There is no one answer to what the right approach or business model is to private banking and wealth management in Asia. But a clear and consistent strategy is a critical success factor.

Date: June 2012

Tags: Strategy, Value proposition, Differentiation

Strategic positioning in Asian wealth management and private banking today is more important than ever before.

Being focused and deliberate about a business strategy, and how to execute it efficiently, will leave only those who are true to label standing – profitably – in five years’ time, or even less.

Inevitably, there are as many opinions on what is “right” as there are individuals giving them. From, the largest firm in the world by number of employees to the most focused and lean boutique, being profitable and providing true value to clients will be a symptom of being true-to-label and playing to the strengths of the individual institution.

"I think that banks will increasingly be forced to stop being all things to all clients,” says Michael Benz of Merrill Lynch Global Wealth 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,” says Benz.

"I don’t think there is any single model which is the best for private banking in Asia,” adds Stephan Repkow, CEO, private banking, at Union Bancaire Privee in Asia. “I respect the broker-dealer approach that some large organisations take, but at the same time I believe that the bespoke and bottom-up approach to servicing HNW individuals offers a good complement to the more execution-led and transactional-driven approach.”

Among the many other factors which contribute to success, closely following clarity and consistency are quality and integrity.

While every bank has its own culture, its own approach to serving its clients and its own unique challenges, those firms which are committed to Asia and growing their market penetration – through whichever measure is relevant to them – quality and integrity will prove to be the key differentiators going forward. 

Being focused

According to Bryan Henning, managing director and head of global research and investments within the wealth and investment banking division of Barclays in Asia, the convergence of upstart aspiring wealth management firms – which tend to be the Chinese banks and the regional names – with the international banks of all sizes will mean the industry will continue to face a cost-income challenge.

"There will remain a shortage of quality RMs, product specialists and advisory staff, because the industry has more potential than the people available at the moment to service it,” he explains.

But this will determine which types of firms are successful in different segments, depending on the base they have to start from, says Henning.

For example, a regional player with a good feeder retail network will do well in the mass affluent space, and then might work up into private banking, he says. By contrast, a capable investment banking firm will feed into the private investment banking segment servicing the wealthy entrepreneurs in terms of both their corporate and personal money.

"Rather than trying to cover all segments, firms now need to be more tactical and focused in their strategies to play to their strengths and niches,” says Henning. “Otherwise the cost-income ratio will make it prohibitively expensive.”

Adds Lok Yim, managing director and head of private wealth management for Deutsche Bank in North Asia: “Ultimately it is critical for any bank to determine what they are good at, and be realistic about what they are not as good at, and then target the relevant customers in the space where the bank is strong.”

For many firms which take a top-down approach, with the aim of getting a certain market share from the whole Asian wealth management pie, they risk being too general.

"Taking that type of macro view is often why a lot of new entrants fail – they lack focus,” says Alex Jagmetti of Gonet & Cie Group.

Being nimble is also increasingly important in today’s environment – especially for new entrants.

For Gonet, by contrast, as a multi-family office in Asia backed by a bank, which in itself is a point of differentiation, it is looking to building a business via RMs who have proven track records in specific and pinpointed Asian locations. “They will develop the Gonet business in their specialist markets,” says Jagmetti.

"It is particularly important when entering a new private banking market such as Asia to be entrepreneurial,” adds Repkow, “and be able to adapt to various market situations and be relevant in the various segment of the market in which we want to provide our wealth management offering.”

For UBP in particular, Repkow says that the fact there is a family behind the firm helps to make it closer to most of its Asian clients, given that many HNW individuals in the region are entrepreneurs who take a family-led approach to running their businesses.

In line with the need to be focused, 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,” says Benz. “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.”

Further, it goes beyond the desired frequency of contact, he adds. 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.

"When it comes to segmentation by wealth, I don’t see any value in taking that approach,” says Barend Janssens of RBC Wealth Management. "A client with US$1 million to US$3 million in assets, for example, can be extremely profitable for the bank, for instance if they are a trader.”

Global offerings

Taking advantage of the opportunities in Asia also relies on a business model which recognises the different point in the region’s growth cycle, coupled with and this pace and extent of wealth creation, especially in China, Indonesia and India, plus the fact that a vast amount of this is first-generation wealth.

"For foreign players, which also have differentiate to compete and find new niche areas, focusing on product innovation, service delivery and a superior customer experience will be key,” says Nam Soon Liew, partner and financial services advisory leader for Ernst & Young in Asia Pacific.

