Educating advisers

The recent financial crisis has seriously affected wealth managers’ profitability due to huge market losses last year, a decline in ‘net worth’ of rich individuals and increased investors’ allocation to lower margin asset classes. Yet it is also offering a great opportunity to private banks to rethink their business model and retrain advisers on how to liaise with wealthy customers, who seem more willing to follow professional advice. But firms need to act quickly, before all the lessons learnt in the past couple of years are forgotten.

“In a bull market clients sometimes can very domineering in terms of how they want their account to be run,” says Christine Ong, CEO, Wealth Management at UBS in Singapore. In Asia, high net worth individuals, who are mainly successful entrepreneurs, may have seen a 30 per cent growth in the capital invested in their business, and expect that same kind of performance from their financial investments with private banks. They believe portfolios should be managed in the same way they run their business, taking risk and trading, as opposed to managing assets with a longer term view in mind, to preserve family wealth, which should be segregated from their business, says Ms Ong.

“The Asian crisis in 1997-98 and the latest financial crisis have been a good educator for clients. When the market is only going one way, they think that the market will always be a bull market and will always make money that way. But at each cycle, clients get educated,” she says. “Many of the investors who chose to have single positions, such as betting on an emerging market bond because of the good yield over the years, learned a lesson about issuer risk. Those who focussed on certain stocks, and that did not like blue chips because they don’t move very fast, have experienced the volatility,” says Ms Ong.

“Over the years, we found it is very important to close that gap,” says Ms Ong. “We really think that we have to benefit from this learning in the market and we have put even more emphasis on client education.” During 2009, UBS WM has already held more than 100 seminars for client education in Singapore, on investment strategies, financial planning and wealth succession. “In the past we used to spend a lot more on lifestyle events for clients and all sorts of sponsorship,” says Ms Ong. But now, with the reduction of number of staff and the recalibration of the entire organisation, “you have to be smart as to how you spend your dollars,” she says. Private bankers have also learned the hard way. Those who have grown up in the bull market have tended to share the views of the client to achieve their aspirations, she says.

“Advisers have learned that you have to be quite firm with the clients, because it is better for them in the long run. We have been focussing a lot on the aspect of understanding your client needs and then tailor a solution that addresses his needs.”

Staff development

Most of the training for both clients and advisers is run at the Command House, the UBS Wealth Management Campus set up in June 07, an historic building in landscaped gardens, until a few years ago the official residence of former President Ong Teng Cheong, transformed by UBS into a state-of-the-art training and conference facility. The move of Curdin Duschletta, from Zurich, where he was the global head of learning and development for UBS’ Wealth Management and Business Banking division, to Singapore, as head of learning and development for UBS in the Asia Pacific region, underscores the importance of staff and talent development as well as client education in the Far East, points out Ms Ong. The global private bank has also committed resources in order to shift its asset allocation process to the next stage, she says.

Over the past 18 months, the firm has built a sophisticated tool, where the product research is rigorously tied to the in-house portfolio recommendation, for every single asset class. Unlike in the past, where the adviser had access to product recommendations from the research team on one side, the model portfolios on the other and they had to collect all the information and plan the portfolio themselves, now they just have to take specific product recommendations associated to the asset classes, says Ms Ong. It is part of a bid by the massive global institution to reign in its armies of private bankers with a much more structured approach. “We are tracking the take up rate of this tool by our client advisers and then training them to make sure they keep up with it,” says Ms Ong. This research based advisory process is based on the portfolio approach but it also gives a lot more flexibility to the client as to how he wants to structure his portfolio, she adds.

Back to basics

“After the crisis people understand that a diversified portfolio tends to hold up better when there are winds of change and volatility,” says Jennifer Tay, head of investment advisory and sales of unit investments, Asia Pacific, at Citi Private Bank. “The crisis has worked in our favour in steering portfolios in the direction we want,” says Ms Tay. Private banking means going to back to the basics of understanding clients’ risk appetite, experience and sophistication and adopting an individually-tailored approach, but there is also much more care taken in liaising with them. “We now read the small print to them as well,” says Ms Tay.

“Not that we did not mention it in the past, but now we make sure that they understand the risk and take note of it before we move on and sign.” Ms Tay believes that in fact “it is easier to deal with clients now because they no longer like in the past ask for 15-20 per cent annual returns.” If they were to get a steady return of 8-20 per cent on average per annum over three to five years time, which is achievable on a balanced approach, they are actually quite happy, she says.

Changing appetite

“In 2008 all the clients wanted was to sit on cash and treasuries but this year they are starting to open up, to listen, to probe, to invest. Their risk appetite is improving,” she says. “But the forgetting rate is quite high and fast. Asian clients have propensity to take bets and that remains, but it will take a couple of years to return to the kind of risk appetite we had before,” predicts Ms Tay. In order to improve the service to clients the global bank, which serves ultra-high net worth individuals having at least $25m net worth, has, early this year, set up a unit made of both investment counsellors and portfolio managers, who used to liaise separately with the client before then.

