Seven approaches to winning back client trust in Asian wealth management.
If the banks can do that, it will pave the way for them to earn trusted-adviser status and in turn sustainable revenue streams. If they can’t, those firms will cede even more market share to the boutique players and independent managers less severely affected in the global downturn.
By late 2008, and continuing into 2009, concerns over stability and frustrations with product-pushing advisers were leading clients to either move accounts from firms with tarnished reputations, shift the balance of money they held in different accounts, or shun completely those wealth managers whose advice had proven to be lacking in objectivity and inappropriate. Or a combination of the above.
While the unprecedented speed at which banks’ revenues and asset bases have shrunk since late 2007 has profoundly shaken the industry, the negative impression left in clients’ minds threatens to be longer lasting and most damaging if not rectified.
So how can the industry as a whole regain this lost trust? With great difficulty, is the short answer.
Fundamental to being able to achieve it at all in this new environment requires managers and frontline staff to recognise and learn from the mistakes and practices common to many of them in the past, as well as from the changing needs of the clients – all under the watch of more vigilant regulators.
Significant changes are needed to the industry’s revenue model and cost base; consolidation is inevitable. “Because Asian investors have lost so much money in this crisis, this is the best opportunity to overhaul the way the industry services clients,” says a senior investment advisory specialist at a global private bank. “This might be the only time for a long time to come when wealth managers can create that type of relationship with their clients and direct them towards taking a proper approach towards asset allocation.”
That will require the banks to pursue a compliant and cross-border personal financial planning-led approach with emphasis on transparency, accountability and risk management, so that they are more aligned with what is in the long term interests of their clients. Integral to that is upholding the highest standards of integrity, professionalism and exemplary business conduct, and making sure that investment advice is fair and objective.
Only by being receptive and responsive to the changes in the perception, outlook, needs and behaviour of clients do wealth managers stand a chance at regaining some of the lost trust.
The obvious place to start is listening to clients and trying to fully grasp what they want and how they want it delivered. And then offering that in a simple but practical way.
At the time of writing this book, senior executives and advisers at many private banks had already begun the long and arduous process of meeting with clients to gauge their reactions and intentions for their accounts. The entry point for practitioners to get talking with clients again has been to try to help them restructure their portfolios; by first figuring out the client’s new risk tolerance, investment objectives and long-term needs, wealth managers can then agree on what products, if any, and the style of delivering those products, are most suitable for each client.
Critical for the banks to succeed is for them to be able to tailor each of the various aspects of their business model so their service style meets the changing needs of clients (and regulators), including: the competency of relationship managers; the sales and advisory process; suitability processes, documentation and supervision of general dealing terms; risk management and disclosure; compensation and frequency of reviews of margins; transparency on fees, commissions and reporting; the way they manage client expectations; and the use of behavioural finance techniques.
Senior practitioners have outlined some of the inter-related measures which are critical for management to adopt and implement in helping rebuild trust with clients – these are discussed further below:
1. Aligning the interests of the bank and the client
The first step in rebuilding trust is bringing the needs and goals of the client into line with those of the bank.
That needs to start with a high-level management commitment to making sure the philosophy of acting in the client’s best interest runs throughout the firm. It needs to be stated as an overriding objective for everything the bank does on a yearly, quarterly, monthly, weekly and daily basis – from the start of the year in strategy and business development planning, to regular investment advisory initiatives, to morning sales meetings.
A rule of thumb that some practitioners suggested is for advisers to not sell anything they wouldn’t buy themselves in theory. Until now, that hasn’t been the case at many institutions, where the best thing for the bank in general hasn’t been the best thing for the client. From management right through to frontline staff the focus has typically been maximising revenue – increasing transaction volume and earning more fees by providing whichever products will help achieve that, as well as through expanding the network to increase sales.
Discussions to figure out which “idea of the day” relationship managers should be trying to sell their clients need to be replaced by a willingness to do whatever is necessary to educate clients and offer them a product which moves them closer to hitting their goals and puts the clients’ ability to make money first. A more consultative approach from relationship managers would help this advisory process.
An important part of putting this into practice is overhauling the revenue model at most firms, so that relationship managers aren’t incentivised to sell large quantities of products, and are instead rewarded for developing long-term relationships.
2. Educating clients properly
Since late 2008, wealth providers have said they have been spending a lot more time and money educating clients on all aspects of their portfolio management. That has included teaching them about different asset classes and how to understand what their risk appetite means for their strategic and tactical asset allocation.
Much more time and effort is required to be spent on education, not just now because of the repercussions from the financial crisis, but on a consistent basis. This needs to be done by relationship managers and investment advisers in person one-on-one with clients, in small tailored workshops on specific topics, via hard- or soft-copy educational materials such as newsletters and client memos, and by online seminars, training and other presentations, including trying to test for understanding.
The banks must show their commitment by allocating more resources than previously to the educational process, for example, sending investment consultants to join relationship managers at client meetings to discuss topics such as diversification, or investing in a less product-centric way.
