In April 2014 Korn Ferry conducted the sixth annual survey focused on the offshore private banking industry in Asia. Over 400 business heads and private bankers were invited to give their views on a range of topics affecting the industry today. The survey targeted those at the director level or above possessing a minimum of five years of service in private banking with an Asset Under Management of at least US$200 million. Over 120 executives responded, of which almost 90% have been working in the private banking sector for at least 10 years, with 22% in CEO-level positions.
In terms of market coverage, a wide cross-section of Asia is represented including Hong Kong, China, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Philippines, and Japan. Executives from over 20 major banks participated in the survey.
A select group of Asia CEOs was also invited to attend a breakfast forum in Singapore to discuss the survey findings. Up for discussion were a host of issues pertaining to the changing role of private bankers, investment trends, and the challenges facing organizations today including the complexity of regulatory compliance, attracting and retaining key banking talent, and technology disruption. The following paper highlights the issues raised at the forum moderated by Serina Wong, global sector leader, wealth management for Korn Ferry.
Reassessing the role of relationship management.
Private banking is both individualized and complex in nature, and the landscape is evolving at a rapid pace in Asia. New bespoke banking service providers are making their mark in some territories, and new technology disruption will likely be a game changer in the long run. Banks continue to feel the strain of regulatory requirements, which continue to seriously affect margins. This also conversely stems the tide of new technology disruptors, at least in the short term. Asia’s “new money” wealth segment is rapidly growing and poised to overtake traditional family business focused on succession planning and steady returns.
To best serve high net worth clients, banks need a robust platform and to scale operations to cope with a changing economic environment, and a deep understanding of the local market can never be underestimated. The discussions touched upon distinct variables, and in some cases divisions, within the region as a whole. Each geographical market has its own unique differences in cultural outlook, investor sentiment, market maturity, and legal framework, each creating precise challenges for global firms.
Opening the discussion, Bryce Wan, head of portfolio management, private wealth management at Goldman Sachs, gave a brief snapshot of current investment sentiment and investor behavior, which shows a shift to a more long-term approach and an injection of client realism. He saw client expectations becoming more aligned to real market conditions, stating: “When talking to high net worth families in Asia, they are not too concerned about year-on-year returns anymore. They seem to have learned lessons from the financial crisis and have a much better concept about investment risks.”
Typically, past expectations of up to 20% returns were the norm in some markets, and while current sentiment is positive, pragmatism reigns. The post-financial crisis period has ushered in dramatic changes, Wan said, driven by the slowing economy in China and decelerating property appreciation.
Transitioning to the role of a credible adviser rather than merely a “product pusher” and rebuilding relationships with clients are key, but they also reflect the dynamics of the client-banker relationship in a changing market. “We need to educate clients on how to think about asset allocation and risk management, and through this process we are actually educating ourselves about the real needs of our clients. In the past, private clients often dictated the conversation to focus on product offerings and banking terms, but we should be more focused on the investment strategy and risk management instead,” explained Bryce Wan. Service, advice, and opportunity remain the cornerstones of this relationship.
Key challenges: The harsh realities of regulatory compliance.
Continuing the trend from last year, regulatory requirements remain the main focus for bank executives tasked with ensuring compliance within tight budgetary constraints. Although this fell from 69% in 2013 to 57% this year, it is still by far the most pressing issue in private banking. While the well-established firms with robust client review processes can weather the storm to some extent, the regulatory landscape is driving up cost-income ratios across the board. In practice, this means hiring more compliance personnel as well as investing in more advanced risk-control systems and specialist training for front office staff. For new entrants in the market who do not have these embedded in their operating culture, there could be a lot of short-term pain ahead.
Peter Flavel, CEO for J.P. Morgan Private Wealth Management, pointed to an environment where control processes are being enhanced industrywide with a keen eye on balancing business activity with underlying business risk: “Business leaders need to reflect on the evolution of the private banking business model and the costs of operating in a new environment with additional thoughtful and efficient risk controls. There’s been a lot of healthy dialogue across the industry in helping to come up with solutions that align costs and income ratios in a fair balance.” He foresaw competition and compliance taking their toll in the long run: “Over time, as competition and the cost of implementing new compliance standards rise, we may see greater consolidation in the private banking industry.” This was a viewpoint echoed by Barend Janssens, head of Royal Bank of Canada Wealth Management, emerging markets, who also saw the tough environment from a slightly different perspective: “We as an industry are increasing internal pressure not to make mistakes. We have to ask ourselves if the profitability potential is actually high enough compared to the reputational risk we run in the future.”
