Majority of private banking bosses reluctant to embrace change

Despite the significant impact of the Covid pandemic, the majority of private banking industry leaders are failing to adjust their business models, according to a survey of 50 c-suite participants in Europe and Asia from Accenture Wealth Management. The latest research was carried out to help map out industry responses to “new demands and societal changes” shaping the 21st century, with $260tn of “holistic personal wealth” at play.

“When we talked to theses leaders, 78 per cent said they would not make significant changes to their business model, so you had quite a conservative, complacent industry focused on the traditional model,” says Ian Woodhouse, head of strategy and change at Accenture’s Orbium consulting practice.

“But there is a sharp distinction, with the other 22 per cent starting to move quite significantly. So we are on a cusp between the traditional and the newer model,” says Mr Woodhouse, a wealth management veteran across Europe and Asia.

Changing role of advisers

This reflects two things. Firstly, a changing of the guard has seen many large wealth managers now feeling the influence of recently-recruited ‘next generation’ chief executives. Secondly, the Covid pandemic, which caught wealth managers unawares, has refocused attention on the value of technology-enabled remote adviser interaction. This digital sector is where wealth management has particularly lagged behind investment banks, retail banks and asset managers.

“In a sense, Covid provides another jolt in addition to the top management change, so we are beginning to see this path towards the new model, although it won’t be easy for everybody,” warns Mr Woodhouse.

Crucially, the role of the adviser must change to match the new structures of the wealth management firms. “There are advisers who can make that change, but not all of them will cope,” believes Mr Woodhouse. “Advisers are becoming more like data centres on legs. What you are able to do now, with new tech, which turns them into this role, is that you can provide them with a lot more insight and info from the wealth managers, which clients really value. As long as the advisers are enabled to deliver richer, more interactive discussion, then they can make the transition.”

At some of the largest private banks, there are younger, entrepreneurial clients who actually prefer speaking to older, more experienced advisers, as they are looking for a relationship able to offer them guidance and mentorship, in addition to advice on investments, which is becoming increasingly commoditised. 

“A lot of the value going forward will not be about the products, but about the advice and the softer side, the ability to put clients in a valuable network which you can’t get anywhere else,” insists Mr Woodhouse.

Shift to responsible leadership

He also identifies a shift to a more responsible leadership among senior management, attuned to societal trends and requirements to report on corporate responsibility. “They can show clients how and when they will be carbon neutral, how they are investing money for those clients demanding increasing diversity and how the industry can report on these factors.”

The industry, he feels, is being “jolted into action”, not just by Covid, but by the changing mentality of clients. Accenture’s ‘Voice of the client’ surveys show significant changes in what the next generation is seeking from its wealth managers. 

“They are much more attuned to environmental and social investing factors and to thematic investing,” confirms Mr Woodhouse, with 22 per cent of wealth managers currently offering ESG and impact investing products and services.

They are also more focused on non-bankable assets as a new area of uncorrelated diversification. Clients, he says, are becoming “much harder” in their assessments of private banks’ managements, “holding them to account if they don’t see responsible leadership emerging”.

Throughout our wide-ranging conversation, he emphasises, however, that there are only a minority of private banking firms in this vanguard, spearheading the industry, and effectively “dragging” it towards a new model. Worryingly, 40 per cent of survey respondents admitted that a strong culture for change and the ability to embrace new ways of working are currently a challenge.

“It’s not going to be easy as the industry has been so conservative in the past,” he warns. He and his colleagues also describe a “time lag” of several years, during which relationship managers need to be trained in new ways of working and doing business. They refer to this as a “maturing of the adviser organisation”.

Select your segment

The problem preventing progress, he explains, is not just inertia, but an economic anchor of fee pressure, as greater transparency drives down margins for wealth managers. This does not necessarily restrict growth, but it may well change its nature. 

“In the past, with a 10-year bull market, you could grow by just throwing more people at it, hiring more expensive advisers,” he recalls. “But although this gave you growth, it wasn’t particularly productive growth as you were also adding costs and putting margins under pressure.”

Going forward, he envisages that banks must make more effective choices around which client segments they service, predicting which sectors of society will be more productive as diversity becomes more important and a “one-size-fits-all” model of previous times is rendered redundant.

Although there has been much industry attention on the ultra-high net worth segment, an increasing focus on alternative, non-bankable assets, which need specialist lending formats, will push this highest tier of clients to bank with a more limited number of larger private banks, particularly those with investment banking arms. “With these clients, you are not just talking about families, but business interests, so you need an institutional quality of asset management,” suggests Mr Woodhouse.

The segments he expects to be more attractive in the future are the high net worth “middle layer,” which is “under-served, with the highest margin,” and the fast-growing mass-affluent base, essentially demanding “wealth management for the masses.”

“Conventional wisdom a few years back was that all the technology companies would come in and take the private banking market by storm through robo-advice and that all these new tech companies would radically change the industry,” he says. But that has not happened. Instead, what Mr Woodhouse sees is a growth of partnerships, utilising technology, very profitably, to serve the mass affluent segment. 

Unless they have a highly advanced technology platform which they can share across all three markets, wealth managers are faced with the choice of focusing on the ultra-high net worth, high net worth or mass affluent client bases.

Can ‘one bank’ serve all-comers?

The exceptions are the global giants, the likes of Credit Suisse, Citi and UBS, who have the opportunity to provide services right across the spectrum through the so-called “one bank” concept, allowing them to combine investment banking, corporate services, asset management and private banking.

In the ultra-high net worth segment, for instance, investment banking services are typically needed to serve entrepreneurial clients. “Providing services for private business interests and
non-bankable assets is clearly a big opportunity going forward,” predicts Mr Woodhouse. 

Much wealth, he says, is held in non-tradable businesses and properties and it is in the interests of investors in these assets to come together with their peer group. Accenture estimates private investors have lodged more than $140tn in such assets. This conversation and structure is typically facilitated by a private bank. 

“If one private investor, want to get rid of a hedge fund, for instance, it could be that the wealth manager finds another UHNW client on their own books to take that on. Therefore they are facilitating making non-tradable asset quasi-tradable,” explains Mr Woodhouse. “They are matching supply and demand within their client base. This will offer new revenue streams for the bank.”

But there are also many clients without business interests, for whom investment banking services offer little relevance. “You have to adapt to this segment’s needs and that’s the area where the banks need to pay much more attention,” he says. 

This new segmentation is not just based on size of wealth and assets, but also the behaviours and needs of the asset owners. “That is something wealth managers have traditionally struggled with,” admits Mr Woodhouse. “Private baking was always supposed to be client centric and focused, but unfortunately, for a lot of the clients, it ended up being product centric, and focused. As we shift towards an era of advice, that is changing.” 

By 2025, just 17 per cent of wealth managers expect traditional segmentation – based on investible assets, age and region – to remain important. A new-style approach of balancing client needs and added value with operational efficiency and cost management is predicted to emerge. 

Despite all the talk of technology, innovation, partnerships and new business models, the challenge facing the wealth management industry today is essentially the same one as it was pre-Covid and pre the global financial crisis of 2008.

How do we move from selling products to actually acting in a client’s best interests? Although we are slowly moving to a resolution, the analysis from Mr Woodhouse suggests many private banks are still acting in their own interests rather than that of their customers.