Posted on: January 25, 2010
SAGE hosts dialogue with major wealth management players in Singapore. Balancing IT with staff capabilities
The wealth management industry seeks a new model and a better reputation.
With challenges to the wealth management industry coming from all directions–from regulators, clients and top management–The Asian Banker and SAGE Financial Systems hosted in Singapore a roundtable dialogue with key wealth managers and private bankers from OCBC, Standard Chartered Bank, UBS and UOB to discuss key issues in the industry.
Participating bankers outlined as one of their most pressing general concerns the lack of proper segmentation in some aspects of the wealth management industry. This is manifested in the knee-jerk reactions by regulators who may not understand the wealth management needs of the different tiers of clients–from the unsophisticated mass-market investors to ultra-sophisticated high net worth individuals–that have led to harmful “broad-brush” regulations. While there used to be distinct regulations between mass market and private banking, where the private bank really enjoyed certain exemptions because of dealing with sophisticated investors, new regulations show that the distinction is narrowing fast.
Another key point for the bankers was that IT support for both sides of the business should be clearly differentiated and tailored to the various customer bases and business models; while the IT infrastructure remains less vital for the private banking business as long as relationship managers (RMs) have the experience to build a trusted relationship, the lack of a stronger technology component to provide support for RMs who need better resources to sell more efficiently in the mass market segment has harmed the industry as it struggled with rapid expansion. “In the mass market business, IT needs to be embedded all the way from front to back,” said Wyson Lim, head of wealth management at OCBC. “Institutionalising advisory with IT may help ensure quality of advice is not compromised.”
The industry has under-invested in technology and over-invested in RMs, particularly in the mass market areas, leaving institutions vulnerable to poaching exercises by rivals, but also squeezing their profits as new regulation extends the selling process and RMs deal with an increasingly complex marketplace. ”The advisory process for the mass affluent market is getting more and more regulated, this requires stronger support by IT solutions to manage risk and help the relationship managers to propose the right products to their clients,” added Patrick Rotzetter, chief business development officer for SAGE Group SA.
Revisiting the role of IT in the business model for wealth management means improving resources for mass market RMs in order to lighten the burden of handling risk management and compliance measures and allow them to focus on relationship building. “It has become a compliance exercise rather than a real fact-finding discovery exercise with the client, trying to help construct a portfolio for a client,” said Lim. “We may have lost the meaning of advisory.” However, IT still needs to be balanced correctly with the “human element,” and it needs to be highly customizable for the various segments and complex product needs of the industry.
A unified approach
Contrarily, participating bankers also supported a unified approach in other areas, such as regaining the confidence of clients in their ability to serve. “Restoring trust from an industry point of view–more on the mass affluent and the retail side than the private banking side–is extremely important, because if we don’t do that, if we don’t do it collectively, it would take much longer to restore trust, if at all,” said Lim.
Another unified measure was the creation of an industry lobby group or representative body to come up with codes of standards on marketing practices and incentive structures, to present industry issues and concerns to regulators, and to promote a more level cross-border playing field. “I was hoping that the crisis would be deep and hard and force us to get together to self-police at a level that made sense amongst professionals,” said Bryan Henning, global product head, wealth management, Standard Chartered Bank. “Now with the rebound, we’re all back in our holes doing the exact same things we used to do before, rather than getting together as an industry to agree on appropriate standards which will ensure sustainable growth going forward.”
Participants agreed that the business model for wealth management has been under strain due to tremendous cost and efficiency pressures, which exacerbates the need to introduce more sustainable business models and scalable processes to an industry that suffers with each downturn of the business cycle. As wealth management businesses and private banks have resumed the model of hiring RMs as they gear up for growth, wage inflation can be expected; additionally, new regulations that lengthen the time of conducting a transaction are pushing the cost of doing business higher still. Training RMs will also be a serious challenge due to the complexity of the business in Asia, which considers multiple asset classes, geographies and currencies.
Searching for new carrots
Incentive structure has been one of the most contentious issues in wealth management, just as it has in nearly all parts of the financial services industry. Clearly, certain products should not be over-incentivized, and revenue that is earned should be counted evenly across all products. Deferment for certain products will be needed; that will include clawbacks for RMs who leave before long-tenure products have matured, as would be a move to a discretionary model that is not based on just revenue or AUM, but has linkages to the performance of a team or a business unit. Even outside of the issue of RM incentives is the problem of client incentives, where the marketing of wealth management products has traditionally included incentivization by offering gifts, which has also led to wrong client behaviour.
Recent problems related to the mis-selling of structured products have been a major determinant in the entire business dynamic of the wealth management industry and have introduced troubling elements. Leveraging the media storm around the case of Lehman Brothers mini-bonds being sold to unsophisticated investors, even sophisticated clients are complaining to regulators that they should be treated the same and be given compensation for losses on structured products. Participating bankers also emphasized a need to control buyer bias towards inappropriate products that veer dangerously away from proper portfolio construction or asset and fund allocation, which can also lead to inappropriate investment strategies. Given the importance of making strong decisions with personal wealth, it is clear that better financial literacy programmes, and even “certifying” investors as sophisticated, are key measures needed to force investors to take responsibility for their investments over the long term.