PBI spoke with three wealth analysts from Capgemini, Aite and WealthInsight to compile seven key themes that defined the wealth management and private banking markets in 2016. Was the year of shocks as disruptive to the private banking space as it was to the political arena? Read on…
A difficult operating environment
One of the dynamics that persisted in 2016 was a constrained profitability environment.
“Cost-income ratios over the past three to four years have been stuck in the 80% range. That's driven by the cost that they have to bear from a regulatory perspective, the cost to modernise their IT systems, the low interest rate environment, HNWIs being more picky about what they pay for and the transparency around fees,” explains David Wilson, head of strategic analysis group at Capgemini.
Regulation is still not going away
“It may have dipped recently – for the first half of 2016, regulation was perhaps replaced by the opportunity of digitalisation – but regulation has spiked again. Over the next few years, regulation will be a big issue with things like PSD2, GDPR and Mifid II coming,” says Stephen Wall, senior analyst, wealth management at Aite.
US regulation particularly significant
With the US elections taking centre-stage for most of 2016, talks of the changing regulatory landscape has and will continue to impact banks worldwide.
A point that marked the regulatory space in 2016 was the fiduciary duty coming down in the US.
“It is significant because of the impact it’s going to have on the US wealth market. It also has the potential to cascade to other markets such as Asia-Pacific over time, something that wealth managers have to keep their eye on as we go into 2017,” says Wilson.
Panama papers scandal significant
The Panama Papers leak scandal in April 2016 led to the leaked information of affluent individuals’ names and associations being scrutinised by governments in the UK, Germany, France, Italy, Spain and Australia.
“This is unsurprising given that the private banking industry is in the midst of preparing for new stricter regulation to commence in 2017,” says Ouliana Smith, head of content at WealthInsight.
Over 60 countries have signed up to the Standard for Automatic Exchange of Financial Account Information or Common Reporting Standards developed by the OECD, which is aimed at establishing a truly global exchange of data.
“In addition, EU countries must implement the revised MLD4 into their national law by June 26, 2017, which has stricter rules for customer due diligence, beneficial ownership, politically exposed persons and the non-payment of taxes,” adds Smith.
The Panama Papers leaks, and most recently the Bahamas leaks, could lead to some individuals withdrawing money and bringing it into mainstream wealth management or redirecting it to more stable destinations. “The change in perception will gradually promote transparency and accountability.” Smith says.
Redefining segments and geographies
The lead change this year and over the past few years has been the reshaping of the market, or the private banking model, with firms pulling back from geographies and segments to refocus what they are doing, according to Aite’s Wall.
“Being less thinly spread and focused has enabled banks to focus on spending in specific areas – whether it be digital, regulation or a particular geography.
“If you look at some of the exits from Asia that have been announced in the past months, I think that's proof that there is more of a refocus in the market,” says Wall.
A mindset shift on digital
There was a shift in mindset on the parts of wealth firms in 2016, looking to fully embrace digital.
“Two years ago HNWIs were saying that digital was important to them, but other than a few leaders, advisors were still ambivalent towards the need for front-end digital innovation.
“Partnering with fintechs, allowing self -service, using visualisation technology – this made wealth executives terrified. What you have seen in 2016 is a broad industry shift, accepting that digital is important. Some firms have started on their journeys, but more needs to be done” says Wilson.
According to Wall, the industry is now taking technology seriously.
“One of the benefits of the wealth industry refocusing is that firms are starting to spend on technology projects and streamline their infrastructure from a data and core banking perspective – putting in place plans for the digitalisation of the client experience.
“In 2016 we moved from the market talking about technology to a point where they are actually implementing technology.
“I would argue that it’s still a bit of an iceberg analogy, in the sense there’s only a small amount you can see above the surface, but there’s probably quite a lot going on behind the scenes,” he explains.
Firms are more willing to outsource
Firms are now more open to things that were traditionally taboo in the wealth space.
Many are looking at outsourcing, not just the back-office but middle-office areas, and turning to robotics to automate processes.
“They’re looking at AI, not just for the front-end proposition, but also to achieve innovation in efficiency,” says Wilson.
Building attractive propositions
The year 2016 gave wealth managers and clients several reasons to look on the bright side. According to Wilson, this is an industry where the client base is “extraordinarily resilient”.
“It gets bigger and bigger each year; even when there’s a crisis like we had in 2008, we’re quickly seeing wealth levels pop back up. Although it’s harder to make money, the client base is growing and ever-more sophisticated, which creates opportunities,” he says.
New and attractive propositions for wealthy clients are necessary, and this was most evident in 2016.