Some private banks have also launched initiatives where they are paying clients to attend theoretical finance classes at local universities, for instance to help those clients become better-placed to understand a relationship manager’s motivations behind recommending certain products. Such an approach is good marketing at times of economic suffering and uncertainty.
Banks also need to work out what education clients need on a long-term basis. For instance, the performance focus of clients has in many cases led to a poor level of education about the benefits of and options for wealth preservation and inter-generational transfer.
There is also a need to have honest conversations by teaching them about some of the lessons that banks themselves have learned about leverage, product-pushing and other issues which arose from the financial crisis.
Further, education about a particular bank’s franchise and what that institution can do for its clients is one of the key planks of new business models. The mystery shopping experience described earlier clearly shows that this is not happening. So no trust can be established in the first place.
3. Improving the level and type of communication between relationship managers and clients
Wealth managers must be able to provide constant direction to clients on both the performance of their investments as well as the wider portfolio implications and options.
Practitioners said that previously, and especially during the downturn, many relationship managers have offered very little guidance to clients about how products they sold them were performing, either on their own or in the context of the client’s portfolio. As a result, it was very difficult for the client to make an educated decision over whether to take profits or losses, and when, and over how to plan for the future.
This communication is also related to the clarity of statements which banks send their clients. Clients have often complained that they don’t understand what they get sent, making it the responsibility of the relationship manager to explain it clearly, as well as the bank to tailor the information suitably.
According to an Asian Banker Research survey in late 2008, two-thirds of the 40 banking industry professionals in Hong Kong and Singapore polled, including bank chief operating officers, heads of retail and wealth management, senior product managers and relationship managers, said they recognised the need for increasing the level of communication with clients to forge mutually rewarding relationships. Forty-three percent of the respondents admitted the inadequacy of customer communication in their institutions.
The survey also found that while banks have been reaching out to customers across multiple channels, this has mostly been too impersonal. For example, e-mail was the most frequent method, according to the survey, accounting for 69% of communication, suggesting need for more face-to-face communications with clients. At the same time, 40% of survey respondents indicated that administrative hassles are the barriers to improving communication, followed by performance targets (38%) and service fulfillment (35%).
The three most important areas the survey identified for improving the quality and documentation of customer communication were risk profiling (33%), information disclosure (30%) and analysis reviews (28%).
4. Changing the psychology of relationship managers
Tied to the need for more communication is the requirement for management to fix the psychology of frontline staff, to make sure clients are kept abreast of the reality of their situation – in essence, contacting them regularly when market movements impact their investments and overall portfolio, especially if in a negative way.
That problem was most acute during the volatile times of falling markets and valuations in 2008. Yet advisers were too inexperienced and too afraid to talk to unhappy clients and know what to say. That was in stark contrast to the relationship with clients during bullish markets, when advisers were in weekly, and sometimes daily, contact with clients to offer stock tips and push product.
Key to reforming their approach to clients, whether during good or bad markets, is demonstrating more empathy and accountability with the fact that they are dealing with large chunks of an individual’s wealth. That in practice means regular reviews of portfolios with clients, with the frequency dictated by the type of portfolio and investment behaviour of the individual clients.
By staying in contact with clients during tough times, advisers can learn more about how their client behaves in those conditions and start to better understand how their needs and goals might be changing for the long term.
Such knowledge can be used to tailor their products and services in the future. Even if that type of approach results in encouraging clients to close loss-making positions, if done in a consultative way then an adviser can strengthen his or her relationship over the long run.
An important part of the psychology of wealth managers is being confident enough to advise against certain investments a client might want to make. While it is likely to take investors longer to start looking again at complex or innovative products than following previous financial downturns, by their nature Asian clients want the next hottest thing, especially if it offers the potential for high returns. This makes it imperative for advisers to develop a much better understanding of clients’ investment psychology and the techniques to manage certain behavioural tendencies. In short, relationship managers need to stand firm when advising a client against buying a particular product if there is a mis-match with that client’s risk appetite or his or her overall portfolio mix.
Pre-financial crisis, the asset-grabbing mentality of wealth managers in many cases led an adviser to only quietly warn a client against a certain investment, rather than forgoing a sale if the client said he or she was going to do it anyway through another bank. Now, advisers must be willing to not simply give clients what they ask for, but to try to persuade them what is in their best interests.
5. Matching the experience, skill-set and personality of an adviser to an individual client’s needs
Given the urgent need in Asia’s wealth management industry for providers to be more responsive to the individual needs of clients, finding a suitable adviser for each client is critical for developing the right type of personal relationship, especially at the private banking level. Gone are the days when inexperienced relationship managers were given product fact sheets, a call list of clients and a script.
Too often overlooked in the past was the importance of growing relationships by getting to know clients in a way that is more similar to the traditional approach taken in private banking in Europe.
This will depend on many factors, such as the risk tolerance, product preferences, time horizon, and short-, medium- and long-term investment needs and objectives of a client, so the individual personality, experience and skill-set of advisers must be carefully assessed to create the best fit.
