Many Asia-Pacific-based private banks are betting the region’s rising middle class will see them achieve spectacular gains in client assets and profitability in the future. Yet some say private banks have ‘sleepwalked’ into their current asset bases and could be hit with big losses if they fail to get strategies right. Will Cain reports.
The emerging affluent and mass affluent segments have been one of the hot topics in wealth management in 2011.
Almost all of the leading wealth management banks now offer a package designed for one or both of these sets of individuals, usually defined as the $20,000 to $100,000 and $100,000 to $2m segments respectively – with Singapore-based UOB one of the latest banks to launch services to the “rising rich”.
While most in the financial services industry agree an important part of their future profitability will come from this affluent segment, there remains a lack of clarity around how best these customers can be acquired and retained.
“It’s a fair point to note that while in the retail space all banks are trying to build their propositions to cater to this segment, not many banks – even those that have started to look at this segment – have the right formula,” said one banker spoken to by PBI.
“There’s significant overlap between where the private bank begins and where the retail banks who want to play in this space ends. That issue is being defined as we speak.”
This is important because the last boom in interest in affluent-based wealth management services, in the late 1990s and early 2000s, did not end happily for a number of well respected businesses and their executives.
Some racked up hundreds of millions of dollars of losses through failed initiatives.
One of the biggest failures was at UK-based Lloyds TSB, the predecessor to Lloyds Banking Group, which launched an affluent service called Create in 2001.
The proposition included access to the Goldman Sachs PrimeAccess broking service, which enabled clients to access Goldman research, equity dealing and market making, custody and settlement, and gave them access to selected IPO offerings.
It was a core part of the Lloyds TSB strategy, and when the service was launched it was projected to double wealth management pre-tax profits from £300m ($468.7m) to £600m.
The initiative was eventually abandoned in 2003 after an estimated £100m of investment. It is not clear why the service was scrapped although the bank reported customer take-up had been low and there were concerns Create may cannibalise other parts of its business, notably its investment and insurance arm Scottish Widows.
UBS was another to announce plans for a mass affluent offering in 1999, only to abandon it a year later.
Even HSBC, whose Premier service is now regarded as one of the most successful affluent propositions, did not achieve success first time around. Its initial attempt at the affluent market was a 50:50 joint venture with Merrill Lynch called MLHSBC, launched in April 2000.
HSBC eventually bought out Merrill’s share in the business for nothing after it ran up losses of $171m, according to the bank’s 2002 annual report.
Clearly, despite its great potential, affluent banking comes with risks attached. Failed strategies, according to the examples above, may be measured in the hundreds of millions of dollars.
How can banks avoid making such costly mistakes now that wealth management services for the affluent have become popular again?
Value of KYC
A seemingly fundamental but often overlooked component of strategy in this space is that banks need to know who their customers are and what they want, according to Seb Dovey, managing partner at Scorpio Partnership.
Scorpio runs a project called Future Wealth, founded in 2009 and scheduled to run for a decade, to engage with affluent and high net worth individuals and monitor their consumer preferences and general attitudes to wealth.
It then helps private banks build strategies to deliver the types of products and services these customers want.
He argues product and service solutions need to be much more nuanced than the simple segmentation based on wealth and gender currently offered by most banks.
Customers drive business
“The idea that one size fits all for all is antiquated,” he says.
“We’ve got to understand [in the wealth management industry] that it’s customers that drive businesses, not the other way round.
This is something that’s well understood in other industries. The technology and health care sectors are good examples.
But the financial services industry still wants to dictate to its customers because it thinks it knows better than them.”
This sentiment is echoed throughout the three annual Future Wealth reports and a related analysis of Asia’s emerging affluent segment called the Future Priority report. In particular, The Future Priority research, which was published in January this year, highlights the importance of regional differences even within areas which banks typically treat with a fairly homogenous strategy, for example Asia-Pacific.
The conclusion is reached through the creation of a set of archetypes for consumers in countries across Asia which reflects their attitudes to a range of topics including wealth, spending habits, personal values and family and social life.
The four archetypes created in the analysis show how differently consumers’ attitudes, values and expectations vary across markets in Asia.
It shows, for example, that prospective private banking clients in South Korea value status highly and also tend to be more ostentatious with their wealth.
From a private bank perspective, this means they are more likely to respond to private banking offers which offer some element of prestige, for example exclusive bank cards or associations with high-end brands.
It also shows South Koreans are likely to be more willing to talk about wealth and their wealth requirements, meaning the provision of financial advice becomes an easier process.
However, they are less likely, on average, to be persuaded to sign up for offers where specific benefits are available, for example value-based services and discounts.
It shows, arguably – and the archetypes are not definitive – that South Korean consumers may also be less price sensitive in an investment context.
If the South Korean archetypes are compared with a market like Hong Kong, it becomes clear how important a more detailed approach to private banking is required in different markets.
The very archetype that is least likely to prevail in South Korea, a benefit/value-based proposition, is the most important type of offering based on the preferences of Hong Kong-based affluent and high net worth individuals.
The research bears out a subtle shift which is already underway in private banking – the revision of typical Asia-Pacific-based structures to an emphasis on a smaller number of core markets.
Banks including Credit Suisse, BNP Paribas and Coutts have all been involved in this process during 2011, reflecting to an extent that a ‘build it and they will come’ approach to private banking offices in emerging markets is not the best approach.
“If you’re simply opportunistic, where you sign up whoever you meet as a client or even a candidate, you just don’t necessarily get the right level of intellectual capital. [You can not] grow and be relevant in the countries that you want to be in,” says one private banker spoken to by PBI.
Sleepwalking into asset bases
Dovey puts it more strongly. “Many private banks in Asia, as much as worldwide, have kind of sleepwalked into asset bases and don’t know how they got there,” he says.
Now, as the global economy teeters and purse strings start to tighten once more, Asian private banks are trying to rationalise and find ways to generate a return on the investment many have received from their parent institutions.
Cost-income ratios in Asian private banks are among the highest in the world, a situation which has been allowed to persist because of the growth anticipated in the region.
Affluent wealth management is likely to be one of the key means of achieving this projected growth but is likely to require private banks to overcome their aversion to technology and meet the demands of affluent customers for accessibility and convenience.
In addition, for investment services to be provided on a more industrial scale, advisers need to be given access to better tools.
Utilising technology for financial services
This has not been the strong-suit of private banks in the past. Dovey says private banking clients regularly tell him they get a better and more convenient investment service through their HSBC Premier accounts than they do through their private bank.
“I’ve never accepted the argument that once you become rich you’re no longer interested in utilising technology for your financial services,” says Dovey.
He adds there is resistance from private banks to implement technology because either their customer bases are too small or because they say they know what their clients’ needs are, and that this doesn’t include technology platforms.
One common argument, particularly for banks serving the ultra high net worth segment, is that their clients do not need a day-by-day or minute-by-minute update on their total net worth.
They say many of their requirements can be resolved with a quick telephone call to their private banker.
Technology generating higher margins
In this respect, the level of technology required at private banks appears to be differentiated. A pure play private bank with 2,000 clients all with assets in excess of $10m has lower technological requirements than a bank with 2m clients with assets of between $50,000 and $1m.
However, it leaves the banks with smaller, wealthier client bases with the same problem – high cost income ratios and low margins.
On the other hand, banks with broader customer bases can use technology to increase their share of affluent customers, generating higher wealth management margins and lower cost-income ratios.
“I would always tend to look at the institutions which have big distribution networks and say: ‘You’ve got the game to win in this market.’. Priority [emerging affluent] is probably where there’s biggest growth.”
But, as others have found out in the past, realising this is no straightforward task.