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MARKETS & INVESTING | Tony Chua, Hong Kong
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Trust trumps investment performance for high net worth individuals

Need arises for ensuring steady supply of private bankers as focus shifts to Asia.

What matters most to Asia’s high net worth individuals now is having quality relationship managers. Not surprisingly, particularly given the current weak investment market conditions, the emphasis on investment performance has given way to the need for higher quality advice built within comprehensive and integrated wealth management planning solutions which meet individual clients’ circumstances. These findings were revealed in the Asia Pacific findings of the PwC 2011 Global Private Banking and Wealth Management Survey.

According to the 43 companies across eight countries in Asia who participated in the biennial study, the region’s well-heeled clients remain cautious about the service and advice they received from their private bankers. Only 18% of the private bankers from Asia’s top financial centres - Singapore and Hong Kong - believe that they have attained “trusted advisory” status with 60% of more of their clients.

“Trust remains an elusive goal for many of the financial institutions in the post-global financial crisis years. Many of the private banks are still bearing the brunt of the reactions to the industry. Although we’re seeing a greater shift in focus to Asia, especially with the tough economic climate in Europe and the US, wealth managers in Asia can no longer expect the old rules to apply. The game has changed and the next two years present a window of opportunity for private banks to regain lost trust and make good the promises made. Leading private banks in Asia have already embarked on this journey by working closely with their regulators,” says Justin Ong, PwC Private Banking and Wealth Management Leader for Asia Pacific.

People
Service issues of the past need to be dealt with at all levels. Client servicing is being re-evaluated and feedback from participants in the PwC survey is that relationship managers need to expand their knowledge beyond "run-of-the-mill" capabilities. Understanding client's behavioural preferences (as opposed to professed preferences), having a more professional grasp of tax issues, and better risk management and regulatory accountabilities will be key reputation differentiators.

However, the talent pool in Asia is still considerably youthful. According to the survey participants, 55% of relationship managers in Asia have less than five years of experience. Only 21% have more than ten years of experience.

Poaching is still the dominant approach to recruitment but in reality, this strategy needs deep scrutiny given findings from the recent survey.

The single biggest reason why relationship managers leave a private bank is because of being asked to leave for under performance (52% of banks and 68% of respondents from Singapore and Hong Kong quote this as the main reason)

Clients are also becoming less sticky with their relationship managers. The proportion of assets under management (AUM) a relationship manager brings into a private bank is reducing. Currently only 25% of relationship managers in Hong Kong and Singapore are able to bring more than 60% of their AUM to their new employer. This is much lower than the amount a relationship manager was perceived to be able to bring in several years ago.

Performance and Change
Securing sustainable growth will be paramount in Asia in the next two years as revenue growth projections far outstrip the global average of 15%, and more than double that in the Americas and Europe, Middle East and Africa (EMEA).

With the current stress in the global economy and the uncertainty even in Asia, performance will still be under pressure but the scope for cost cutting will be limited. Many of the private banks have been embarking on the journey to transform business and operating models to deliver the desired results.

44% of the banks surveyed believe they are only able to further reduce operating costs by less than 5%, having already trimmed operating costs over the last few years.

In Asia, cost-to-income ratios have already been lowered by 12%, from 91% in 2010 to an expected 79% by end-in 2011.

“Excessive regulation and increased cost of compliance such as suitability requirements, the Foreign Account Tax Compliance Act (FATCA), anti-money laundering and other compliance requirements are a risk to private banks and a challenge to business growth. There is the sense that this risk will continue to rise, especially in some markets where private banking activities are increasingly being placed in the same bucket as retail and the lack of differentiation will create asset outflows from the industry. Achieving both revenue growth and managing the bottom line has always presented a tough call, and no doubt the uncertainty brought on by a challenging global economic environment will stretch the tension further,” says Emily Lam, PwC Private Banking Advisory Services Partner for Hong Kong.

Longer term growth opportunities
A more fundamental transformation of the private banking business around clients in Asia is needed to tap the market for growth. Currently, the majority of the private banks in Asia rarely or only sometime charge clients for advice. Moving revenue model away from transactional activity remain a difficult goal.

Investment advisory services and execution-led brokerage remain the largest components of revenue today (42%)
Revenue from discretionary mandates is still only 12% of total revenue although it is expected to show the largest increase in contribution to revenue over the next two years.

Client referrals, third parties and group cross-referrals are the largest sources of new clients now and going forward. There is a need to develop the referral network internally as well as externally to stay in the game
Entrepreneurs remain the largest component of client base, followed by wealthy families and inheritors. Family office clients, who represent only 10% or less of the total revenue and AUM of most of the private banks in Asia, remain elusive as a market.

However, as the Asian wealth continues its growth trend, both Hong Kong and Singapore will be seen as important financial centres for any private bank looking to establish a foothold in the region. The success of Asia as a wealth management hub will remain balanced on many factors, not least among them a strong robust regulatory environment, transparency and customer protection which is already apparent, but also the need to ensure that there is a ready supply of quality private bankers.

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