Era of evolution
Private banking institutions are being charged with implementing new strategies, changing their focus and offering far more to their customers
Amid all the changes taking place in the banking sector, the private segment is undergoing a particularly sweeping transformation. While the industry has been adapting ever since the crash of 2008, the pace has been kicked up a gear, with 2015 seeing notable strides in terms of restructuring. This trend in private banking has continued this year, alongside numerous other changes relating to strategy, focus and realignment.
Increasing assets under management is not always advantageous
The underlying cause of this evolution can be attributed to recently established requirements, from new OECD guidelines, to cross-border regulations and know your customer, which, collectively, have sent seismic waves throughout the world of private banking.
Increasingly complex and difficult demands have raised costs for private banks substantially, while the greater need for transparency has added to the pressures placed on institutions. Such demands are leading to the development of new models, a new culture and a host of challenges, but with these challenges come numerous opportunities as well. Ultimately, 2016 will divide private banking into winners and losers.
Streamlined strategy
Implementing a new strategy is critical for private banks in the present climate. A major part of this is redefinition, whereby expansion is reined back and geographic presence is focused. In line with this change, big players in the field are making a marked effort to reduce their global footprint in terms of their private banking enterprises.
HSBC has started the process of closing down its private banking units in various markets, such as India, Turkey and Brazil. The group has also sold its portfolio of clients in Switzerland and Monaco. Rivals Barclays, Deutsche Bank and Credit Suisse have taken a similar approach to reduce the international presence of their wealth management businesses, given that increasing assets under management is not always advantageous.
Together with growing regulatory pressure, a continually challenging macroeconomic environment will have a role to play in instigating these changes, forcing both advisors and clients to weigh up the risk-reward paradigm of investment. Private banking models now require a far greater focus from both existing firms and players fresh onto the scene. This in turn is driving up the level of competition, particularly in those markets in which institutions are vying for the same clients and the same investments.
The next generation
One of the most notable trends to hit wealth management institutions this year is offering a more progressive customer experience, which has partly grown out of mounting customer expectations. As a result of the global financial crisis, clients have a far greater awareness of their financial affairs, and, as a result, are taking a more active role in their wealth management. In effect, individuals are paying greater attention to risk management, compliance and the reputation of the institution they are dealing with. Banks too are focusing much more on risk management in 2016, taking measured actions to improve their existing systems, while also introducing new and more integrated processes. Numerous private banking bodies are still undertaking this transition in a bid to ensure their clients’ ever-changing needs are constantly met.
Customers themselves are also changing. A new generation is now flowing into the world of private banking: they think differently from their predecessors, they have higher expectations, proactive attitudes and a new perspective in general. They have grown alongside technology and, as a result, their behaviour is shaped by it and its constantly evolving nature (see Fig 1). Having come of age during and/or seen the impact of the 2008 financial crisis, they are more in tune with the dangers unwatched institutions can produce and the importance of standards and compliance. Indeed, it is the new generation of clients that has raised the standard of service and engagement from their wealth managers.
Click to enlargeAlthough shifting demographics and the transfer of wealth from one generation to the next will disrupt current relationships, and thus create gaps in numerous firms, they also provide a vast array of new opportunities for less established institutions. Moreover, they offer the potential for a greater market share for individual firms – both old and new – as long as they can cater to this generation.
Family offices
Concerns regarding longevity of investments are also increasingly important, forming an integral part of communication between investors and wealth managers. It is this shift in investor mentality and private banking culture that has seen family offices grow in popularity. Although the exact meaning of the term varies from place to place, the family office was created to look after the wealth of extremely high-net-worth families – though they have traditionally offered far more than just guardianship of capital (see Fig 2). These niche institutions are trusted with various personal matters, often acting as mediators between squabbling siblings and governors of trusts, while keeping all aspects of family life organised – from education to domicile and travel.
The new generation of clients has raised the standard of service and engagement from their wealth managers
Out of the original concept of the family office, two variants have emerged: the single family office and the multi-family office. While the former fits in neatly with the paradigm of a traditional family office, the latter, as the name suggests, branches out to include numerous families. The past year or so has seen multi-family offices grow in number and popularity; this trend again can be attributed to the financial crisis, which led more people to seek highly personalised investment advice and asset management. Adding to this upsurge in interest are the changing demographics mentioned above of a growing number of first-generation affluent individuals.
Click to enlargeAs the climate of global uncertainty persists in the coming year – together with more newly wealthy families from emerging economies – the demand for family offices is expected to grow. That said, with increasing regulatory pressure and competition, whether all players currently in the game can maintain their course is yet to be seen.
A new phase
While pulling back geographically and applying greater focus helps wealth managers to concentrate their resources, greater investment into technology is also critical – but draining. Moreover, the talent required nowadays is an additional cost that continues to escalate, given the level of expertise needed, the expensive training required, and the current rate of retirement by the previous generation.
Then there is the urgent need to redefine business models and strategies – an immense challenge in itself given the scale and breadth of the transformation required, as well as the pace needed to keep up with changing trends and increasingly fierce competition.
Nevertheless, despite such colossal challenges, the opportunities now available within the private banking industry are just as large. There is a lot of money to be made from this new landscape, both for the client and their wealth managers, but only if the necessary changes are made – and promptly. There will be those who crumple under the pressure, but those who survive will flourish. In the coming year, the sector will see winners and losers. Time will tell who is who.
