By CHEW XIANG
The economic crisis has brought the soaring wealth management industry down to earth and it must change to survive, according to a new study by PricewaterhouseCoopers (PwC).
The report, titled A New Era: Redefining Ways to Deliver Trusted Advice, argues that falling asset values and the number of high-profile scandals in the industry have hurt trust between clients and their relationship managers. 'There is a sense that some wealth managers might have placed short-term revenue goals - and not client interests - at the heart of their businesses,' PwC says.
The report, which surveyed 240 private banks and wealth managers in 40 countries around the world, says firms losing clients and assets will now have to focus on providing quality advice and invest in technology. 'Wealth managers must up their game. The industry is at an historic crossroads. Quality of advice is the real differentiator,' says Justin Ong, Asia Pacific private banking and wealth management leader at PwC and one of the authors of the report.
While wealth managers have fed deeply from the trough in the past few years, the 'economic crisis has presented (them) with challenges that they have neither the experience nor the skills to deal with', PwC says. As clients turn away from risk and demand more transparency, it will no longer be possible to sustain profitability by pushing products, the report notes, and that means wealth managers will have to focus on providing quality advice. 'Wealth managers can no longer afford to be all things to all people.'
While many firms profess to focus on their clients, the reality of delivery is often different, the report says. Many do not have formal client retention programmes and clients are seldom asked to comment on the quality of service they receive. While most wealth managers now report spending more time on cultivating relationships with clients, some clients have become disillusioned with the poor quality of their relationship managers and the advice given.
Over half of clients said their primary source of financial advice was their own research and knowledge. Wealth managers identified the three most common areas of weakness for front-office staff as an inability to adapt to change, lack of client relationship skills, and poor appreciation of risk.
While there is some consensus that reform of reward systems is needed to drive better service, 55 per cent of wealth managers say they have no plans to change this in the next two years, the report says. 'There is a strong sense of 'first-mover disadvantage',' the report notes. Average retention of relationship managers is still very low and only a quarter of them have discussed medium-term career development plans with their firms, the report says.
Worse for the industry, their relatively fixed-cost base means they have little scope to cut expenses and improve efficiency, the report says. Cutting front-office staff could cause clients to leave. 'The best way to escape from this cost trap is to grow through acquisition of new clients or increasing the share of wallet from existing clients,' PwC says. The wealth managers with the best performance, however, poached relationship managers at twice as much as the average rate, the report says, noting that the best firms also had the lowest ratio of clients to relationship managers.
On the other hand, size does not matter, as the industry does not have great economies of scale, PwC says. 'Our survey suggests very clearly that there is no direct link between size and profitability (in terms of cost/income ratio).'
What firms can do is make better use of technology and improve their process management, PwC says. For instance, at the peak of the crisis, many wealth managers were unable to keep up with clients' demands for regular, even real-time, updates of their financial position. Sharing services and back-office functions, as well as outsourcing what need not be done in-house, are also suggested ways of cost-cutting, the report says.
This article was first published in The Business Times.