Authors: Philippe Theytaz, Ian Woodhouse, IBM Business Consulting Services
In the last two years, the wealth management and private banking industry has experienced a greater period of turbulence than at any time in its history. This was caused by a combination of factors: the long US boom and subsequent stock market bubble collapse, the surfacing of major corporate governance issues and bankruptcies of some large well-known corporations, all of which had a major impact on investors' confidence.
The European Wealth and Private Banking 2003 Industry Survey took place in October/December 2002, and included participants from more than 100 leading European wealth managers and private banks. It reveals that the environment has continued to be difficult. Due to market volatility, many clients have stayed on the sidelines. Worse, for the first time, an entire generation of investors lost money in consecutive years. Industry players were unprepared for such dramatic change. Initial responses centered around obvious short-term cost reductions and ways to diversify revenues. Beyond this, there was evidence of significant restructuring as several players withdrew from certain geographic markets, refocused on more attractive client segments and, in some cases, undertook acquisitions to achieve scale benefits.
The survey also reveals significant changes in relative market share and positioning between the individual industry participants, illustrating that some have been more successful in responding to the pressure than others. A particular theme of this report is to better understand the characteristics required to be a successful participant in the future and, more important, how to best respond to and capitalize on the more challenging environment. One hundred five leading wealth managers and private banks participated in this survey from 13 key European onshore and offshore centers.
The survey:-
Asks participants for a wide range of strategic, operational, people and information technology issues.
-
Concentrates on obtaining useful operational and systems benchmark data. This industry survey containsonly a summary of key benchmark findings. More detailed benchmarking is reserved for participants only.
-
Provides meaningful comparison information by analyzing the responses in several dimensions, such as size of assets under management, individual country-specific data, and overall onshore and offshore groupings. It also highlights differences between mature and emerging markets. This enables more precise identification of specific trends to assist industry players to better understand and respond to the trends that are the most relevant to them.
-
Details useful insights in respect of information technology. The current difficult times have forced industry participants to give greater attention to obtaining more value from information technology as a key enabler of change and a source of improved performance.
-
Focuses on understanding the characteristics of high-performing CEOs and executive teams across Europe. Participants were asked to identify those wealth managers and private banks whom they regarded as being leading players across a number of dimensions. Subsequently, the CEOs of these organizations were interviewed in more depth to gain greater insight into the factors that are driving their success. This information provides unique insights from these highly respected and experienced individuals and organizations. This helps to provide some useful pointers and road maps of how to address key challenges head-on.
All of the data and insights derived from the survey and supporting benchmarks (which are provided confidentially to respondents) should help industry participants identify and focus on those key strategic, operational, people and information technology issues that will be critical to competing effectively in the more turbulent environment.
Key Findings
A number of themes have emerged from the survey findings. These key topics indicate where respondents believe efforts and resources should be concentrated as individual wealth managers and private banks seek to respond to the industry changes now underway.
1.Participants emphasize the need to adapt to changing client needs.
We asked respondents to rate the top six from a list of 16 external drivers of change. Top of the list was adapting to client needs. Second was the need to get more experienced staff to achieve this supported by more effective use of information technology. Responding to the changing macro-economic environment was also rated highly where participants expect to be increasing their investment performance, adapting to increased regulatory requirements and responding to slower rates of industry growth.
There is now the realization that getting to know the clients, their specific needs and requirements have become essential in the current difficult financial market environment. Faced with more sophisticated client needs, private banks and wealth managers need to compete for more specialist skills and experienced staff to better harness the existing client base and provide an attractive value proposition to potential targets.
We asked respondents to rate the top six from a list of 16 internal drivers of change. The top three were all key client metrics, acquiring and retaining clients as well as enhancing service quality. For the first time, cost optimization was rated fourth, reflecting the pressures within the industry. Other elements identified concerned enhancing value propositions. These were improving brand image and reputation, broadening the product and service range and adapting to open product architecture.
2. Wealth managers and private banks need to work much harder to understand their clients' needs and price for value delivered.
Wealth managers and private banks claim that a key to success is the ability to know the client better and understand their requirements in more detail. Interestingly, responses received indicate that most participants feel they have little or no understanding of their clients' non-liquid assets, their extended business, family issues and personal interests. Worse still, a small proportion has at best limited knowledge of the client risk tolerance, reporting requirements and pricing concerns.
Survey respondents indicated that the industry has a clear problem with pricing. Participants replied that they experience serious difficulty in holding pricing and making their clients pay for value.
This is staggering in an industry that prides itself in its ability to offer product and service solutions based on individually tailored and intimate understanding of each client. We observed that clients' needs analysis is becoming more complex and has to be performed on two levels. At the individual level, the life cycle, wider financial interest and lifestyle issues all need to be considered. At the individual portfolio level, the individual client requirements for risk, time horizon, reference currency and other considerations all need to be factored in as well.
