Life in the fast lane: Consumer behaviour in the luxury goods sector, which has transformed beyond all recognition, is a strong indicator of just how quickly the profile of Asia's second and third generation high net worth individuals has changed. - PHOTO: BLOOMBERG
RAPIDLY changing markets, technology, the regulatory environment and competitive pressures have shattered the economics of the traditional wealth management business. To survive, thrive and best serve the needs and interests of clients, wealth managers must recognise and address a number of issues that have become "game changers".
If ignored, we believe these issues will unseat the traditional players and change the face of the industry, leaving the once dominant private banks on the sidelines wondering how they could have got things so wrong.
Of the many issues that must be addressed, three are fundamental:
- The step-change in investor attitude;
- The pervasive use of technology, and;
- Possibly most worrisome of all, the inexorable rise of independent financial advisers (IFAs) and external asset managers (EAMs).
Game changer 1: The new rich are different
Consumer behaviour in the luxury goods sector, which has transformed beyond all recognition, is a strong indicator of just how quickly the profile of Asia's second and third generation high net worth individuals (HNWIs) has changed. While the first generation wanted control over its investment decisions, today's younger-generation HNWIs are far more hands-off and see no need for regular face-to-face meetings to review their portfolios. They aren't asset management experts, and they have no interest in being stock pickers; they simply want to do what they are qualified to do - be they lawyers, doctors, entrepreneurs - and leave their investments in the hands of the professionals.
While on the surface this sounds like good news for private banks, there is an underlying issue. Although the people in this demographic group are
hands-off, they are possibly the most informed investors in history. They know much more about the options available to them and discretionary investments are much more appealing to them.
This is putting fees under a huge amount of pressure. They provide a lucrative revenue stream, and the banks have had them to themselves for years. Banks charge brokerage commission on equities, they add upfront fees on funds, they earn on foreign exchange spread and, to a lesser extent, they charge fees for custody. But a major slice of the action comes from the fees associated with the professional management of investors' assets, particularly when they are discretionary portfolio mandates.
The knock-on effect is that banks are being pushed into charging less for these services. Now that they are expected to do more work for less reward, they are feeling the pinch that comes from margin compression. Their only recourse is to offer more innovative fee structures, such as performance-based or component-based fees, or fees based on the size of the investment portfolio. Importantly, whatever creative ideas they come up with, the net result is that the investors are the winners.
Game changer 2: Crossing the digital divide
Game changer number two has been much talked about, but the laggards in the industry have not dealt with it fast enough. Today's HNWI investors are tech-savvy and mobile. They want to be able to access their investment information, execute instructions and check the performance of their investments, on any device - be it smartphone, tablet or PC - 24/7, wherever they happen to be. Traditional institutions have been slow to see the benefits of the technology CASM - Cloud computing, Applications, Social media and Mobile - and their tardiness in crossing the digital divide has cost them dearly. They have not taken advantage of the efficiencies technology can offer, and they have not developed the infrastructure needed to fulfil investors' "anywhere, anytime, anyhow" requirements.
Collectively, the CASM represents a change that is as life-altering to us today as the industrial revolution was to the Victorians, and this is only the tip of the iceberg. The all-encompassing change, in the way both structured and unstructured market information is produced and consumed, cannot possibly leave the wealth management industry untouched.
Game changer 3: Keep your enemies closer
Possibly the most worrying issue for the old guard of the wealth management industry is the seemingly unstoppable rise in the number of independent financial advisers flooding the market. Where once there was cautious competition between the banks and these intermediaries, today the gloves are off. There's no question that they are the new competitors, so much so that industry regulators have been seeking to raise the barriers to entry, both to safeguard investors' interests and to protect the integrity of the banking system. Nevertheless, the number of ex-bankers going independent continues to defy gravity.
If the banks are to retain their high net worth clients' portfolios, they must accept that they have to share their fees with these competitors, which doesn't augur well when they're already reeling from rising cost-income ratios.
What's more, when their clients start listening more closely to the advice of their independent adviser who has, of course, come from a private bank and knows exactly how bank fees are structured, they find themselves wondering why they ever agreed to the high charges on trades they used to assume was a given.
The wealthy investor is not only flush with choice as to whom to trust his or her money with, he or she is also much more informed about the dark arts of the industry. The bargaining chips are now on the other side of the table. Fee negotiation is the name of the game, be that a reduction per trade, or pay by performance. And, of course, the new rich tend to spread their investments across banks. Once they realise the power they have, they can put pressure on all of them to reduce fees and be more transparent with their disclosure.
Where does that leave the industry?
There is no question that the wealth management industry in Asia is at a crossroads and change is inevitable. The global financial crisis transformed everything, of course, but so has the rapid increase in the number of HNWIs in emerging markets, especially in Asia. These issues have already led to a number of structural shifts in the industry. But the three game changers discussed here will have a lasting impact on the entire wealth management ecosystem and will shape the industry's future.
As Stephen Hawking said, "Intelligence is the ability to adapt to change."
If the players decide to tackle these game changers head on, and if they apply their intelligence, demonstrate new-found agility and come up with some smart innovative solutions, they should be able to transform their traditional business models and not only survive but thrive.
