With new competition and customers demanding outstanding service, specialisation is proving the only way to succeed in wealth management 4.0, writes Orbium associate partner Ian Woodhouse.

Private banks and wealth managers have tried hard to stay in an increasingly tough game over the past five years. Some have bought up competitors to gain scale, others have launched new services aimed at the mass affluent. But it seems that many are still struggling. Could it be that the future lies more in client specialisation and solutions rather than in mega one-stop product driven shops?

We have recently seen a number of banks, big and small, refocus their wealth management business as they face a perfect storm of rising costs, new competition and more demanding clients. Last month UBS closed its UK Smart Wealth robo-advice arm aimed at mass affluent clients, citing the units’ ‘limited short-term potential’. The Swiss bank indicated it would refocus its efforts within wealth management towards the top end clients.

UBS and others have begun to realise that they stand a better chance of controlling costs, protecting margins and developing successful products and services if they now target specific client groups – be they ultra high net worth individuals, the high net worth, entry level private banking clients or the mass affluent.

Another truth that has recently come to light is that no one bank can profitably hope to provide every service required by clients across all these segments any more. Those that are doing best in terms of growth have excelled in client focus and improving the client journey and experience enabled by data insight and adviser digital interactions.

For some, refocusing means geographic and product divestments – Barclays and Coutts sold all or some of their international operations while Hoare & Co sold its investment management arm to Schroders. Others are still making acquisitions to grow their chosen client focus such as Rathbone Brothers’ takeover of Speirs & Jeffrey and SocGen’s acquisition of Kleinwort Benson’s wealth management arm.

The diversity of strategies at work appears to indicate that banks are still trying to work out how to survive in the rapidly changing business of wealth management.

In terms of maturity, wealth management has reached level 4.0, where success depends on having a highly customer-centric, digitally enabled model with data at its heart. Only data can deliver the insights to enable the advisors to tailor services to meet the needs of exacting customers while keeping costs down to protect margins.

Figures from Credit Suisse reveal a dramatic shift in the ranking of banks by growth of assets under management. Between 2011 to 2015, JP Morgan was kingpin at 11%, followed by Goldman Sachs at 10%, UBS at 8% and Credit Suisse at just 4%. From 2015 to the end of the third quarter of 2017, Credit Suisse jumped to joint first place with Goldman Sachs at 11%, JP Morgan sunk to third at 9% growth, UBS was fourth at 8% growth and Deutsche Bank, with bank restructuring, shrunk to negative growth.

Credit Suisse, the big winner, has done a lot of work to reposition itself to serve the ultra high net worth market – those with liquid assets of at least $30m.

This market requires very specific services, including the type of corporate finance advice found in investment banking. The Swiss giant, along with UBS, JP Morgan, Goldman Sachs and, much more recently, Deutsche Bank, have been refashioning their investment banking arms to support their wealth management activities.

Down a tier, banks without an investment banking arm, such as Julius Baer, are concentrating instead on the high net worth market. These customers want portfolio management and more personal advice on questions such as tax and inheritance planning.

At the other end of the spectrum, traditional fund providers such as Fidelity and Vanguard have been able to develop mass-produced standardised products and services that can be delivered cheaply to the mass affluent. Fintechs such as Betterment have also developed these robo-advice type services that can be delivered in an automated way cheaply.

Even within the four main wealth segments, banks are finding they must specialise further. The five new tribes of private banking clients each demand specific skills. For example, banks such as EFG and Pictet have moved to provide specialist services for first-generation entrepreneurs, such as coaching to help clients grow their successful businesses to unicorn status*. Royal Bank of Canada hopes its focus on women will pay off.

None of this is easy. It is expensive, complex and time consuming and several banks, including UBS, are now on their second digital model underscoring the importance of getting it right.

At Orbium, we believe the fragmentation of the wealth management industry is just beginning. Specialisation and focus will be key to staying in the game. Whether you are a big global name, a mid tier player or a boutique, the use of data and the honing of in-house skills to meet the needs of your target market segment will be essential to thrive in this new era.

*a privately owned start-up worth at least $1 billion