Private banks must be more targeted and critical in their strategy and growth ambitions to be profitable in Asia, especially given today’s challenging markets and industry fundamentals, reveals Michael Benz, managing director and head of global wealth management for Merrill Lynch Global Wealth Management in Asia Pacific, in an exclusive interview with Hubbis.
Date: Dec 2011
Tags: Strategy, Value proposition, Growth, Segmentation, Regulation, Client experience
With so many private banks continuing to either set up or expand in Asia, what challenges do they face?
According to our Asia Pacific Wealth Report 2011, the number of high net worth individuals (HNWIs) in Asia Pacific, which stood at 3.3 million in 2010, is now the second-largest in the world, overtaking Europe and nearing that of North America. On the basis of these numbers, it seems that the typical Asian HNWI has also become more sophisticated in his/her expectations of wealth management.
However, despite the size of the Asian wealth management market and its continued growth, with so many firms entering the industry, the relative attractiveness decreases and it becomes harder for new entrants to be profitable, especially given the shrinking margins that come with a maturing industry.
At the same time, with more regulatory requirements on banks, the entry hurdles appear to be significantly higher than ever before.
How far can the regulatory burden go?
The trigger for the increased focus on regulation was clearly the 2008 financial crisis and mis-selling of certain products.
The purpose of the regulatory changes is to make sure that investors are protected by putting the obligations on banks and wealth managers to know their customers and to assess the suitability of products for those clients. This way, clients understand what they are buying and the industry is obliged to apply rigorous know-your-client (KYC) and suitability requirements.
However, there has to be a balance in terms of what actually enhances the client experience and takes into account each client’s needs and ultimate goals.
Some people talk of the “retailisation” of the wealth management industry. I wouldn’t necessarily subscribe to that view. The value of US$1 million today is significantly less than 10 or even 20 years ago, where the typical threshold of wealth comes from.
What can banks do to penetrate more of the wealth which exists in Asia?
I think that banks will increasingly be forced to stop being all things to all clients. In this respect, segmentation has to go beyond what most institutions do today, which is segmenting purely by asset size.
I am thinking of basic needs and behavioural differences. This depends on whether the client is someone who just wants peace of mind and only gets a call and statement update once a year; or someone who wants to have daily contact with the banker to more actively manage his/her account.
And it goes beyond the desired frequency of contact. This type of segmentation can also include aspects like liquidity features of a client’s assets, preservation versus growth expectations, and the need for a certain type of risk management.
Above everything, a bank should consider its own strength as an institution, and what value it can provide to a particular group of clients particularly well. This also means creating different areas of client coverage. And once the main areas are defined, in order to make sure that they lead to economic success, they need to be looked at from a fully-integrated, front-to-back perspective, including all related costs.
How else do you expect to see private banks positioning themselves to capture the growth in wealth going forward?
The trend over the past years has been for banks to answer all questions about the long-term growth of wealth management in entering domestic markets and trying to capture the local growth potential. Since the financial crisis, this somewhat naïve view has ceded to a more realistic perspective for various reasons.
First, many institutions have experienced themselves how difficult it is to build a business from nothing in a new market, particularly if there is no existing institutional business. It typically takes many years to even break-even.
Secondly, onshore and offshore growth in wealth management is looked at less as an either-or proposition and more in their interdependence. The wealthier a society or market becomes, the more its wealthy individuals will feel the need to diversify their assets outside of the home market into one of the wealth management offshore centres.
So offshore banking might have a very attractive future, particularly in Asia where the main hubs of Hong Kong and Singapore are surrounded by fast-growing emerging economies.
As a result of this, and combined with the slimmer margins in the post-crisis wealth management industry in general, I wouldn’t be surprised to see some of the private banks thinking more critically about where they can be profitable within what time frame.
This will lead to some institutions pulling back from their domestic operations in the Asia-Pacific region.
What are the component parts of good advice and service in private banking today?
It is all about offering sound, proactive advice and investment recommendations. To an extent, the regulatory changes have led relationship managers (RMs) to have a higher level of discourse with their clients, starting off with suitability assessment.
This enables an RM to really get to know their clients much more closely, in terms of their trading habits and in what kind of products, what they expect going forward, what they want from their wealth, their risk appetite in volatile markets, and how they are likely to react if they lose a certain part of their wealth.
Also, banks are increasingly being forced to institutionalise this process, and record and monitor the information they collect. This is yet another result of increased regulation of the wealth management industry.
In addition, taking a team-based approach addresses the fact that it is very rare to find individuals with all the skills and attributes required for being successful in this role – being super-savvy technically, having a highly-developed sense for investing, and possessing finely-tuned social skills. This is particularly relevant for the larger client groups with increasingly complex needs.
What else would be considered a key ingredient of a good client experience?
The most important thing is a client going away feeling that they have got what they really needed, and in an individualised way.
No client likes off-the-shelf service, especially if they feel that the banker hasn’t listened to what they are really saying or what they need at that point in time.
Without being dogmatic, I believe that an excellent client experience critically depends on the process: finding out what the client wants, devising a tailored solution, agreeing on the implementation, and then reviewing it.
In what ways should RMs be engaging their clients in today’s volatile and uncertain market environments?
The time when clients need their bankers is when markets enter tough times or turn volatile. The past few months have been extreme, almost like they were in 2008. So this is a time when we need to present clear investment views to clients and to address their key needs.
Nobody can claim that they know where the markets are going, but it is important to give a measured opinion, in terms of how we interpret the markets and what clients should watch out for – simple messages but clear guidance.
