Regulations and client expectations change status quo in wealth management industry, finds PwC research

PwC issues findings of 2011 Global Private Banking and Wealth Management Survey

Singapore set to be the top wealth industry centre
Switzerland and London to come under increasing pressure
Established centres to come under pressure from emerging markets due to increased regulatory pressure
Focus changing to client service and value

The status quo in the private banking and wealth management industry is changing as the focus shifts to client service and value delivery, according to a new PwC report published today. The report -Anticipating a New Age in Wealth Management - includes findings from PwC’s 2011 Global Private Banking and Wealth Management Survey. New competitors are challenging the dominance of established firms, and the impact of new regulations and more demanding client expectations are forcing private banks and wealth managers to change their client service infrastructures and the way they operate. Those who can master change will be in a position to win increased market share and lead the industry, says PwC.

Some highlights:

Today’s client is cautious, smart, less loyal and expects excellent service and clear value
Regulation has become the not-so-invisible hand, increasing the cost of operations
Greater operational efficiency and effectiveness are required, not just to compete but to survive
Standing still is no longer an option and institutions must now quickly adapt or face being left behind

In its 2011 biennial report, which surveyed a record 275 institutions from 67 countries, PwC found that wealth management continues to be a lucrative business with untapped potential for significant growth if institutions can be agile in adapting to meet changing demands.

PwC’s survey found that the industry faces multiple pressures in five key areas, as follows:

Performance and change

The DNA of the wealthy investor has been transformed as a result of the global financial crisis and recent scandals. The result is higher expectations of service and value. Clients are more active in managing their affairs and they are paying increased attention to reputation, regulatory compliance and risk management.

In our survey:

Wealth managers’ average cost-to-income ratio remains stubbornly high, 28 percent of respondents reported cost-to-income ratios of less than 60 percent, while only nine percent also achieved revenue growth in excess of 10 percent
Only 13 percent of organisations rated themselves as high performing in terms of transformative change; however, fully 42 percent aspire to higher levels of performance in the coming years
Respondents see new competitors emerging and more than 30 percent expect significant consolidation over the coming two years

Jeremy Jensen, PwC Global Private Banking and Wealth Management, EMEA leader, said:

“Private clients have traditionally been relatively easy to manage, but the financial crisis and recent scandals have awakened the sleeping giant. With clients taking a much more active interest, wealth managers now have to work harder to earn their long-term loyalty and trust. Delivering the clear value that clients want is contingent on understanding and anticipating their changing needs, circumstances and perceptions.”

Speaking about Ireland, Maeve Corr, Director, PwC Ireland Private Client Services said:

“We are seeing similar issues with Irish private clients, in that they are taking a more active interest in managing their affairs. Clients are more focused on regulation and security of institutions, they are trying to get a better understanding of their risks and position their portfolios from a diversified global perspective. While loyalty to relationship managers is still an issue, the main concern is the strength of the institution and service satisfaction. There is a great emphasis on cost and performance.”

Markets and clients

Shifting patterns of world wealth between emerging and established markets and tougher regulatory oversight present challenges for some wealth managers and opportunities for others.

In our survey:

In looking at the maturity of global markets (both on-shore and off-shore), it is important to keep in mind that the relative growth rates between established and emerging markets now vary significantly
Thirty-five percent of clients now demand controls reports, and 39 percent demand evidence of compliant performance track records
Fifty percent of client assets leave the firm on intergenerational wealth transfers in many markets
Respondents cited referrals from existing clients as the biggest source of new clients and, yet, only 37 percent of CEOs believe existing clients would recommend them to new potential clients

C. Steven Crosby, PwC Global Private Banking and Wealth Management, Americas leader, said:

“The dynamics of global change are significant. Centres, players, strategies and approaches are shifting and evolving. Agility and client focus will determine the market leader of the post-crisis landscape. Using technology intelligently will be key to staying relevant to clients.”

Client relationship managers and human capital

The shortage of talent is one of the biggest barriers to future growth. Top quality people are becoming more valuable, more difficult to source and more expensive to train. The industry is getting better at institutionalising client relationships with organisations. Links between performance and pay are becoming critical. New strategies, incentives and support are needed to attract and retain qualified professionals.

