Have wealth firms fixated on costs at the expense of income?
Technology has helped private banking to implement efficiencies and cut costs. But it is proving much harder to boost profitability
Scorpio’s latest edition of the Global Private Banking Benchmark shows a tale of two halves for the global wealth industry. The assessment of wealth management’s key performance indicators highlights that private banks managed to successfully navigate regulatory and political upheaval of 2016, with assets under management (AuM) rising by almost 4 per cent on average.
The results, based on publicly available information provided by more than 200 wealth managers, indicate that cost-to-income ratios also fell below 80 per cent for the first time since 2012, reflecting wealth managers’ concerted efforts to cut costs, in spite of continued compliance pressures. Strong profitability growth however, masked the industry’s underlying struggle to improve revenues, with operating income rising just 0.04 per cent on average.
As advanced technology continues to reshape the wealth management industry, firms will increasingly be able to recognise cost savings through process optimisation. As such, the challenge going forward is likely to shift to managing the revenue side of the profits equation.
Many firms are experiencing pricing pressures, driven by regulations, the trend for passive investing and the wave of lower-fee competitor models entering the market. Solving this equation will require increased focus on enhancing the proposition with advisory capabilities and improvements to the client experience.
This year, the largest 25 firms in the Benchmark managed $13.3tn of HNW AuM, representing a 63.2 per cent market share. Of the top 10 operators, seven had a North American focus.
However, Asia’s private banks gained momentum in 2016. China Merchants Bank stands out, having added more than RMB400bn ($60.7bn) to AuM in 2016 as a result of enhanced customer acquisition efforts, as well as upgrading its private banking proposition. Bank of China, entered the ranking this year, managing more than RMB1tn on behalf of its wealth management and private banking customers.
By contrast, many of Europe’s key operators experienced negative AuM growth due to a combination of internal restructuring initiatives, decisions to scale back from non-core markets and reputational challenges.
As well as posting strong financial KPIs for 2016, wealth managers were also able to move the dial on client experience, with our annual client engagement tracker indicating an improvement of 5.72 per cent.
Generating favourable financial outcomes through driving better understanding of the client’s needs has been at the forefront of Scorpio Partnership’s development of Client Engagement Score (CES). HNW CES measures the overall rating of the client experience for their wealth manager by HNWIs and UHNWIs across the globe. Our research indicates there is a relationship between client perception of the firm and the AuM growth rate.
Some firms fared better at converting enhanced quality of the client service into improved financial performance. North American banks are leading the ranks of wealth managers, with only one European bank among them in a top quadrant by CES vs AuM growth metrics
North American operators tend to have a more forensic approach to tracking, measuring and monitoring the client experience across multiple metrics. As such, we see them consistently move the dial on client engagement and, as a result, their financial results. The commitment to active listening to the needs of the clients will be imperative to a strong advice-led model.
Caroline Burkart is director at wealth management think-tank Scorpio Partnership
