Getting Ahead Of The Curve

A crisis may spell opportunity, but it’s still a crisis. Look for digital acceleration and further consolidation as the post-Covid world takes shape.

Even before the novel coronavirus threw everyone’s strategic thinking into an uproar, close observers were aware that private banking faced a raft of stubborn—and interlinked—structural challenges, obscured by bullish financial markets and the wave of newly minted Asian wealth. Private banking’s digital transformation lagged that of other businesses, from travel to mortgage lending, dragging on efforts to rein in its two biggest cost items: well-remunerated relationship managers and swanky offices.

The business’s lingering 20th-if not 19th-century air put off many of the millennials and Gen-Xers who are in the process of inheriting their parents’ trillions or earning their own. And it made private banks more vulnerable to competition “from below,” mass-market brokerages that have gone online more decisively and are gunning for the lower end of private banking’s traditional $1 million-plus-liquid clientele.

“Rising markets allowed private banks to outgrow many of their problems,” McKinsey analysts concluded in a recent report on the business in Europe. “Growth was almost exclusively driven by rising assets under management (AuM).”

Covid-19 has rudely torn off the fig leaves. While equity markets rebounded from panic levels in March, assets under management are far from certain to match the steady rise of the 2010s. China this year is expected to suffer its slowest rate of growth since the Cultural Revolution, reducing the world’s most reliable flow of new wealth to a trickle. Other Asian growth markets, like India and Indonesia, will be lucky to escape recession.

On the plus side, clients who’ve grown used to piling up profits on their own trades may remember what they need private bankers for: structuring durable portfolios and strategies that maintain wealth through the generations. That’s particularly true in Asia, where the money is newest and most self-assured.

“These people have had a once-in-a-lifetime crisis twice in 12 years now,” says Bryan Henning, a Singapore-based consultant and former private bank executive at Standard Chartered and Barclay’s. “They may be getting ready to listen.”

The Essential Ingredient

The essential ingredient for success in the Covid and post-Covid World’s will be technology, close observers say. Private banking, like other service industries, has been catapulted through what was likely to be years of digital transformation in just a few months by the pandemic. McKinsey planted a signpost for where private bankers need to move earlier this year: a “Netflix-style model of service delivery: data-driven, hyper-personalized, continuous and, potentially, by subscription.”

That’s easier said than done, however, when the goal is managing high-net-worth families’ intricate financial affairs as opposed to serving up the next series to binge-watch. Private banking operations, both client-facing and back-office, have been stuck in manual for good reason; the value proposition rests on boundless investment choice and a seamless blending of financial and personal affairs under one roof. That’s tough to mechanize.

“Portfolio management software like BlackRock’s Aladdin is better suited for institutional investors who have a particular profile,” Hemming says. “For private banking clients who will invest in anything, it’s very complicated.”

Nonetheless, a few digital pioneers are ahead of the pack, and turning it to great advantage while face-to-face service is still largely on hold, says Wally Okby, senior wealth management analyst at Aite Group in Boston. “There are at least two dozen areas where the top banks are excelling, [including] client engagement, operational processes [and] estate planning,” he says. “Wealth managers that didn’t invest in technology are at the mercy of others now.”

Financing Netflixization requires deep pockets, so current trends toward industry consolidation look set to accelerate. “In 2010, you could be profitable with $20 billion in AuM,” Hemming observes. “By 2016, that was up to $40 billion. Where does it go now, with the rising costs of technology?”

McKinsey statistics underline the advantage of size. Asian private banks with more than $80 billion in AuM earn an average profit margin of 37 basis points on that sum, the firm found this year; banks below $20 billion earn a mere three basis points. Boutiques in danger of extinction are particularly numerous in Switzerland, the cradle of private banking. “There are 80 Swiss banks that have a $3 billion to $5 billion portfolio,” says Okby. “Covid-19 could force that down to 50.”  

Hanging Onto the Millennials

Getting ahead of the digital curve will help private banks with their second-most pressing longer-term problem: hanging onto customers as huge chunks of assets transfer from baby boomers to their children. Three out of five millennials, loosely defined as people born between 1981 and 1996, expressed dissatisfaction with traditional wealth managers, and 80% were thinking about using a new wave of fintechs instead, according to a global survey conducted last year by consultant Simon-Kucher & Partners. 

“The biggest thing private banks can do is focus on when assets change generational hands and other players come in with digital capabilities,” says Nalika Nanayakkara, who leads the Wealth and Asset Management practice at Ernst & Young in New York.

Online-only startups may ultimately team with private banks rather than challenge them for multimillion-scale fortunes. “You’re seeing more and more fintechs starting to rent out their platform,” says Rutger van Faassen, vice president of Consumer Lending at Informa Financial Intelligence in New York. “It’s a way to keep costs to a reasonable level.”

Mass-market wealth managers are more formidable competition, argues Nanayakkara, given their digital footprint and entree to the rising rich through 401(k)s and other workplace saving vehicles. “They build relationships with the next generation through the employer channel and bring different instruments together under the financial-wellness concept,” she says. Private banks’ dominance is safe among ultrahigh-net-worth clients, she predicts, but the megabrokerages will battle them in the “sweet spot” of $1 million to $15 million investable assets.

As private banking’s digital offering strains to keep up with the times, so will its relationship managers. RMs need to reach out to youth, but they are graying, McKinsey found; just 25% of advisers in North America are younger than 45, down from 33% in 2010. That’s not the only mismatch. While most of North America’s $30 trillion in managed wealth will soon belong to women, most advisers are men. “No wealth manager is known to have cracked the code on serving women through new and differentiated value propositions,” McKinsey concluded. 

The past decade’s asset surge kept RMs employed and in high demand. But the 2020s will see their ranks trimmed by 20% and the survivors becoming “more like integrated life/wealth coaches” as bots armed with artificial intelligence take over much of old-school investment planning, McKinsey predicts.

Half a year in, the great Covid-19 pandemic doesn’t yet look like a game changer for private banking. Financial markets rebounded even as the disease spread, heartened by unprecedented rescue efforts from governments and central banks across the globe. Private bankers are inclined to think they’ve lived through worse in the industry’s approximately 200-year history.

“Concern in the industry is very muted,” says Fabrizio Zumbo, head of European Research at Cerulli Associates. “Economists are looking for a V-shaped recovery with assets back to where they were in six to 12 months.”

But this nonchalance overlooks the pandemic’s role as a game accelerator, highlighting the challenges that the business faces and moving up the deadlines for confronting them. Private banks will survive, but not all of them.

“We’re going to have a kind of Darwinism when we finish this crisis,” Zumbo anticipates.