What are the challenges facing wealth management?

Ray Soudah  Founder of Zurich-based M&A advisers MilleniumAssociates

Private banks must prioritise their most profitable hunting grounds

Asia, where European stalwart Société Genéralé recently sold up its private banking interests to DBS of Singapore, despite tireless efforts to succeed, could prove the toughest of all wealth management markets, believes Ray Soudah, founder of Zurich-based M&A advisers MilleniumAssociates.

If Swiss banks – and Mr Soudah gives UBP as an example – are able to clone their efficient European platform in an Asian financial centre, rather than building local infrastructure from scratch, then they have much more chance of success with a lower cost base.

Indeed many formerly global players such as Barclays and HSBC are now carefully choosing their target markets in order to remain both compliant and profitable. The sale of $12.5bn (Ä9.6bn) of HSBC’s Swiss assets to LGT ties in with HSBC group strategy to refocus on a handful of core markets.

Until now, most large banks have not worried too much about choosing their options, as both regulations and markets have worked in their favour. The end of Swiss banking secrecy, however, means a rethink for many about the old offshore model and a shift to onshore, compliant banking across Europe. Economic uncertainty could also lead to re-assessment of cost structures.

Swiss banks such as UBS, Julius Baer, Pictet and Lombard Odier have all benefited from excellent revenue streams, because stockmarkets surged 30 per cent over three years, says Mr Soudah, a long-time campaigner in the field, having held senior management positions at Citi, the National Bank of Bahrain, Clearstream and UBS, before setting up his own consultancy in 2000.

“Private banks received a present from the market. But the biggest risk to banking is this market bubble bursting. This will impact them dramatically.”

Whereas these banks would still remain profitable should the market fall 30 per cent, anything more than 40 per cent would leave them struggling to break even. “That would be a worry for those banks, and they should look to cut their costs while times are good,” says Mr Soudah, who suggests the institutions must gradually re-segment their customer bases and prioritise their most profitable hunting grounds.

The division, as in Barclays, of private from investment bankers, meaning relationship managers can no longer benefit from the larger bonus pool, has also proved a key change. It is difficult to properly incentivise private bankers working within a consumer banking structure, believes Mr Soudah, in contrast to Deutsche Bank, where they continue to share the status and rewards of top investment bankers.

Other difficulties in private banking can often be attributed purely to problems suffered by parent banks in their home countries, rather than specifically relating to wealth management operating models.

Domestic turbulence has accounted for potential transfers of assets from the likes of Banque Privée Espírito Santo, a Swiss private bank owned by a troubled wealthy Portuguese banking family.

Similarly for Israel’s Bank Leumi, it made economic sense to sell Swiss assets to the expanding Julius Baer, particularly with a looming US fine threatening to dent profitability.  

Amin Rajan - Founder of the Create consultancy

With staff salaries making up 70 per cent of current costs, banks must rethink their models

Profitable wealth management models can only currently work in a bull market, believes Amin Rajan, founder of the Create research consultancy. When bourses are not booming, it is too expensive to generate “alpha” returns and costs begin to overtake revenues, he says.

In order to fix this, he is calling for a highly variable compensation model, bearing in mind that up to 70 per cent of current costs are from staff salaries. “We need to make sure people have very low base pay and then when times are good, they get bigger bonuses if they deliver,” says Mr Rajan, a former senior economist with the UK Treasury and adviser to politicians and CEOs of listed companies.

“Wealth managers have been so afraid to lose key staff that they still pay them well when times are bad,” says Mr Rajan, adding that most disciplines introduced after the 2008 crisis have since fallen by the wayside. Poorly performing private bankers are still rewarded with “amazing bonuses,” he says.

“The whole culture of compensation goes against creating the necessary shock absorbers. There are constant steps forward and steps back,” says Mr Rajan. “You don’t change the DNA of an organisation with this approach.”

However, certain private banks including some Swiss players are beginning to introduce new models in asset management, where rewards are judged purely for success and are leveraging these structures in their private banking arms.

