Gaurav’s Weblog

The recent headline announcements of the type that UBS, the world’s largest wealth manager, is cutting 2,000 jobs may imply a crisis in the wealth management sector. Behind the headlines it can be seen that those cuts are apparently being made to other UBS lines of business, such as commodity trading and investment banking. But the turmoil in the world’s financial markets has impacted the wealth management world.

One direct impact has been the fall in the equity markets. Ian Cookson, advisor to the executive committee at EFG International in Switzerland points out that ‘the fall in equities market has meant two things: one is that the value of the assets under management has taken an enormous hit. And the other is that trading volumes have gone down.’ As asset management charges/custody fees are based on the value of assets under management then ‘this hits you in the pocket’. Lower trading volumes have also reduced fee income.

Despite this market fall, the wealth management sector has continued to increase. According to the Capgemini World Wealth Report 2008, the number of high net-worth individuals (HNWIs) worldwide increased from 9.5 million in 2006 to 10.1 million in 2007, so up by six per cent. This has attracted more banks (and non-banks) into the sector. For example, Allied Irish Banks (AIB), a well established retail-oriented bank in Ireland, sees the wealth management sector as one of strategic importance. Steve Lynott, technology stream lead, wealth management programme, AIB, says that ‘AIB has identified [the area of] wealth management as one of significant growth. What AIB is trying to do is meet the needs, both potential and existing, through enhanced training, enhanced structures and through the use of technology’. The company is building on its use of the Finantix front-end product that is currently deployed in the retail branches to collect data and, according to Shane McDermott, head of marketing at Finantix, ‘to identify those clients who are candidates for wealth management early’.

The profile of some of those wealth management clients continues to change. One shift is in the number of clients of a younger generation that have either come into wealth through inheritance or have generated it themselves. These clients are often more astute about money and the financial markets and have prompted a different type of response from the wealth management sector than that seen previously. Mark Gunning, group strategy director, Temenos says, ‘What our clients tell us is that their customers are more interested in, and play a more active role in, the management of their money. We see a decline in the old-fashioned private banker, who took your funds and then met up with you once every three months, to much more heavily involved clients. That will steer a couple of things we have been doing to the system or things that our clients have been using the system for.’

‘When you are in a market such as this one and all the benchmarks are going down then people want to know that you are doing the best you can’  - Gary Linieres, Third Financial

This real-time information does not necessarily imply universal direct use of the internet by the investor – it may be by their advisor. Some institutions are demanding this, but others take another approach. Klaus Kreil, director of sales at systems supplier, CPB Software AG, in Austria says that, ‘in the private banking market that we are in, end customers are usually not really initiating transactions themselves but have advisors behind them. For those customers that are the end users and wish to access their portfolios online, then the bank can choose to allow, or not, their customers to access their portfolios.’ This is a service differentiation that an institution may address through customer segmentation – giving highly wealthy private banking clients some different mixes of access – some through the relationship manager, some through the internet – while the asset management HNWI type client may be automatically given (indeed, may automatically expect) internet access.

Linieres thinks that what has changed over the last twelve months is that private client businesses have been losing clients. ‘It’s very competitive out there and clients are not afraid to up sticks and move. Performance is no longer the number one issue. When you are in a market such as this one and all the benchmarks are going down then people want to know that you are doing the best you can – you can prove that you are adding value.’ Gunning concurs, saying ‘we definitely feel that our customers have to compete more for their customers’ business because often that business will be spread across multiple institutions’.

One area that has seen money spread across different banks may be the Middle East. Traditionally much of this wealth was held overseas in conventional private banks. However, the increasing number of HNWIs in this region coupled with the rise in the popularity of Islamic banking has prompted many conventional banks to offer Shari’a-compliant products alongside their existing services (see article ‘Islamic Wealth Management: Putting faith in your investments‘). Other conventional banks have opened divisions dedicated to Islamic banking such at HSBC with its Amanah brand.

Paul Doody, director of sales (international), ERI, points out that the industry may not have seen the full effect of this geographic expansion. Significant growth in HNWI can be seen in Asian countries and especially in China. As a result, existing wealth managers have opened up operations in those countries. This has led to more companies using hub-processing. Hacking notes that, ‘whereas before it was very much the case that you opened somewhere, you put a system there, maybe multiple applications, a back office and so on but now that is much less the case. Where the regulations allow, institutions are processing country A out of country B because they already have a hardware platform, already have systems and already have a back office. They just put a front office and the corporate face of the bank into the new location and have all the transactional processing in an existing hub.’ This brings into play the need for multi-time zone processing within the core system and possibly the need to have multiple reporting currencies and formats – maybe the regulator in Hong Kong wants to see the balance sheet in a different format to that in Singapore.

Banks such as ABN Amro (IBS, November 2003), JPMorgan Chase (IBS, September 2003) and Schroders (IBS, October 2008) have shown the hub model to be practical and efficient, bringing cost savings, improved control, standardisation of products and services, and a single ‘centre of excellence’ for investment in systems and people.

Another systems implication comes from the geographic movement of wealth. There has been some migration of wealth from off-shore environments to on-shore environments. As a result, there has been an increased demand for core banking systems to perform tax calculations. Traditionally, the off-shore centres provided reporting to their clients whose responsibility it was to report to the relevant tax authorities. Now, on-shore banking centres need to adhere to the appropriate tax authorities and in some cases actually collect tax revenue, such as for withholding tax. This in turn has caused some vendors to make alliances with local tax calculation organisations.

Regardless of location, on-shore or off-shore, Gunning sees another regulatory change beginning to appear. ‘We have seen more interest around the Know Your Customer area. We have found that our clients need to know quite a lot more about their customers.’ As a result the institutions now need to be more aware of ‘involved parties’ and their spheres of influence and authority. Gunning says, ‘we have introduced a whole new level of control where the involved parties around the investment have their roles defined and what activities they are permitted to perform. There are more complex relationships.’

One shorter term change faced by some institutions of late has been how to cope with a steep, sudden influx of business as a result of the financial crisis. Daniel Bardini, who heads Sungard Wealth Management, says: ‘A huge amount of money has been flying into the lower private banking segment’. In Switzerland, there has been a delay of several weeks at some banks merely to arrange appointments. This money hasn’t come solely from UBS but from troubled banks throughout Western Europe. Switzerland has been reverting to its old role as a ‘safe deposit box’, says Bardini. Those banks that have been able cope with the rush have been the winners. Key aids have been efficient account opening processes and systems and flexible on-line services.

In today’s turbulent financial world, with changing markets, shifts in the wealth of regions, and changes to the demands placed on wealth managers, managing those relationships with clients is not only critical to success but, possibly, to survival. So too flexibility and innovation, with customers no longer passive but seeking out those institutions that can provide the best return on their wealth within a solid framework of risk management.