"As Asian entrepreneurs look to take on a more global role for their businesses, this is where a private bank such as Deutsche Bank, in terms of our global reach and diversification, can really service these clients’ needs,” says Ravi Raju, managing director and regional head of private wealth management for Asia Pacific at Deutsche Bank. “[This is] through helping them with in areas such as capital raising or mergers and acquisitions for their businesses, by leveraging the strong corporate and investment banking capabilities.”

International and regional banks which leverage on their global or regional networks, familiarity with markets and operating environments to more easily serve the needs of their clients, will find new ways to cross selling to their existing customer base and attract new customers, explains Liew.

"They could bundle transaction banking with private banking services to dominate share of wallet,” he explains.

According to Raju, this shows the role for global universal banks and where they can perhaps add the most value in Asia.

"We leverage on our competitive advantage, our strong integration with the corporate and institutional platform of Deutsche Bank, to proactively offer creative and non-traditional solutions to clients across a wide range of products.”

Through focusing on helping clients to manage their risk exposure and to protect the returns on their portfolios, Raju said the bank had its best year in 2011 in gathering new-to-bank client assets.

A global value proposition is also a big help in organisations being able to differentiate themselves in today’s environment, says Olivier Gougeon at Societe Generale Private Banking.

"I wouldn’t be surprised to see some consolidation at some point between private banks, to enable them to generate scale and higher returns,” he says.

Why size doesn’t always matter

At the same time, if banks become over-zealous with certain parts of the offering, this leads to problems for clients.

"In general,” says Anuj Khanna, CEO, South Asia, wealth management, at Pictet & Cie, “for private banks with the strategy of targeting clients from US$1 million to US$1 billion, this requires bankers of varying levels of experience to service them. Large players can justify hiring 100 people over two years to serve all client types, especially as there is cross-sell.”

There is no right or wrong, explains Khanna. “It is all about execution.” This includes the management and who is running the firm, and is all about being focused on what the strategy is.

The Pictet offering, for example, is for clients who are cash-rich and need wealth management advice and services, says Khanna. “The dangers of going local in Asia include currency controls, which doesn’t lend itself to managing money in a global way. As a result, entering local markets is not on our radar.”

At the smaller end of the Asian private banking scale, for Bank Hapoalim, Keith Harrison, head of
Asia Pacific and branch manager in Singapore, says that the strategic reviews the firm has done in its business over the last 12 to 24 months have led it to conclude that it must focus on particular markets and become specialists in those areas.

"This does pose a challenge in terms of what we should do with clients which don’t fall neatly into the target markets we have identified,” he explains. “But we have addressed this by looking at the extent of our existing business in other areas.”

As a result, when it comes to marketing, designing products and other efforts that Bank Hapoalim undertakes to grow its business, the focus is on delivering in those areas it has identified for strategic growth. “The other areas still benefit, but the decision-making is made more clear cut,” says Harrison.

For any similarly-sized institution, such an approach enables management to avoid being in a market where it is difficult to build a profitable and sustainable business.

Being smaller also means less dependency on success by pushing products, says Eric Pedersen, head of private banking at Nordea Bank in Asia Pacific.

"We can also adopt a much more tailored approach to each client because of the smaller scale and the fact that there is less need to segment clients in a mechanical way and automate our offering to service them,” he explains.

When it comes to communication with clients, a smaller firm also often has an advantage in relation to continuity of individual RMs with their clients, adds Harrison.

Plus it makes it more realistic to speak to each client on a personal level, rather than just an email blast. “This also makes it more feasible to get feedback from clients directly.”

Sustainable revenue

Regardless of size or strategy, notable about the business strategy of most private banks and wealth management firms to date has been its inward-looking nature.

"The industry has been focused almost entirely on getting more assets under management and then trying to sell the standard product range,” says Janssens.

The pitfall of this approach for the industry as a whole, is that everyone is focused on the same pool of assets, rather than looking at alternatives such as trapped liquidity or capital in a client’s family business.

"This applies to clients across the region, yet private banks don’t seem to be able to capture this opportunity,” says Janssens.

To do so, he explains, requires a strong balance sheet as a starting point, to move away from an AUM-driven approach, and offer clients interesting opportunities.

"This plays to our strengths,” says Janssens, “and we are not suffering in the same way as some of our competitors with legacy European or US businesses.”

However, capturing the opportunities related to trapped liquidity also requires having the right type of experienced bankers to be able to identify and target these clients with the right types of solutions.

Only then can banks get back to the point at which they can be making sufficient and sustainable revenue.

Creating new streams of fee income in any meaningful and sustainable way other than traditional, transaction-led commissions is still elusive for many firms.