In our survey:

Forty percent of respondents rated their client relationship managers (CRM) as only average or below in terms of their ability to meet client needs
While 81 percent of respondents think their firm’s relationship managers greatly understand clients’ investment objectives, only 56 percent agree that they have a full grasp of clients’ overall financial goals, retirement income planning needs (34 percent) or extended family issues (26 percent)
Only 17 percent of respondents said their CRMs currently have an established relationship with the likely heirs of their clients, and intergenerational relationships will be key to institutionalising assets
Poaching talent from competing firms remains the top means of recruiting CRMs; however, given increasing institutionalisation of clients, this is now less about acquiring the CRM client assets and more about acquiring the experience they have
Only 23 percent of CRMs bring more than 40 percent of client assets with them when changing jobs
32 percent of respondents said the main reason CRMs left their organisation in the last two years was that they were encouraged to leave because of underperformance
The most profitable firms have, on average, far lower ratios of clients per CRM. In the wealth band between US $5 million and $10 million, there are 54 clients per CRM on average, but for those institutions with the lowest cost-to-income ratios there are only 26 clients per CRM

Jeremy Jensen, PwC Global Private Banking and Wealth Management, EMEA leader, said:

“The traditional role of the CRM is being reshaped, requiring new skills and mindset change. The entire front-office infrastructure is changing to meet client demands and keep pace with regulation. We see our respondents preparing for significant change in order to grow and prosper. The alternative is not attractive.”

Operations and technology

Respondents are at different stages of their operational evolution. Many continue to run legacy systems and manual processes. Technology budgets are being directed to better support client relationship managers and the front-end client experience.

In our survey:

Only seventeen percent of participants rated their front-office systems as excellent
Large financial organisations highlighted untapped revenue potential through increased collaboration and referrals from other business units within their organisations
Sixty percent of respondents say their technology budgets have risen in the past two years, and 42 percent of respondents have increased their operational budgets
The infrastructure requirements of regulatory compliance create opportunities for technology firms and outsource service providers

C. Steven Crosby, PwC Global Private Banking and Wealth Management, Americas leader, said:

“Transformation of the wealth manager business model is overdue, and this year’s report shows new urgency for change from an industry that has not needed, nor been able, to adapt swiftly in the past. We found nearly universal acceptance by senior wealth management executives that standing still is no longer an option and that there is a need for wholesale changes in the way their organisations deliver value. Those that are ahead are looking beyond the pressures of today to address operational, cultural and technology issues that are standing in the way of future growth.”

Risk management and regulation

Risk management systems and processes are being upgraded to provide integrated approaches to better align risk and value. The global wealth management industry is now at the forefront of regulatory change. Cross-border standards, customer protection and transparency are anticipated to impact the front-end client experience and increase costs.

In our survey:

Increased regulation, and associated cost, was cited as the No.1 challenge to business growth
Thirty percent of participants indicated that the regulatory environment will have a significant impact on their operating costs
Reputational risk was viewed as the top risk to the organisation, ahead of market, credit and operational risk
Forty-one percent of CRMs were rated as having average or below average ability to meet client risk -management and regulatory requirements
Seventy-one percent of respondents have reviewed their risk-management frameworks within the past six months
Despite the adverse financial impact, 57 percent of CEOs surveyed believe the new regulations are beneficial

Justin Ong, PwC Global Private Banking and Wealth Management, Asia Pacific leader, said:

“Participants believe the centre of gravity for wealth management is moving, and established centres are under pressure from emerging markets. In response to increased regulatory pressures, our respondents see Switzerland, London and, to a lesser extent, New York, all being challenged by the rise of Singapore and Hong Kong in the coming two years.”

ENDS

About the PwC Global Private Banking and Wealth Management Survey
The PwC Global Private Banking and Wealth Management Survey was conducted between December 2010 and April 2011. Survey questionnaires were open to members of the private banking and wealth management community, and completed by 275 institutions in 67 countries, including 62 percent from Europe, 24 percent from the Americas and 14 percent from the Asia-Pacific region. The survey is not sponsored by any third party is part of PwC’s thought leadership to the financial services industry.

About PwC
The firms of the PwC network provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. For more information see www.pwc.com.

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