According to Bassam Salem, CEO, Asia Pacific at Citi Private Bank, much of the regulatory overkill is a direct result of past industry complacency resulting in offering unsuitable products; however, there was also an accord among some participants that the regulatory trajectory could be about to ease off toward a “short-term equilibrium.”
Participants learned that, in both Hong Kong and Singapore, private banking industry groups have been formed to create a constructive forum to discuss pressing issues and speak with a unified voice on regulatory matters. Su Shan Tan, group head of consumer banking and wealth management at DBS, said the issues have concentrated the minds of industry leaders to work collaboratively to face the challenges head-on.
Attracting and retaining talent: Cultivating a positive company culture.
In line with previous years’ results, survey respondents believed leadership stability is the overriding factor in attracting and retaining the best private banking professionals; however, of interest is the emergence of company culture, which has steadily climbed in importance over the last five years. Participants then addressed the question: What does company culture actually stand for and how does it manifest itself in a global environment? Bassam Salem explained that you cannot create a defined written policy for some aspects of company culture—it evolves through a collective understanding, setting examples, and inspiring best practices. Su Shan Tan cited the “pride values” at DBS, which reveal themselves in practice as, among other things, “purposeful banking, relationships, and innovation.” Peter Flavel stated that “clearly articulating who you are and who you are not” is essential to being able to define a company’s culture.
Serina Wong highlighted the need for a firm’s culture and professionalism to be communicated to new entrants at the outset with a smooth, problem-free onboarding system and orientation. She pointed out that, with professional support and mentoring, talent will not only show loyalty but also are more likely to be promoted earlier.
On the theme of retaining talent, turnover rates in the industry currently stand at around 10% as shown in the survey findings. When participants were asked how satisfied they were with their current employer, an upturn was noted in the number of bankers highly satisfied in their firms. In part this can be explained by a wider crosssection of people benefiting from pay increases over the last year.
When it comes to attracting talent, the cost of developing raw potential into a top-tier banker is very high, and too few banks now have the luxury of time to do so. Unsurprisingly, when looking to hire talent, the best private banking professionals come from other private banks, with half of CEOs concurring in the survey. Riskaverse firms prefer the security of relationship managers with proven experience, but the trade-off, as Bassam Salem pointed out, is spiraling cost-to-income ratios. Banks pay a premium for private bankers they believe will furnish them with a book of clients, but Bassam Salem saw it differently: “When we lose bankers, we don’t lose the clients, as those relationships have long been institutionalized.”
Transitioning people from other banking sectors, and even from outside the industry, is a high-risk strategy; however, virtually all attendees cited examples of successful transition. For example, corporate and commercial bankers have some common skills and mind-sets that allow them to make the leap successfully.
Other financial sectors, as evidenced from the survey results, are less effective as a good source of talent. Changing from the transactional nature of investment banking, for example, to servicing individual high net worth clients requires a big culture shift. All in all, the executives agreed that taking a long-term view and patiently grooming private bankers would pay dividends. “From the beginning you must have a good support structure around new people, with good mentoring and management,” noted Serina Wong, especially when employing people without previous financial industry experience. Innovative development programs along with the flexibility to fast-track high-potential talent are key.
Fastest-growing product: Asia warming to managed portfolios.
Survey respondents were polled on what product areas they believe will have the fastest growth over the next 12 months, with discretionary portfolio management most cited by CEOs. Executives saw this as an interesting development, given the supply and demand issues in this area. Salem pointed out a more realistic client approach on the discretionary portfolio front: “Since the financial crisis clients don’t believe someone will always outperform, but increasingly they want transparency—they want to see a segregated portfolio with all the securities.” Arnaud Tellier, CEO, Singapore at BNP Paribas Wealth Management, acknowledged the trend for DPM and noted a clear disconnect between the thinking of CEOs and bankers based on the survey results. Dispelling the myth that there is no appetite for managed portfolios in Asia, there is significant demand if they are packaged well as part of an asset allocation strategy.
Regarding asset allocation strategy on the client side, participants agreed there is a great deal of innovation, but often investment sentiment is weighed heavily by sector bias. “Clients tend to veer toward what they know best,” said Su Shan Tan. Bassam Salem agreed, stating, “We believe we have the better solution, but the reality is they are more successful than we are, and they have made their money by taking risks.”
