Financial Services Issues.com

The Pricewaterhouse Coopers Global Private Banking and Wealth Management Survey 2009 has been released and provides some interesting insight into how the current financial crisis has impacted the wealth management industry, and what further changes lie ahead. Below are highlights of the survey:  

• A wealth manager’s core business is to develop and cultivate the client relationship, but very few firms can truly live up to that promise. Our Survey shows that the most profitable wealth managers have significantly lower ratios of clients per CRM in the different client segments, which shows that taking care of the client really does provide its own rewards.
• Our Survey suggests very clearly that there is no direct link between size and profitability (in terms of cost/income ratio).
• Almost two-thirds of CEOs place acquisitions in their growth strategy for the next two years.
• The crisis shows us that high-margin products, often produced in-house, can be too complex for both CRM and client.
• Among the most profitable respondents, 60% of CEOs indicate they can cut more than 10% of the total cost, which would increase their profitability even more.

• After a slump in asset prices and a number of investment scandals, many wealthy clients have lost significant trust in their customer relationship managers (CRMs) and their institutions.
• Servicing excellence depends on CRMs’ abilities to capture and to understand client needs and expectations. Here, our Survey shows increased sophistication. While 86% of respondents are still segmenting their client bases according to current assets, many respondents are now applying behavioral criteria, such as ‘investment style’ or ‘attitude to risk’.
• More than 90% of wealth managers surveyed have seen their CRMs increase interactions with clients and for 69% of organizations the frequency of advice to clients has increased.
• Evidently, few wealth managers are using proactive tactics to address issues arising from the crisis, as only 55% of respondents appear to have formal client retention Programs – a dangerous omission in current market conditions.
• Our experience confirms that in wealth management CRMs will not be able to elevate service levels sustainably without significant investment.
• Market turbulence has caused clients to switch their goals from investment performance to wealth preservation. This is the essence of ‘Nouveau Classic’ banking. Consequently, clients now expect more attention, keener insight and much greater transparency. 

• Some 60% of Chief Executive Officers (CEOs) anticipate moving to an advice-led model with a full open architecture for externally sourced products within the next two years, contrasting with the 53% that use this approach today.
• By bundling proprietary and third-party products together – assuming in-house investment performance allows this – CEOs can avoid paying away margins to third-party product providers.
• There is a trend for wealth managers to move from transaction-driven to advice driven businesses, with a likely associated shift from commission-based revenues to fees.
• Comprehensive financial planning processes are increasingly becoming the foundation of client relationships, and include ongoing reviews for changes in goals and circumstances.
• In selecting products that fulfill target allocations, wealth managers are seeking to develop robust client suitability and due diligence processes. The goal is to ensure that recommended products are suitable from both risk and fit perspectives.
• The financial turmoil and various investment scandals have highlighted operational risk issues never considered before. As a result clients are demanding transparency at a level never considered before.
  • Clients want greater disclosure around areas such as products, services and business relationships.
• 87% of CEOs say they regard inter-generational products and services to be a priority and 68% consider retirement products to be key. Providing estate- and trust-planning services and vehicles, and identifying and understanding the target beneficiaries’ investment preferences and risk tolerances will be crucial to wealth managers. 

• Many CRMs have neither the experience nor the training to deal with the challenges that today’s economic crisis brings to wealth management. Aside from the obvious difficulties of managing volatile investment portfolios, their communication skills have been found wanting as they have to deliver bad news to clients and respond to mounting frustration and increasing demands for greater transparency.
• Currently, the top five factors used to measure CRMs’ performance are increasing assets under management, meeting revenue targets, attracting new clients, satisfying clients and retaining clients (see Figure 18). In the current climate it is difficult, if not impossible, for CRMs to perform well against most of these criteria – indeed they are making CRMs demoralized and disengaged. Wealth managers need to focus on the factors that make a successful CRM in the current market and take steps to measure their CRMs against a new, more relevant set of criteria.
• Some wealth managers realize they should change compensation structures to drive more client-centric behaviors and to encourage CRM loyalty. These organizations will focus on aligning bonus and remuneration with desirable organizational behaviors, and rewarding long-term client service, rather than focusing strictly on revenues and assets under management.
  • Remuneration structures with long-term pay outs will also encourage CRMs to stay in place at organizations, reducing the amount of CRM poaching. 

• Over the next two years COOs expect a 5% reduction in the outsourcing of portfolio management. Additionally, they expect a 7% reduction in the outsourcing of tax advice, which currently is the business function most likely to be outsourced in wealth management.
• Similarly, functions that were historically regarded as core competencies but are now recognized not to be strategic differentiators are being outsourced. For example, an 8% increase in the outsourcing of trading/executing and payments is anticipated.
• CEOs regard use of technology as the weakest element of their organizational capabilities and 63% of COOs expect to increase their IT spend in the next two years. Long-term investment is required; indeed, 82% of COOs will undertake some form of major core system upgrade, including 36% who will introduce enterprise-wide solutions for their organizations.
• CEOs certainly believe that there is ample room for costs to be reduced, with 36% of our respondents estimating that 10% to 20% can be eliminated, and 18% estimating that reductions greater than 20% can be achieved with more aggressive non-traditional Programs. Process reengineering is an obvious place to start, with 84% of Finance Directors expecting process efficiency projects to be a cost-control strategy, and process automation appearing second in our COOs’ list of top operational strategies. 

• While the majority of wealth managers have invested in strengthening their risk management processes over the past few years, only 27% of CEOs are very confident that they have appropriate risk frameworks in place to identify.
• The most common method of risk management reporting remains loss prevention and governance reporting, as was the case in our past two Surveys. Yet, significantly, 36%of risk officers expect that in two years’ time their approach to risk management will focus on stakeholder value and integrated risk and value management.
• Over the past few years the costs of compliance have increased for most wealth managers. Respondents anticipate that these will continue to rise. The key drivers are mounting regulatory requirements, as well as evolving client expectations and demands.