next generation heirs and millennials.

Steve Crosby, Americas Leader, Global Private Banking and Wealth Management at PwC, said:

“In Western Europe growth is slow, while North America shows moderate growth, and in the emerging markets growth remains relatively high but has slowed in some areas. To these markets, we can add a further group of nascent emerging markets which are accumulating new wealth most rapidly, with net new money growth forecast as 16% in 2013. The multi-speed wealth management market is here to stay and wealth managers need to embrace this.

Retaining clients remains a focus for wealth managers. Respondents cited that on average they are able to keep only 56 percent of a client’s wealth assets once the assets are transferred to next generation, which shows both the importance and the challenge of better managing inter-generational wealth transfer. Wealth managers need to improve their understanding of clients’ extended family issues to capitalise on the inter-generational opportunity.”

ENDS

 

About the PwC Global Private Banking and Wealth Management Survey

PwC’s 2013 Global Private Banking and Wealth Management Survey reflects the changing industry landscape and adds our own point of view to provide the global wealth management community with an independent framework, to guide further analysis and thought around how to evolve business today to better serve the needs of clients tomorrow.

The 2013 survey gathered insights and perspectives on critical aspects of the challenges confronting participants, with a host of different operating models and businesses across all segments of global wealth management. Participants’ combined responses yield a fascinating self portrait of global wealth management both now and into the coming years.

 

Media Contacts
Candy Li, PwC LLP Singapore (Tel: +65 6236 7429 Email: candy.yt.li@sg.pwc.com or pwcpress.sg@sg.pwc.com)