This is the second in a two-part examination of what might be in store for the wealth management industry in 2012.
The wealth management industry heads into 2012 facing many of the same challenges that it did a year ago in how to achieve a greater share of investable wealth, cope with a tight-margin environment and steer clients through the reefs and shoals of global turmoil.
If there is one thing that has become abundantly clear over recent months, it is that managing the finances of high net worth and ultra HNW individuals is not a fat-margin business, or if it once was, it isn’t so any more. The average cost-income ratio for the world’s wealth managers has reached almost 80 per cent (source: Scorpio); other measures, from the likes of PricewaterhouseCoopers, may give a slightly lower level in the low to mid 70s, in percentage terms, but the general trend has been unmistakable. The industry has not seen a big uptick in assets under management since the crunch year of 2008, but costs keep going up. Even in Asia, some of the breakneck hiring pace has slowed.
On a cheerier note, however, Asia remains a strong growth engine, notwithstanding some queasiness about issues such as whether China’s red-hot property market is due for a nasty correction. The ageing of Baby Boomers in countries such as the US and likely pressures on state-funded retirement systems also means that financial planning is still riding a secular upswing in demand. Another secular shift - as noted lately by Northern Trust and other institutions - is the greater wealth management firepower of women. It would be sensible for firms to reflect this by promoting women to more high-profile roles; it remains a male-dominated industry.
So what sort of ideas and themes ought wealth managers keep in mind in running their firms over the next 12 months?
Intelligent pricing of products and good client segmentation will remain important ways for firms to gain and keep an edge, Ligia Torres, UK regional chief executive at BNP Paribas Wealth Management, told this publication. (Torres is a member of sister publication WealthBriefing’s editorial board).
“In a world where all private banks are trying to improve their profitability, there are untapped potential savings to be done and profits to improve only through the re-engineering of the process, and the adjustments of product/services pricing on a very strict client segmentation approach,” she said. “Managers do not necessarily realise the hidden treasure they have that is at the reach of their hands,” Torres said, adding that this was particularly true of the largest banks. (BNP is one of the biggest wealth managers in the eurozone).
Share of wallet
A question that has been asked for some time is whether the global industry can increase the proportion of HNW individuals’ investable assets. For several years, that “share of wallet” figure has stuck fairly solidly at around 40 per cent, Sebastian Dovey, managing partner at Scorpio, told this publication.
Banks and other wealth management players need to be better at exploiting different types of networks to engage with future clients, Dovey said. And he is not impressed – so far – by how the industry is using online social networks and other channels.
“Banks have begun to realize how out of step they are with it. We are going to see a bit more cautious understanding of what you can use a network for. The wealth industry has sleep-walked into the digital age. It is going to take several cups of strategic coffee for many to recognize the changes going on around them,” he said.
Talk of networks takes the conversation to how wealth managers find and prospect for clients. Dovey points out that banks actually think they will get about 90 per cent of their new business from client referrals, rather than other routes, and yet 43 per cent of new business actually comes from referrals, he said.
Of that 43 per cent, about half comes from clients and the other half is from internal referrals, Dovey said. A question, therefore, is where the other new business can come from. One issue is how firms can reach out to business and other networks where HNW and UHNW clients congregate.
If private banks do not engage effectively with clients and deliver them the service they need and want to pay for, then it is essential they do more to show clients they are receiving good service. “In fact, it is possible for wealth managers to give tangible proof of advice, whether in the form of reports, or client meetings and other processes,” Scorpio’s Dovey said.
The sector could also see further launches of family offices. “The modern family office industry evolution is in part a factor of clients being dissatisfied with their engagement with the wealth management industry and opting to go independent. In many ways it’s a perfect demonstration of the 'DIY investor',” Dovey said.
The expectations gap
Looking ahead, Dovey notes that a recent trend has been that of a shrinking gap between client expectations of investment performance, and the actual results. This is crucial as it may suggest that better management of customer expectations will lead to fewer cases of disgruntled clients firing their managers.
“A reason that expectations change is better information,” Dovey said.