Serina Wong highlighted survey figures showing that Southeast Asian clients have yet to really buy into the asset allocation trend in the same way that North Asian markets have. Bryce Wan saw new wealth in North Asia driving the trend, but “Southeast Asia clients are more established in terms of their history.” In this respect, Su Shan Tan saw a demarcation along cultural lines. “You can’t change culture overnight,” she said, highlighting that a “one-size-fits-all” approach does not work in a region of competing nations evolving at different paces.
On the other hand, both CEOs and bankers region-wide agreed more flexible and competitive credit terms will help bankers perform better this year. CEOs are mindful of the inherent risks with extended credit facilities, but it nevertheless provides a platform to do more business. Key to finding the right balance is a strong creditbackground specialist team with an informed and transparent approach to liquidity risk.
A technology time bomb is ticking.
Cultural differences based on geographic divisions will narrow as technology disruptors start making inroads in banking. Bassam Salem explained that the first wave of real tech penetration in banking will “affect the retail business industry more than private banking.” He pointed out that technology-savvy young investors are amenable to online platforms but will always seek out the personal interaction and services provided by a private banker, particularly for large investments. Even as automation continues to revolutionize the industry, clients, including the next generation, will always find value in dealing with a personal banker. Bassam Salem also believes most tech firms will find it difficult to meet the regulatory burden or at least will only focus on a single product.
Participants agreed that technology is disrupting the industry and big changes are afoot, although the banking revolution may not be as imminent as many people fear. New tech needs to be accepted and embraced internally to enhance investment advisory, explained Peter Flavel. That raises the question of whether a physical brick-and-mortar bank will still be relevant, although a participant belonging to the next generation stated, “When I receive a name or business card, of course the first thing is to Google the person. While you can find a wealth of information online, it will only get you so far. Technology cannot replace the human experience of meeting in person.” Participants agreed that automation is unlikely to ever fully replace human interaction, as we are essentially social beings.
The way that private banks conduct their business will change dramatically over the coming years, and this in turn will require an evolution in mentality as well as increasingly innovative leaders that can accept and promote new ways of doing business.
Key challenge for HNW clients: Succession planning.
CEOs and bankers agreed that succession planning and transference of wealth remains the primary consideration for their high net worth clients today. A hot topic of conversation in the last few years in China, succession planning and creating a legacy for the future involves a very different mind-set. Attendees agreed that, for many firms, the family business market is difficult to crack, and most banks do not have investment banking solutions tailored specifically for family offices. “Families come to us for real estate deals and investment banking. Their discussions are focused on their business and how it is evolving, but to do all of that, you need an investment bank,” said Salem.
The family business model can be described as a unique system where all the economics are linked. For private banks to better understand succession in family business, they have to take into account the complexities of family relationships. Now, in the modern age, the focus is more on the individual and not the collective thinking, which presents additional challenges. In this new age of technology, it is even more vital to the success and longevity of high net worth families to include entrepreneurship and creativity. An executive noted, “Family business is first about humanity and then business.” The unique structure and philosophy of family business can breed some distrust of private bankers as target-driven product pushers, yet ethics are changing dramatically, and the industry is working hard to change this unfair perception.
The complex regulatory framework continues to weigh heavily on banks’ resources in pure financial costs to administer, and it can also have a draining effect on morale. Regarded by many as pointless paper shuffling, compliancy’s bigger picture is what firms need to communicate to relevant people rather than merely administering the “carrot and stick” method. With a more measured, conciliatory approach from within, private banks can advocate for change more effectively. The impact of global benchmarks is influencing local Asian regulators, and banks can and should do more to anticipate such changes with more proactive risk-based monitoring. The growing shift from commission-based schemes to advisory fee models will affect some seasoned bankers, but the payoff is steadier and more predictable revenue for the business, and most importantly, more client satisfaction.
Business leaders must stay on top of their game to better anticipate and embrace the coming tech revolution. The general fear is of a major shift away from the traditional client-banker relationship. This is unlikely to affect the industry in the short term and especially in the high net worth segment, where more value is placed on human interaction.
The pool of proven talent is finite, industry turnover is stable, and people are staying longer with their firms. There is no magic formula when it comes to selecting and grooming key talent—survey feedback shows that recognized skills, experience, and cultural fit will help smooth the transition, but some of the very best people often come from surprising sources. Whether banks show patience with talented graduates or go for the expensive quick fix, the roundtable feedback points to the need for a strong culture of mentoring, innovative development programs, and stable leadership.