Regulation and client expectations change the status quo in the wealth management industry finds PwC research

Friday 24 June 2011, 7:23AM
By PwC

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. 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 quickly adapt or face being left behind.

In its 2011 biennial report, which surveyed a record 275 institutions from 67 countries, PwC found 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 the industry faces multiple pressures in five key areas, as follows:

Performance and change

The DNA of the wealthy investor has changed 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 pay greater attention to reputation, regulatory compliance and risk management. In our survey:

Wealth managers’ average cost-to-income ratio remains stubbornly high. Only 28% of respondents reported cost-to-income ratios of less than 60%, while only nine percent also achieved revenue growth in excess of 10%.

Only 13% of organisations rate themselves as highly in terms of transformative change, however 42% aspire to higher levels of performance in the coming years.

Respondents see new competitors emerging and more than 30% expect significant consolidation over the coming two years.

Mark Russell, PwC New Zealand Financial Services Partner says, “Clients are taking a much more active interest and wealth managers have to work harder to earn long-term loyalty and trust.”

Markets and clients

Shifting patterns of 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, it is important to keep in mind the relative growth rates between established and emerging markets now vary significantly.

35% of clients now demand controls reports, and 39% demand evidence of compliant performance track records.

50% of client assets leave a firm on intergenerational wealth transfers in many markets.

Respondents cited referrals from existing clients as the biggest source of new clients, yet only 37% of CEOs believe existing clients would recommend them to new potential clients.

Mark Russell says, “Agility and client focus will determine market success. Clever use of technology will be a 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, difficult to source and 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:

40% of respondents rated their client relationship managers (CRM) as average or below in terms of their ability to meet client needs.

While 81% of respondents think their firm’s relationship managers greatly understand clients’ investment objectives, only 56% agree that they have a full grasp of clients’ overall financial goals, retirement income planning needs (34%) or extended family issues (26%).

Only 17% of respondents said their CRMs currently have an established relationship with the likely heirs of their clients, and intergenerational relationships will be key to retaining 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 the CRMs have.

Only 23% of CRMs bring more than 40% of client assets with them when changing jobs.

32% 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 assign a far lower number of clients to each CRM. The average number of clients per CRM for the institutions with the lowest cost-to-income ratios is less than half the industry average,” adds Mr Russell.

Operations and technology
Respondents are at different stages in 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 17% 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.

60% of respondents say their technology budgets have risen in the past two years, and 42% of respondents have increased their operational budgets.

The infrastructure requirements of regulatory compliance create opportunities for technology firms and outsource service providers.

Mark Russell says, “We found nearly universal acceptance by senior wealth management executives that there is a need for wholesale changes in the way their organisations deliver value. Those who 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 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.

30% 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.

41% of CRMs were rated as having average or below average ability to meet client risk -management and regulatory requirements.

71% of respondents have reviewed their risk-management frameworks within the past six months.

Despite the adverse financial impact, 57% of CEOs surveyed believe the new regulations are beneficial.