Age is an obvious example where providers have paid too little attention to matching the right type of adviser to the client. And as second generation clients increasingly take a more prominent role in managing their family wealth, they are far less comfortable trusting a private banker who is a similar age to them; they prefer to deal with advisers who they can see have had more life experience and have gone through financial downturns, for example, so that they are more likely to be composed enough to think of common sense strategies to weather such periods.
Being able to do this effectively will also rely on management hiring the right types of personalities in the first place. New hires need to know what it means to invest hard-earned money: the satisfaction of good performance as well as the fear of losing it.
Being humble yet driven, for example, will make a big difference to the adviser wanting to do the best job possible for the client. Advisers also need to invest time and personal emotion into making every relationship work; such emotion became lost in the race for revenue, and adviser-client relationships suffered as a result.
Clients have learnt from the financial crisis how to better judge the reliability and quality of their bankers, so more accurately tell who has the personality to remain resolute in a financial crisis.
Creating a multi-disciplinary, team-based approach will help firms meet the different needs of each client. With relationship managers trying in the past in many cases to hide their client books by being protective over their relationship, clients have realised that they have been getting less value than they should have. Ensuring clients have a broader relationship with the institution is necessary to be able to fully service a client and know how to advise on his or her best interests in all aspects of their wealth.
6. Enhancing and tailoring business processes to improve transparency and fully understand and cater to the needs and objectives of each client
By putting proper, tailored processes in place to vet clients, and fully understanding and documenting their risk tolerance and level of sophistication, wealth providers can more accurately identify mis-matches between client and product, in turn meeting the requests of clients for more suitable product with much greater transparency and clearer documentation.
In line with this, banks must also be able to identify the difference between a client’s “real” risk appetite and his or her stated risk appetite – that tends to only get exposed when losses start being incurred.
By early 2009, some banks had started to use updated versions of existing questionnaires, for example, to try to highlight clients’ needs, goals and ambitions, and in particular how this might have changed.
Better risk profiling will help banks spell out more explicitly what something like “moderate” or “speculative” actually means, and what impact that has on a client’s portfolio, overall risk appetite and investment strategy. This is also important where a client deviates from this classification and is deemed to be taking more risk than his or her profile parameters dictate.
The banks need to be able to show a reliable audit trail of the following types of things: the conversation with the client, and that it was the right type of conversation held in an appropriate way, and that the client understood what he or she was doing, and that the risks were fully and clearly explained.
Important to suitability and general business processes is also making sure the banks show clients how the wealth manager intends to service them going forward. Part of that will require advisers to go back to basics and explain to clients the entire process, including aspects such as how the banks collect and hold their deposits, how they are looked after, what they will do with them, what the level of disclosure will be, how they will churn out a reasonable risk-return, how they will monitor and assess the portfolio, how they will charge clients, and how they will provide feedback.
7. Providing full disclosure and transparency in terms of products, fees and commissions
Banks should keep in mind that a brokerage-style sales model is not a bad thing in itself; the key is maintaining transparency over the fees and commissions, and ensuring clients know what they are buying and why they are buying it for their portfolio.
In the absence of investor confidence and risk appetite, wealth managers need to provide the simpler, more transparent products which their clients are asking for.
With that comes a responsibility to ensure all relevant information is disclosed and clients understand the product, how it fits within that individual’s portfolio from a suitability perspective, and the cost of that product.
The key is to show that there are neither hidden fees nor unidentified risks which are beyond the client’s tolerance level.
The Madoff and Stanford frauds in the US highlight the unwelcome outcomes when asset managers fail to adhere to the basic principles of fairness, transparency and ethical conduct. It is hard to defend those parties which essentially allow a fund manager to act as his or her own custodian, fund administrator and broker. Yet Madoff fooled not just the typical retail investor but also so-called professional investors.
Disclosure of remuneration is already part of the regulatory reforms underway in the Singapore retail wealth management space, courtesy of the Monetary Authority of Singapore’s (MAS’) proposals in its review of the regulatory regime for the sale and marketing of unlisted investment products.
One of the proposals is that in addition to the disclosure of the remuneration received by the company, including any commission, fee or other benefit, for selling investment products, representatives should also disclose the remuneration they receive from the sale. “There are concerns that representatives may be financially motivated to sell particular products that may not be suitable for the customer,” said the MAS.
The regulator did recognise the practical implementation issues with requiring such disclosure, especially that there is no standard way in which firms remunerate representatives for advising and selling investment products.
With the industry heading it that direction, it bodes well for proponents of products such as exchange-traded funds (ETFs). While the size and scope of infrastructure in markets like Germany for these products dwarfs what exists in Asia, ETFs have a lot of potential in the region. There has been an increasing focus on exchange-traded products due to transparency, cost reduction and liquidity. At the same time as product trends in Asia are likely be regulatory driven going forward, that will help in banks’ efforts to rebuild client confidence.
* This article first appeared in the book “How to Prosper in the New World of Asian Wealth Management: a Best Practice Guide”, published by Hubbis in mid-2009