3. Retention and development of client relationship officers is critical. This will be supported by technology-enabled tools.
Respondents told us that more than 50% of the front office staff have a tenure of less than four years in that role. Again, in an industry founded on the trust, service and the quality of personal relationships, such a short tenure is hardly enough to understand one's clients' needs, let alone anticipate them -- a key to success in building close customer relationships. A further factor in developing client relationship officers will be to provide them with IT-enabling tools, such as portfolio management/investment advice and financial planning tools.
It is critical, moving forward, that the industry can more systematically retain, develop and nurture the skills and talent base of its key front line professionals. An intricate among between culture, teamwork and entrepreneurial drive will be required to succeed.
4. Participants expect their revenue growth to be under pressure in the short term, but are more optimistic in a three-year horizon.
Revenue growth has varied significantly, but participants remain optimistic that they will have the ability to go back to double-digit growth by 2005. The gap between the growth of their onshore and offshore revenue is expected to widen significantly in 2005 when private banks and wealth managers expect onshore revenues to grow by 23% and offshore to grow by just 8%.
5. Cost income ratios have fluctuated over time and there are significant differences among players.
Over time, average cost income ratios have varied from between 61% and 70% to 51% to 60% during benign market conditions. Given current conditions, senior executives are rightly concerned about pressure on cost incomes. Even though wealth managers and private banks come in different shapes and sizes, the findings of the survey show that large banks are less affected than their smaller peer group, thus confirming that they are better positioned if the current down market period continues.
6. Focus on improving value proposition via a net work of alliances and by achieving scale.
Respondents want to focus on their value proposition and pull in additional products and services from a network of alliances in order to cover changing client needs. They also expect the industry to consolidate substantially. Moving forward, they see that managing alliances/partners and achieving scale are key success factors together with the need for client relationship officers to be more focused on selling and marketing skills. Participants expect these dimensions to vary in importance depending on the individual countries.
7. There is now increasing evidence of industry consolidation as more players see the need to increase scale.
There has been an on-going debate about the notion of size and scale. Traditionally, there has not been a clear answer as wealth management and private banking business models of a variety of shapes and sizes have proven that they can be profitable. However, our respondents have now told us that in the changing environment, critical size is now more necessary in order to compete successfully in the market. They believe that 13 billion euros of assets under management will be required for onshore institutions, and 16 billion euros will be required for offshore institutions by 2005.
This could have major implications for the industry structure in different countries. For example, in Switzerland, a large number of offshore participants do not currently have the critical size and we can raise some doubts about their ability to reach that threshold by 2005. It becomes clear that in these circumstances, larger players can benefit from their size, staying power and ability to invest to take a leading role in industry consolidation.
8. To help offset the challenge of scale, alternative business models are being developed and implemented.
Wealth managers and private banks are now re-examining their traditional value chains and are willing to consider a number of options to reconfigure their existing business model. These have tended to focus around major process improvement programs, divestment, mergers and acquisitions and alliances and joint ventures. In terms of major process improvements, most initiatives have been in the middle and back office areas. More recent evidence is that this emphasis is now shifting to the front office. On divestment, some participants have chosen to withdraw completely from geographic markets and or certain clients segments where they had no prospect of scale or competitive advantage or where the rising cost base was hampering their profitable development.
Mergers and acquisitions activity in private banking has traditionally been limited by the high price that sellers sought. Recent transactions in the sector have shown that prices have come down dramatically and that it is now more of a buyer's market. Despite this, respondents have observed that making acquisitions and mergers successful in this industry is not an easy task.
It is also interesting to notice that some potential candidates for sale are not pure plays in wealth management and private banking. Despite the trend towards consolidation, some participants on sale find that they are unable to exit the industry, as potential buyers do not meet the price they seek. Some of the underlying reasons for this lie in the careful analysis and due diligence about the conditions of the business, the client and product mix, etc. The implication of this is that those participants seeking to grow by acquisition will need to have very strong due diligence and restructuring abilities.
In terms of alliances and joint ventures, there is now a greater trend toward wealth managers and private banks linking with external partners to provide additional distribution and to expand the range of products and services offered.
The next wave of major business process refocusing will occur as players experiment with alternative models where by more of their existing functions are centralized within the group and/or outsourced to third-party providers. The transformation of the fixed cost base to a variable one is an attractive proposition. Traditionally, outsourcing was considered only for support services but is now moving into mainstream operational processes within the value chain.
To obtain a copy of the survey or to find out how the findings might apply to you, contact the author: philippe.theytaz@ch.ibm.com
Read other articles in this issue:
· The future of insurance e-business groups
· Investment tip for financial markets firms: put your money in on demand
· Face the fact: Banking fees are better for you
· Portfolio analytics: A field of dreams
|  |
|
|
|
|
