The rewired world of private banking

In the future, private banking will include cutting edge digital tools

Gulf News

The private banking industry is undergoing significant changes. Technology, competition, economic situation and complex regulations are rapidly changing the way your wealth will be managed in times to come. Clients in the GCC will be the winners, and private banks, both international and local, will have to adapt quickly, so that they don’t risk losing client assets.

Private banking has always been about relationships and so it lagged other industries in terms of technological innovation. On the other hand, retail banks have been leading the technological innovation — starting from the development of ATMs to online banking and now to mobile banking. Private banking has been stuck in the old model of face to face contact and little online interaction. This model is set to change. The younger generation of wealthy clients prefers to be engaged with their banks through the electronic medium, with regular updates, so that they are in control of their wealth, even as they live a highflying lifestyle. Private Banks have to invest more on technology, while the private bankers will have to be on top of the information related to the clients portfolio as well as the market movements. Clients will not keep paying hefty fees year after year without getting all round value for money. Clients will start asking some tough questions on the quality of advice, portfolio performance, portfolio risk service and of course pricing. Fees will shift from transaction based to a percentage of Assets Under Management (AUM), with incentives for generating returns beyond normal market returns.

Raising their game

Client loyalty will continue, but banks will always be on the edge, because everybody else in the market will be raising their game. Technology will make price shopping easy, and also because clients will have larger contact base and are connected to various social circles. Clients will focus on consolidating their assets in fewer banks. Larger clients will have Family Offices and professional CIOs to help them in decision making. Smaller clients, with access to so much information, will also demand products and pricing which were hereto available only to large clients. Pricing will be a key driver, as most banks will be offering a similar product basket. Private banks will face a squeeze on their margins due to competition and per revenue client revenue will decline. This will force them to look at widening the private banking offering to include the middle market segment which means a larger client base with smaller per client assets under management.

The rapid onslaught of regulations since the 2008 financial crisis have ensured that Compliance and Risk departments of banks play a major role in determining what and how a private bank can offer services to its clients. The cost of keeping up with new regulations and reporting is substantially impacting profitably of banks. This function is also being supported by technology.

In the future, private banking may well include cutting edge digital tools that offer best information and execution platforms to clients, with mobile technology for giving access to real time basis. This will be complemented with plush offices, hospitality events and a very sophisticated private banker with a service team back up to give an elite personalised experience to the client.

Automated portfolio management advice

Wealth management has seen the advent of “Robo Advisors”, which have made an impact in the middle market, segments i.e. the preferred banking segment of the wealth management. A Robo Advisor provides automated portfolio management advice, without interaction with human financial planners. An estimate by Deloitte talks about USD19 billion under management of Robo Advisors, still a very small portion of the trillions of Dollars managed by the private banks. Technology will make it possible to manage a larger number of clients, with Robo advisers handling a larger portion of smaller clients.

The current mix of client portfolio in the Middle East is skewed towards Fixed Income i.e. bonds or deposits with leverage. This will change as interest rates go up and our regional credit spread discrepancies end. Private bankers will have to be more apt at advising on other asset classes such as real estate, forex as well as insurance together with a solution for succession planning. Private bankers will bring in expertise from each of these asset classes from within the bank. Leverage has become a big part of the offering for Middle East private banks and that will continue to remain. Access to some of the cheapest sources of liquidity and their ability convince their own credit and risk managers about the safety of Middle East borrowers as well as their assets will determine how and what pricing a private bank can offer on this leverage to their clients.

Leveraging client data

Big Data is set to make an impact on the way banks are changing their offering. Banks have access to huge amount of sensitive data of the client and markets, but have not been able to use it for the best advantage of the client. Banks will have to leverage this client data into trusted pinpointed advice that will blend market expertise into complex yet useful investment solutions.

Are these changes good news for the private banking industry? They definitely aren’t from the banks’ point of view but great for the clients. These changes require banks to have deep pockets, and a definite change of mindset. Only those who can change rapidly to integrate technology together with their offering, knowledge base for their client advisers and more wide spread delivery capability will get a meaningful share of clients’ wealth. Will there be a revolution in the private banking industry like the way Uber has done for the taxi industry? Unlikely, because trust and relationship will still be an important factor to keep the client engaged. Those banks who don’t understand the region quickly, expand their credit offering to cover more assets for the region, including real estate and local stock market will find it difficult to get business and will slowly risk making themselves redundant in the region.

Welcome to the next generation of private banking, The client is truly the empowered king!

Sudarshan Malpani, Managing Director, Alpen Asset Advisors Limited