Almost a decade after the global financial crisis, private banking in Asia is at a tipping point. Francesco de Ferrari, Credit Suisse's Head of Private Banking Asia Pacific and CEO Southeast Asia & Frontier Markets, reveals the challenges private banks in Asia are facing over the next decade and how they must evolve to ensure their future success.
Singapore and Hong Kong are predicted to attract wealth from abroad at more than twice the pace of Switzerland over the next four years. Offshore assets in Singapore are forecast to increase by an average rate of eight per cent a year until 2021. And with Switzerland’s offshore assets set to grow by just three per cent annually over the same period, Singapore is in a prime position to challenge the European nation as the world’s leading offshore wealth management hub.
However, to take full advantage of this opportunity, Singapore’s private banking sector must adapt to the changing environment and meet the increasing demand. Credit Suisse’s de Ferrari discusses the key trends driving this evolution and what private banks in Asia must do to thrive.
How has Asia’s private banking sector changed in the last decade?
It’s been 10 years since the financial crisis. The private banking industry in Asia has undergone some dramatic shifts driven by regulatory reforms and changing stakeholder expectations.
Asia represents a third of global wealth. However, despite this massive opportunity, we have seen at least eight mergers and acquisitions taking place in the past few years with many global private banking players leaving the region.
Both international banks that do not have private banking as their core business, and pure private banks, have come to their own conclusions on where to focus their increasingly constrained resources and capital as well as their geographical footprint. Private banking as a peripheral business is clearly not sustainable in this operating environment with the challenging complexities and escalating cost of doing business.
Demands on banks in terms of investment suitability, tightening governance and processes around transparency and fee disclosure, as well as know-your-customer, anti-money laundering and tax transparency have continued to escalate. This has required significant investments and resources to step up internal risk culture and controls.
What are the key challenges facing the private banking sector over the next decade?
The key challenges we face as an industry are restoring and rebuilding the trust of clients that has been eroded since the financial crisis, adapting to the new cross-border regulatory and operating environment under the Automatic Exchange of Information (AEOI) global standards, and ensuring we continue to deliver value of international wealth management to our regional clients.
AEOI should result in a level playing field for all financial centres. As the preferred wealth management centre for regional clients, Singapore has a distinct competitive edge. But it is an advantage we need to preserve through continuously enhancing our value proposition in terms of the quality of our talent and advisory as well as the sophisticated global products and solutions platform we offer. We need to harness technology to deliver the next level of client services and solutions.
At the same time, onshore wealth will continue to grow at a faster pace than offshore. However, accessing onshore wealth across Asia is not simple. To effectively serve the region’s diverse wealth pools, complex private banking operating models are required. These will need to efficiently combine both offshore and onshore platforms while taking into account the end clients’ diverse personal and corporate needs.
How will wealth transfer and the next generation impact private banking?
According to the Credit Suisse Research Institute recent report on Family Business Model, 80% of the region’s new wealth is created by first and second generation entrepreneurs, and this remains the sweet spot for wealth managers.
World Bank Statistics show that every 10 years Asia creates around half a billion new middle class consumers. This long-term growth in middle class wealth presents massive opportunities for businesses in Asia targeting young consumers. Behind these businesses are first- or second-generation entrepreneurs who are the main beneficiaries of this huge economic uplift in Asia.
The private banking business model has to be highly correlated to where these clients are in the cycle of wealth creation in Asia. Private Banks need to effectively serve the current and future generation of clients throughout their entrepreneurial lifecycle. This includes the inception of their business, expansion, consolidation and the handing over of both the family business and wealth to the next generation. At the same time, private banks also needs to provide these entrepreneurs with integrated wealth management and corporate finance solutions for both their corporate and personal needs.
In our view, the business model that is best suited to Asian clients’ needs is the integrated bank with Private Banking as its core DNA and also strong Investment Banking capabilities. If a bank is present at the client’s wealth creation moments, it is easier to become their trusted advisor in the management of the proceeds in the mid to long term.
Concurrently, many of the world’s wealthiest individuals are also approaching retirement and starting to implement their wealth succession plans. However, many wealthy families in Asia do not feel they are adequately prepared for generational transfer of family wealth. As such, there is tremendous opportunity for private banks to help their clients navigate this transition successfully.
How are customer service models changing and why?
Technology, clients and regulatory expectations are transforming the traditional private banking customer service model.
Banking customers are increasingly using digital channels to contact their bank, execute trades and purchase financial products. We must enable and empower our clients to process an overload of data and invite them to engage with us when it comes to complex decisions. Banks which are capable of capturing the complexity of wealth management in an intelligent digitalized and user-friendly way will benefit from a tremendous competitive advantage.
Technology and digitalisation of private banking has far-reaching implications in terms of content management and curation of information for clients. Private banks must think in vastly different ways in terms of managing clients’ onboarding and the whole life cycle of their wealth management needs.
Clients’ wealth management needs and investment preferences are also undergoing longer-term shifts that are conducive to the development of a more transparent and fee-based managed investment approach.
With the investment environment becoming more complex and financial markets becoming more volatile, clients are increasingly recognising the value of moving from an over-emphasis on single security selections to more diversified asset allocation. They are acknowledging that it is more challenging to manage investment portfolios on their own and are more willing to delegate to professional managers.
The rise of Fintech is also accelerating these changes, with the commoditisation of the traditional asset allocation advice model by Fintech players impacting investors’ expectations around fee transparency.
These are positive developments for the financial industry. They bring us back to our fundamental role as wealth managers – to help clients become better at investing their money. As a result, the Asian private banking service model will need to move from traditionally advising clients on single transactions to advising clients on their wider strategic asset allocation, which statistically accounts for 70 per cent of overall performance.
Private banks will increasingly move to a service model where clients pay us for the relationship and the advisory, rather than the transaction. It will be a service model based on transparency in fees and clearly defined service levels, where the client and the bank’s interests are aligned.
How should private bankers in Asia prepare themselves for these trends?
We must proactively embrace and drive change, maintain a mind-set of continuous learning and professional development, and refresh our skill sets and knowledge, in order to stay relevant and deliver true value in the face of changing demographics and client expectations.
Leadership and teamwork are also increasingly critical. Given the extent of change we all need to drive through our organisations, we need to ensure our managers are committed to their leadership responsibilities. Communication and staying close to our people is of utmost importance. We all need to act as change agents, to fully understand what we want to do collectively and feel individually empowered to make changes in our own area of responsibility.
Private banking used to be a much more individual sport, but there is now an increasing focus on teamwork and collaboration. As a private banker, you need to be able to coordinate across divisions and specialist groups to bring the full breadth and depth of knowledge to clients.
Finally, with the continued scarcity of private banking talent in a nascent market, we will need more managers who are passionate about growing our own talent from within the organisation.
To learn more about how you can prepare for the impact of Fintech and other skills needed for the future of finance, visit IBF.