This new approach entails difficult conversations with individuals, which many banks are simply not having. It means addressing bankers’ deficiencies, improving their skills and ‘employability’. If the employee is not good enough to work for their current employer, the bank still has some responsibility to improve performance and prepare them for their next posting, reckons Mr Rajan.

“This gives an important leadership message, communicated through deeds rather than words,” he says.

Many banks are beginning to talk about these fundamental changes to their culture, although he is sceptical about any major progress being made as yet. “At best this is a work in progress and at worst, not more than pious aspirations in some quarters,” he cautions.

A short-term, money-making mentality still triumphs over long-term business planning, he believes. “The business model lacks necessary shock absorbers to ride out the turbulent times that lie ahead.”

If Swiss banks fail to adapt, more money could be lost to institutions in London. While the likes of Pictet and Lombard Odier are enjoying respectable inflows due to strong asset management capabilities, other “more peripheral” banks will struggle as the attractiveness of the old secrecy-led Swiss model fades.

London, on the other hand is becoming an increasingly attractive destination for the wealthy, who aspire to buy UK property and bring assets to be managed with them.

“It is not the strength of the wealth management industry that is the biggest draw for London, but it certainly helps,” says Mr Rajan.

Seb Dovey - Managing partner at wealth management think-tank Scorpio Partnership

Client demands have changed yet too many wealth managers appear stuck in the past

Despite the problems regularly identified by many commentators, wealth management is maturing fast, says Sebastian Dovey, managing partner at wealth management think-tank Scorpio Partnership.

Just 10 years ago, the world’s biggest wealth manager, UBS, managed client assets of less than $1tn (Ä773bn), while today the top two, UBS and Merrill Lynch, oversee $3.2tn between them.

“These figures clearly articulate to clients that we are now an industry,” says Mr Dovey. “We are no longer teenagers in this market. We have grown up.”

Yet despite fast growth, there is no hiding firms’ failure to resolve the imbalance between revenues and costs. “If the market falls, we are on relatively thin foundations,” says Mr Dovey, frequently called in as a consultant by European managers keen to improve their brands and business practices.

The banks he speaks to are becoming “acutely worried” about generating growth, and as such are increasingly keen to identify who their new clients will be, what their needs are and in which jurisdictions they live.

“Sometime soon, the music will stop and we will have to develop a deeper understanding about growth, which is not just about hiring people.”

Despite the emergence of UBS as the only constantly evolving, truly global private banking brand, it is now “open heart surgery time” for most institutions, which have failed to refine operating models against the fast-changing client landscape.

“During the last 15 years, among wealth management clients, the perception of what financial services can do has changed fundamentally,” says Mr Dovey. “Customers have changed their consumption patterns, behaviour and how they interact with professional advisers.”

Yet private banks are insisting on an arcane, hand-crafted, artisan approach, servicing one client at a time. “It’s lovely, but it’s not realistic,” warns Mr Dovey, adding that the main concerns for private clients are convenience and credibility, rather than the highly personalised services they are currently offered.

A recent mass migration to digital platforms and apps has followed, as the industry “finally got digital” after many years in denial, he adds, with $1bn spent by the top 20 banks on digital front-end processes during the last 18 months.

“It is low grade, but at least it is coming. They had denied a wealth of evidence that private clients would accept a digital inevitability,” says Mr Dovey. What needs to be improved now is access to the bank rather than contact with their relationship manager.

“Clients love an interactive portal,” says. “You go into an Apple shop and all the staff know how everything works. Relationship managers in private banks do not know how their products work. This can devalue relationships with clients.”

There has never been a better time for “brave-hearted, career-minded financial services people” to enter the industry and create a new private banking model, he says. Banks are still fielding old school, 50-year-old private bankers to service 40-year-old entrepreneurs. “For private clients, there is nothing more irritating.”

Once private banks begin to adapt to needs of potential clients, Mr Dovey expects thousands of customers currently serviced by retail banks and asset managers to surge toward the leading brands.