18-Oct-02
by Ken Watson, Odyssey Marketing & Alliances Director
By summarising the factors influencing the strategies of private banks, we can explore how advances in technology and software solutions can make it easier to adapt to today’s challenges.
Ongoing Market trends
The market environment for private wealth management is changing in many ways:
There is a steady shift from offshore to onshore investment – and with it a need for the tax optimisation of portfolio holdings and investment transactions. This was noticeably demonstrated last year with the massive exodus of assets from Switzerland following a tax amnesty in Italy.
There is a move from discretionary portfolio management towards advisory mandates. No HNWI will now give full discretion to a relationship manager to manage his or her wealth. The majority of mandates will move to somewhere in between this and an advice-only agreement – and this is perhaps the ideal for the average HNWI.
With this move there is the need for banks to start charging fees for providing advice rather than levelling a fee per transaction or % of assets under management (AUM). However, the risks to Private Banks in moving in this direction while maintaining revenues are obvious.
The differences in management of old as opposed to new money are disappearing. Client segmentation is now by AUMand, increasingly, by the risk profile requested by the client.
There is increasing client sophistication – over half use the Internet, almost half track their portfolios online. E-trading is becoming the norm.
There is an increasing regulatory environment, and global standards of performance measurement to be applied.
Increased screening of new clients is necessary to protect the bank's reputation.
Although there is still much long term growth potential in the HNWI area and in the mass affluent segments, there is also intense competition - and with it a battle to retain existing and acquire new clients. There is also significant doubt still on the value that can be obtained from the latter, even if the numbers of portfolios could be very impressive.
Mergers and acquisitions are still commonplace as the market consolidates.
Banks are acquiring assets handled up to now by independent asset managers: on the other hand there are new layers entering the wealth management marketplace – insurance companies and even telecom companies and supermarkets.
This list is not exhaustive, but it is enough to illustrate the challenge. Add to these the Recent Market upheaval. Rapidly declining AUM and with it rapidly declining revenues. Assets are down 10% this year in many institutions. The current global crisis of confidence in the financial markets is significantly slowing down the growth in wealth management business. One side effect is a simplification of portfolios with a rush out of equity-based investments to lower risk fixed-return instruments.
All this is driving change, and Private Banks are adapting in the following ways:
There is for now a shift in focus from asset growth to cost control, which requires improved centralisation and efficiency.
There are often implications for the organisational structure of the institution. In many cases a ‘factory’ approach to private banking is being adopted. Investment strategies are managed centrally and distributed to the front-end client interface. Relationship Managers are becoming co-ordinators, with access to analysts and research (from the central ‘factory’ or even from outside the organisation ), providing advice and maintaining the ‘personal’ relationship with Customers.
Work-flow is being optimised. Transforming real-time information into personalised client investment advice has always been a huge problem for most wealth management institutions. Better processes and improvements in the cost/efficiency of transaction processing are being implemented.
A second area of focus is client retention – customer loyalty through a valued relationship. Market research shows Clients are dissatisfied: their expectations are not being met. There is intense competition from competitors poaching customers. Investors want value for their money, fees that reflect the service offered; transparency – what exactly are they being charged for and why; clear measurement of performance; and a personal relationship that is maintained – human contact at an appropriate level.
Needs may also vary according to the segment in question: good segmentation of customers is an important element. UHNWI may require financial planning, etc. Private Banking is above all a services industry, with success built on understanding your customers' requirements. Service quality is the key.
All this means that relationship managers need to perform better, generating the same or more income from their clients even in difficult times. This can only come from a proactive approach to relationship management - being able to charge well for good advice.
Part of this change is also a rationalisation of the IT infrastructure. Careful management of technology can reduce organisational costs, increase service and ensure that the wealth management institution is equipped with the right systems to process changing requirements.
Traditional portfolio management systems are becoming a commodity. The value from technology is obtained from innovation – from systems that can meet tomorrow's requirements. In selecting such solutions the following considerations are crucial, and can be seen as a high-level checklist for new systems:
· A common operational platform is provided for different profiles within the organisation - specialised asset managers, relationship managers, assistants, and even external independent investment managers, if required. Each profile can have a tailored user interface, providing easy access to the required functions. This supports a central ‘factory’ approach: specialists build and distribute investment guidelines to Relationship Managers at the client interface.
· Information is available on-line. As markets move quickly, the Private Bank must have real-time information, supporting the delivery of relevant, real-time information to its customers.
· Proactive advice, as well as the traditional analytical information for portfolios, can be delivered. The system must continuously monitor portfolio positions in line with the market, and deliver recommendations to the customer.
· Internet delivery is available – now confirmed as an important additional, but not necessarily alternative, channel for relationship management. Most of today’s private banking clients expect remote access to personal investment details and this infrastructure is therefore a necessary investment. On the plus side, web access may also lead to improved deployment efficiency, reduced ongoing operation costs and even the potential to charge customers for the delivery of information and advice they request on-line.
· The system needs to be accessible to these clients on a 24/7 basis.
· Investment recommendations are optimised by including local tax considerations when providing advice to Customers.
· Customer profiling is essential. The management of customer information and contact data should support proactive advice to the customer and also form the basis for effectives sales and marketing campaigns.
· Risk management and compliance are supported, and specific requirements can be catered for.
· Straight-through processing of transactions and the ability to support different work-flows. Ease of integration of data flows with other systems within a banking organisation.
· New investment products can easily be created and processed to rapidly exploit new market opportunities.
A further opportunity to rationalise costs can be found in IT Services outsourcing - collaborating with other non-competitive institutions in custodial or back-office processing.
These are difficult times, within a shifting market place, and private banks must adapt rapidly to new challenges. The right technology can help.
Private banking organisations should continue to invest in new technology for wealth management, even in the current recession. The return on investment from reduced organisational costs means that payback can be achieved in a surprisingly short time – less than a year has been quoted in some cases. On top of this, few doubt that wealth management is a strategic area for the future, and competitive advantages require a modern technological platform. The right systems must be in place so banks can seize the advantage from the upturn which will inevitably happen (eventually!)
These systems have been developed by the most forward-looking financial IT companies. Today they are being implemented by the most forward-looking wealth management players.