“Investment counsellors used to talk about capital markets products only and they were single-trade driven,” admits Ms Tay. “We have now trained them on the importance of understanding clients, their needs and objectives in terms of risk-adjusted returns, and only then to come up with an asset allocation.” On the other hand, portfolio counsellors, who talk about managed investments and have always adopted an asset allocation approach have been trained on capital markets. “These two sets of counsellors now sit together, exchange ideas and talk to clients jointly. It is a more holistic and disciplined approach,” she says.

Looking at the future, Ms Tay wishes that every banker and counsellor always had the client’s interest at heart. “We need to incentivise advisers correctly because if we only measure how much revenue they bring in, they will just do the quickest thing and bring in money,” she explains. “The challenge is changing the internal mindset, the bankers’, the counsellors’ and you need to educate clients as well and remind them why this kind of long-term approach makes sense, before they forget all the pain of the last two years.” The crisis has offered a chance for banks to gain a larger share of clients’ wallets, as investors are diversifying their wealth across multiple institutions as a means of reducing risk.

In Asia, domestic banks in particular have benefited from this development. “We have seen a big inflow of AUM as a result of investors rebalancing their portfolios,” confirms Kwong Kin Mun, head of private banking, South Asia, at DBS. “DBS bank has been able to lend, whereas many of the banks are not in the position to do that,” says Mr Mun, who does not hide that the whole DBS group too had to “trim staff”, at the end of last year. “Clients were shell-shocked about the insolvency of so many global banks and have turned to domestic banks for safety,” he says. Before the crisis, high net worth individuals would typically use the services of at least four to five private banks; now the trend is to give their wealth to fewer, strong banks amongst which assets are spread equally to diversify risk, says Mr Mun.

With the downturn the frantic poaching of private bankers that was typical in the bull markets has slightly subsided. “The financial crisis has brought back some sanity to the market, which was just too stretched,” he says. “Everybody knew that it was a bubble, but nobody admitted it at the time, because things were going well.” Simeon Fowler, chief executive at the executive search firm Fox Partnership Asia believes that local banks, which have seen outflows of assets and their best private bankers leave for the global and richer peers in the boom market, are presented with a good opportunity to get their house in order. “The local banks are sitting on a huge amount of clients’ assets for safety only, because clients have just pulled the money back from the larger international firms, to what they know better. Now domestic banks need make sure that they get their strategy right,” says Mr Fowler.

International banks hired tremendously during 2007-2008, luring the most experienced or sophisticated bankers from the domestic banks with much higher salaries, and in general adopting an expansion strategy that often resulted in recruiting “anything from hairdressers to sport stars to lawyers” just to have access to their network, he says. “It is very difficult to actually identify a good banker when the market is booming, because everybody does quite well,” he says. Nevertheless, this strategy somewhat worked well for them in the bull market, while local banks suffered hugely. “What is now key for domestic banks is to get their succession planning in order and get the right talent, they need to be competitive and get their strategy right because they have lost so much of their talent,” says Mr Fowler, explaining money is an even more important driver in Asia than elsewhere. Some of the bankers get paid 30 per cent more in Singapore than in Europe, which is even more remarkable given the tax benefits Singapore enjoys.

Value of advice

Mr Fowler also believes domestic banks should focus more on developing their product offering, in addition to talent, to retain assets. Product offering is not a differentiator for a private bank, according to Rajesh Malkani, regional head of South-East Asia at The Standard Chartered Private Bank. “If you look at the top ten private banks in the world, the difference in their product offering is virtually nil; so the differentiator is going to be the advice they are giving their customers, and there should be a price for that,” he says.

“There needs to be a paradigm shift in the way private banks price their business.” Just like a doctor charges the patient for the consultation and then for the medicines, similarly wealth managers should be charging a fee for the advice they give and then a marginal fee for the execution, which should be a smaller component of the overall fee, says Mr Malkani. In Mr Malkani’s ideal world, clients would automatically go to the investment advisers that give them the best advice, the right returns at the risk level that they are willing to take, just as we keep going back to our doctor because we are happy with the advice he has been giving us. “This used to happen,” says Mr Malkani, his thoughts going back through the 20 years he has spent in private banking.

“In Asia, the broker wealth management model somewhere got mixed, as fees started shrinking very rapidly due to increased competition, and customers tended to go for the cheapest solution,” he says. “Today all private banks charge a percentage of the product they sell. This is the route customers have chosen to follow, as it makes it easy for them to compare the same products from different banks,” says Mr Malkani. “Customers need to be made more aware of the value of the advice and this is one area where the senior people in the industry need to speak up.”

