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09/11/2013

Value creation in Private Banking

Between 2011 and 2012 the global population of HNWI's increased by 9,2% and reached 12 million individuals. In 2011, for the first time, most millionaires lived in Asia, followed by North-America and Europe. In 2012, Global HNWI wealth increased by 10% to a record $46.2 trillion. With the positive performances of equities in the developed economies in the first half of 2013, we can expect yet another record high at the end of the year. However, bottom-line results at private banks, especially in Western-Europe, still lag behind.

In a context of increasing regulation, low interest rates and low client risk appetite due to volatile capital markets, private banks find it difficult to boost their profitability. Initiatives to reduce costs by rationalizing operations have been launched; yet a more important change in the business model is needed. A new generation of clients with different attitudes towards private banking needs, different communication habits etc., pushes private banks to rethink their value proposition. Therefore the real challenge for private banks today is to increase the overall value perception of their services.

Aligning the business model to client needs

Traditionally, client segmentation by private banks is focused on wealth levels, which assumes that clients with similar assets have similar needs and expectations. Yet, the needs of a client evolve along his life cycle. The entrepreneur segment, for instance, will require a broader product range, like private investment and corporate finance solutions, at different moments in time and through different channels. Private Banks need to go further in their effort to capture and analysis these needs. To meet these requirements in an efficient way, services and products need to be delivered these in a seamless way across business units. By applying lean techniques to eliminate waste in end-to-end processes the needs of the client can be addressed more directly and in a cost-efficient way. Universal banks can benefit from their scale by setting up shared services for operations, risk management and IT functions. Whatever the operation model a private bank adopts, it should be characterized by a clear accountability for process owners, supported by an incentive structure which should boast a culture centered on operational and service excellence.

New technologies form a great lever to to manage the client relationship throughout the entire sales process and the client's life cycle, especially with regard to knowledge management. To provide tailored advice, CRM's must be supported by tools that offer an integrated 360-degree view of his clients. Moreover digitalization induces important cost efficiencies by replacing redundant or slower processes. The CRM's remain the most valuable assets to create value for the clients as they are their central point of contact.

Investing in human capital

In today's shift to a client centric wealth management, CRM's are required to offer a broad scope of offers and services to a more demanding client. CRM's are pushed to increase their knowledge as well as being more productive. It is therefore crucial to provide an excellent framework to support and empower the CRMs by building strong support networks, aligning the compensation strategy to the firm's long-term growth goals and providing extensive training programs. This is particularly important with regard to talent scarcity which has lead to growing compensation demands of both CRM's and specialists and therefore smaller margins. The high turnover rate of CRMs (10 years or less on average) heightens the risk of customer attrition and demands continuous re-investment in training of young potentials. This problem has to be tackled by the root by effectively managing the recruitment process.

When servicing a particular segment, the choice of which CRM to assign to which client is paramount. The benefit of segmenting CRM's is that they can build expertise and develop business for a specific client-group. Therefore, CRM training and compensation criteria should be clearly linked with the needs of the segment he is serving. As the demand for specific expertise (fiscal specialists, philanthropy advisors...) is becoming more important due to changing client demands, the role of the specialists in the organization will also depend on the type of segment that is served. In a CRM-lead model the CRM is best fitted to serving the client's needs with expertise being provided through a centralized specialist team. For clients who demand direct interaction with specialists, a team-lead model with a dedicated team of specialists is better suited.

Managing the reputation through risk management

As worries are rising about the impact of implementing complex regulatory changes on operating costs, an equally pressing issue is the impact on clients. Cross-border regulation, client protection, transparency requirements, product suitability... have a direct impact on client satisfaction. Historically risk management in private banking was confined in managing the clients' investment risk. Now, building an effective risk management framework is critical with regard to a private bank's reputation.

Firstly, risk management needs to be embedded firmly in the organization instead of organized in silo's, with no direct link to day-to-day operations. An effective risk management that answers to the expectations of clients should be in line with private bank's strategic objectives. This means that business risk indicators should be linked with strategic KPI's. Secondly, poor risk management when selecting products is by far the most detrimental to client trust. With an expanding product offer (lending, alternative investments) more complexity is introduced which requires better risk management. This is in line with expectations from regulators, the Markets in Financial Instruments Directive (MiFID) requires a Know Your Client (KYC) policy to ensure suitability of products and services for clients. It makes sense for wealth managers to ensure client reporting is as sophisticated as the product that is covered. Finally, appropriate training of CRM's is needed to help them making the right decision when structuring client's portfolio'. If CRM's don't fully grasp the risk entailed in a certain product, the client relationship is also at risk.

Building a distinctive brand on a strong value proposition

The value proposition is a clear way to differentiate oneself towards the customer. Through segmentation, customized value propositions can be launched that act on the specificities of a certain customer group. Therefore customer experience must be defined for different stages in the customer lifecycle. This can be done by assessing the impact of a value proposition on different segments. The use of digital channels can be a strong differentiator both by adding value to the client but also by improving the internal operational performance. Mobile technology and social media need to be factored in when developing client services, especially when focusing on new-generation clients. Mobile access to data will enhance the client's experience while interactive technologies create a new way to communicate with clients, but also offer strong tools for spreading knowledge internally. With more automation in processes, CRM's can allocate their time more effectively. Access to deep analytics can help them to focus on the right activities.

The capacity to deliver a fully integrated offer in an efficient way is where value can be created for client. With a high correlation between brand reputation and choice of private bank, the brand has to be associated with the value proposition. Brands should be managed consistently across all segments by appointing a brand manager, responsible for creating a storyline across the business. If the brand has to be carried consistently towards the clients, the CRM's are its prime ambassadors. Moreover it creates opportunities to tie CRM's to the private bank, which is an important challenge if you look at the increasing mobility of CRM's.

Sia Partners

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