It may just be that clients at different firms have become battle-hardened to market gyrations and adverse events. For instance, in late summer, the industry was rocked by news that UBS’s investment bank had suffered a $2.3 billion loss due to alleged unauthorized dealing. At the time, some analysts expressed the view that UBS’s wealth management clients might jump ship but in fact that does not appear to have happened to any great extent. Maybe clients have become more stoical.
A hardy annual theme is an expectation of more industry consolidation. To date, such expectations have never quite lived up to the billing. In Switzerland, for instance, it is expected that the fractured industry, under pressure as bank secrecy erodes, will see a shakeout. And some deals may get done. It remains, however, an industry where making corporate marriages last beyond the honeymoon stage can prove to be difficult, particularly in cross-border stages.
That economic news will remain unsettling is not in doubt. As with this time last year, the industry still has to contend with how to protect and grow client wealth in an environment of negative real interest rates. Wealth management strategists, bemused by the political shenanigans of the eurozone, were generally cautious in their asset allocation advice as 2011 drew to its close.
Concerns about inflation and weakness or volatility in other conventional asset classes will remain for months to come. In that environment, the quest for uncorrelated assets, including the seemingly esoteric fields of art and other collectables, as well as hedge funds, private equity and commodities, is likely to remain. Hedge funds have struggled in 2011, while private equity has eked out gains, but gold holds its luster, even for those who don’t predict the death of fiat money.
Randall Willette, of Fine Art Wealth Management - and also on this publication’s editorial board - says growth of the niche arts and collectables market will continue to be driven by wealth creation in developing economies. He believes that art as an alternative asset class will become “more mainstream” among sophisticated private investors. He also expects that private client art accounts and segregated art portfolios will be increasingly adopted by UHNW individuals due to the virtues of greater control and transparency. Less positively, Willette also expects the art market to become more litigious.
Costs and mobility
The need to keep costs under control is sure to remain a high priority.
“Cost savings are going to be core in helping banks ride out the tumultuous times ahead. Since 2008, most have addressed the issue of cost reduction within their business and dealt with the “low-hanging fruit” i.e. improving capital structures, assessing asset performance and looking at ways to cut the cost base without impacting productivity. However, there are now other areas banks need to examine,” said Mark Gunning, director of banking solutions at Temenos, the wealth management technology firm.
But it is not just on the cost side that banks need to be nimble, Gunning said. The coming 12 months should see continued flourishing of those ubiquitous “apps” and tablet devices. Everything, it seems, is “going mobile” – but not all firms may understand the benefits, and limitations, of these technologies.
“It’s widely predicted that over the next 18 months 80 per cent of banks will have some sort of mobile banking offer. But there is still limited understanding of the power of this channel,” said Gunning.
“Many banks today are not seeing this channel as a real differentiator but we are beginning to see a perception change here and more banks will build growth strategies around mobile. Security will remain a key factor in people’s attitude towards mobile banking, which will call for banks to formulate and implement strategies that are underpinned by sound security features. Over time we will see the mobile channel handle more and more transactional banking – with the web being used more for advice and product selection,” he said.
At Avaloq, another wealth tech firm, its UK sales manager, Peter Dingomal, is bullish on the uptake for mobile technology in 2012, but also provides a few words of caution.
"2012 will be the year in which UK private banks and wealth managers roll out mobile strategies to both attract and retain clients. Surging adoption rates of iPad technology will drive private banks to offer more technologically-innovative solutions to their mass affluent and high net worth investors. In 2012, we will see some leading UK private banks move to offer mobile services to their HNW/UHNW investors," he said.
"However, banks adopting mobile technologies will be reviewing their customer base 'stickiness', and will adjust mobile strategies accordingly – relationship managers will not relinquish precious interaction with customers lightly," Dingomal said. "We expect to see more private banks replacing their front-offices, with either new systems or bolt-on point solutions, in order to offer mobile interfaces," he added.
Making use of technology as a way to reconcile the challenges of rising costs, rising client expectations and a tough economic environment looks sure to continue as a theme for 2012. And as this industry has learned the hard way over the past few years, it pays to plan for the unexpected.