Changing income streams

Private banks certainly recognise they are too heavily dependent on transactions as source of revenue and that a move to a fee-income based model would be beneficial. “At the moment, on average 35 per cent of our revenue is recurring,” says Carolyn Leng, co-head of CIMB private banking in Kuala Lumpur.

“We have been very focused on transactions, because of how the outfit was initially set up,” admits Ms Leng “but we are now looking to move our business to 50 per cent on recurring income to very much align our interests to that of the clients,” she says. But Asian clients are typically reluctant to pay a fee, and the challenge is to change their mindset. The “active advisory model”, will allow clients to take their own decisions, but pay for the value added, the advice, in the form of an annual management fee, which will be a percentage of their total assets under management.

There will be no upfront fees for funds while transaction costs for single securities would be set at an institutional rate. “Some clients are starting to open up to the idea and we are hoping to launch this model by the end of the year,” says Ms Leng. To implement this shift, the industry has to put even more weight and dependence on its experienced investment advisers, who are a scarce resource. In Singapore, the Government has been actively working to raise the bar for the professional development of the city’s financial sector workforce and training providers. Four years ago The Institute of Banking and Finance, the Government’s financial training development arm, developed, in collaboration with key industry players, a structured competency framework, the financial industry competency standards (FICS). Through this initiative, private banks are encouraged to develop accredited training programmes, the cost of which is heavily subsided by the Government itself. These programmes have provided the avenue for people to get properly trained, says Mr Justin Ong, partner and Asia Pacific private banking leader, at PricewaterhouseCoopers in Singapore.

“Training and development has been an issue in the past,” says Mr Ong. “People that became private bankers were very sales driven and not well qualified, and many of them were not able to deal with clients in the downturn,” he says, making reference to numerous cases in the recent past when advisers were not returning clients’ calls or were just giving them bad advice. Product suitability, in particular, has become a big issue because of the misselling of Lehman mini-bonds. “We are actively working with companies on product suitability and on their remuneration system,” says Mr Ong. Banks have to make sure that advisers are appropriately trained to sell the products, that the product sold is suitable to the customer, and that the remuneration model encourages a client-centric behaviour; this should include a claw back mechanism, if something goes wrong, so that advisers’ interest will be in line with that of the client, he says. Mr Ong believes the big change in the wealth management space in Asia will occur within the next two to three years, when intergenerational wealth transfer will become an important topic. “The whole understanding of private banking has been relatively shallow,” he says.

“Most investors see private banking as an avenue to do trading. A lot of them are not going to the banks with a holistic perspective of generational planning, which is where the European model has been more focussed. “In the next 10 years, 80 per cent of wealth in Asia will be transferred to the next generation, the whole investment model will move from the traditional Asian model to the very much Swiss type model and the banks will have then to shift their business model to cater to that,” believes Mr Ong.

China’s perspective

In China, where wealth is growing very rapidly and the major four domestic banks as well as an increasing number of foreign banks are positioning themselves in order to tap into this wealth, the big hurdle to overcome, even more than in the rest of Asia, is the lack of experienced advisers, as private banking is just at its dawn. And it is still too early for universities and business schools to do much about it, by setting up wealth management courses, believes Dr Jing Liu, professor of finance and associate dean of Cheung Kong Graduate School of Business in Beijing, one of China’s top three business schools. “Once you train these people, they need to find jobs. But the private banking industry is only at the beginning, so it would be difficult for them,” says Dr Liu. “The younger ones, who attend the MBA, have aspirations to become private equity managers, CEOs, investment bankers or management consultants” says Dr Liu. “The advisers’ job is not regarded very highly, in general, at the moment” he says.

“Advisers just try and sell some products to their clients, but the kind of products they can offer is very limited, and banks cannot hire high calibre people to run this business,” says Dr Liu. In China, investors can just invest in deposits, government bonds, which offer a similar rate to deposits and in the stock market, he says. But private equity investments are very hot now. The business started in the early 90s when US equity funds invested in China and got very high returns.

“Now there is a growing number of China-based private equity funds, which raise money in China.” Many successful entrepreneurs are private equity investors. “Private equity is an important avenue for people to grow their money. This is very different from wealth management, because there is no diversification; people generally take a large stake in a company and are often involved in its management.” In the future, when they have grown their wealth, they will need to diversify and pass it on to the next generations, says Dr Liu, echoing Mr Ong at PwC. “Today entrepreneurs are still young, there are so many opportunities, they are very ambitious and want to grow bigger and bigger,” he explains. Chinese people, who are strong betters, do not want to miss out. “You invest money in a business or in private equity and that goes up 50 per cent, you never can get that kind of return in the public market globally, if you get 10 per cent that is great,” adds Dr Liu. “In China there is so much energy that people don’t want to sleep, they want to do more, because there is so much opportunity.”