"To move away from a product-centric approach generally, the industry must work together to embark on charging fees for service in a more formal and collaborative way,” says Carolyn Leng, head of private banking at CIMB Private Banking in Malaysia.

However, charging clients for what they have gotten used to receiving for free, coupled with the disappointing performance of many clients’ portfolios, is proving to be a tough sell.

Plus, HNW individuals in Asia are well-connected in their own networks – so cluster together so exchange information.

Further, for private banks which move from a traditional, transactional-led model to a discretionary or solutions-based model, there risk is being too far ahead of the curve, says Alan Luk, head of private banking and trust services at Hang Seng Bank.

"If clients are not yet willing to pay annual or portfolio fees, this will create a gap and risk the bank losing some market share,” he explains.

This means the industry will in reality only move slowly towards these types of models.

"There will always be doubts as to whether the market is ready for this approach, but as an industry we need to make a collective effort to change the clients’ mind-set.”

Within the growing group of Asia’s middle class and mass affluent segments, meanwhile, Vineet Vohra, HSBC’s regional head of wealth development in Asia Pacific, says that the fast-growing pools of wealth in places like China, India and Malaysia are now slowly being invested into an increasingly diverse range of assets.

"We expect to see increased demand for wealth management solutions that cater to needs around protection, long-term savings including education and retirement, wealth growth and wealth transfer,” he explains.

The right leadership

The right business model is, as has been highlighted, only as good as the way in which it is executed – which comes down to the skills and attributes of senior management.

Given the cost, regulatory and revenue pressures within Asian wealth management today, change is must within the industry, and successful change starts with strong leadership which decides and sticks to decisions, and then pushes them through, says Mario A. Bassi, managing director and head of Asia for Solution Providers Management Consulting.

A well-planned strategy, defining the mission and vision of the organisation, and incorporating flexibility to adjust rapidly to the evolving marketplace must be defined by the leadership and disseminated promptly throughout the organisation, adds Noor Quek, founder and managing director of NQ International.

"This process will enable them to define their niche, differentiate themselves from the competition and enjoy economies of scale,” she explains, "as cost containment has become a significant challenge for institutions.”

Although specific skills and attributes will depend on each bank’s culture and model to a certain extent, to succeed in today's environment, relies on senior management appreciating and treating RMs as serious professionals who are expected to socialise on an equal basis with the HNW community. Important people in society don't like it to deal with unimportant bank employees.

This requires a high level of respect and empowerment, obviously within the regulatory boundaries.

"Good leadership involves grooming bankers as well as looking at how to meet demands for staff, and ensuring a sufficient number of experienced individuals,” adds Bassi. “It is also important to have senior bankers to guide and mentor younger RMs. It isn't possible to learn everything required to be a successful private banker until they are on the job.”

As a result, senior management should try to avoid at all costs trapping their RMs within the short-term interests of the institution and the long-term interests of the relationships with their clients.

More specifically, if leaders tell their RMs their vision, how they intend to achieve it, and their values and unique value proposition – combined with an efficient platform – then RMs are likely to be engaged and stay loyal to an organisation.

"In turn organisations will be able to deliver growth,” says Bassi. “While banks are afraid of RMs leaving it is important for management to not only service the top-end but also manage the tail-end. This doesn't necessarily mean letting them go, but rather giving them the time and tools to move up to the next level. This also involves mentoring them to help them learn from more experienced or more successful RMs.”

This isn’t always the case in the current competitive landscape.

While a lot of private banks previously gave new staff a relatively long period of time to perform, Albert Chiu from EFG Bank says senior management today won’t wait as long for a banker to prove themselves, “as the willingness to show a lot of patience is under significant pressure given the high cost-income ratios”.

Important measurements now also include aspects such as pipelines and the way the staff engage clients and management.

"We have to do a lot more due diligence on individual bankers before we hire them,” says Chiu. “It is no longer good enough to have a reasonable track-record as a priority banker and then want to move to the next level and become a private banker.”

The focus is also now more how a banker has won or cultivated clients at previous firms, and how they have managed them. “The hiring process is therefore a lot more selective.”

A further dilemma for many managers today is striking the balance between the short term and long term more generally.

For example, most managers, especially within the universal model, can only dream about having 50%-plus of client assets managed on a discretionary basis, to create recurring, predictable income. But it will take some time to grow the discretionary book, and many senior management cannot predict how long they will stay in their position.

So why pay too much notice of future earnings? It is much more tempting to focus on the current profitability as that is more tangible and most likely more important for the next step in the individual’s career.

Such a dilemma remains a significant threat to the development of the industry in Asia.