Talent, product and customer segmentation are the key levers a private wealth firm can pull to decide on its business strategy, according to Sridhar Srinivasan, partner & India head at consulting firm Oliver Wyman.
Targeting white space
Oliver Wyman’s 2012 ‘Targeting the White Space’ report estimated emerging Asia had US$11 trillion of unmanaged wealth, making it the battlefield for growth in wealth management.
The proportion of wealth that is ‘managed’ is very low in Asia compared to developed wealth management markets. “That is the hope for the future. The percentage of managed wealth to total wealth is so small that at some point there is going to be an inflection,” says Srinivasan.
Most global private banks have focused their efforts on the UHNW and upper HNW segments, on the assumption that these segments allow them to offer integrated solutions across wealth, capital markets and investment banking. Meanwhile, premier banks have covered the affluent segment onshore with a ‘retail-plus’ type of offering.
Therefore, the US$1-5 million segment, which the report labeled ‘core-wealth’, was underserved. This lack of coverage is due to gaps in the current capabilities. Premier banks lack the people, product and service capabilities while private banks, while in possession of the required products and skills, lack processes and system capabilities to handle increased volumes in terms of clients, transactions or RMs.
Private banks have focused on UHNW clients due to an inability to cater for the less wealth cost effectively. This has made the UHNW segment highly competed with low differentiation and low margins.
Some banks are starting to focus on this core-wealth or lower end of the HNW segment. For example, JP Morgan Private Bank started a division to focus on the sub-US$10 million. Standard Chartered aligned its Priority, Private Bank and SME businesses under a ‘High Value Client initiative’ to cross-sell the franchise. Citibank launched the Citigold Private Clients initiative for the US$1 million segment.
Levers for success
The Oliver Wyman report discusses eight levers to success in this HNW segment:
- People: Apply more robust processes to talent development and retention
- Segmentation: Align client segmentation with RM career paths
- Product: Move from bespoke production to bespoke delivery
- Service: Deliver scalable solutions in wealth planning, tax, property and lifestyle, using client data-mining to predict buying patterns and needs
- Pricing: Increase internal governance (for example RM pricing behaviour) and base pricing on profitability and client value
- Processes: Create sales force tools and processes to engage clients at “moments of truth” and consistently deliver sales through deep institutional client-knowledge
- Operations: Deliver a unified platform focused on enabling sales and client insight through a client relationship management (CRM) system across banking and investments
- Brand: Deliver a differentiated brand with quality and innovation as core brand messages
Srinivasan believes the top three for the Indian market are people, segmentation and product.
The report highlights that the ‘grow-at-all-costs’ philosophy in many organisations had created inflated cost bases. While organisations aim to attract top-sales talent, few know precisely what they are looking for. RMs in the HNW+ segments currently take, on average, five years to reach full productivity but the high turnover rate means this point is rarely reached.
Mass affluent segment requires a radically different approach to talent acquisition, development and management. The capacity to attract superstar RMs is, at best, limited to a few organisations. So organisations should focus on consistent recruitment process.
Increasing RM productivity is important to achieving sustained growth. The use of forced performance distribution across key performance indicators identifies top-performers and best practices as well as the training or coaching needs of low performers.
Consistency and discipline are key as the talent model moves from poaching to long-term talent creation, maximisation and retention.
Segmentation is still largely neglected in Asia and is driven by compliance (teams focused on geographies and client wealth levels). However, the core-wealth segment requires more effective segmentation due to the higher volume of clients and a higher ratio of clients per RM.
The key difference in this segment is that the number of clients is large enough to justify dedicating teams to specific segments. Segmentation should be linked to RM skills and training. For example, RMs targeting entrepreneurs require a deeper knowledge of corporate finance.
Srinivasan said the Indian market still needs to learn to do segmentation: “Wealth managers in India don’t do client segmentation and indiscriminately chase every segment. It is an AUM game currently in the hope of making money in three years or so.”
In the mass affluent segment, product has historically not been as significant a differentiator as it is for UHNW clients.
Oliver Wyman believes that the core wealth segment expects guided product architecture and model portfolios, are receptive to well positioned advice and clearly connected to their objectives, are less price sensitive than the UHNW and HNW+ segments and expect connectivity across lending, cash management and investments to understand their total financial situation and reporting needs.
The report suggests organisations should consider moving from bespoke construction to bespoke delivery – i.e. from manufacturing (product/portfolio construction) to distribution (advice and sales processes).
This will place more emphasis on the client engagement skills of RMs and client-segment based proposition design.
Again, the Indian market is way behind. “Much of what is being done in wealth management in India is peddling of mutual funds. There isn’t really any distinctive advisory. All advisers go around saying they are advisors, even though they may not be very insightful,” says Srinivasan.
Firms focusing on the more than US$ 5 million segment need to have a clearly differentiated product platform, perhaps a combination of open architecture and in-house manufactured products.
Some Indian firms have chosen to adopt the manufacturing route by developing niche strategies in high margin growth asset classes. “The own products of these wealth advisors have performed well despite difficult past 3-4 years. That I think is a good story,” says Srinivasan.
Start with your DNA
While picking the three key levers of people, segmentation and product, Srinivasan stresses that the strategy for each firm would depend on their starting point and their own DNA. “For Credit Suisse, private wealth is at the core of its strategy and everything else just exists for them. For someone like Standard Chartered Bank, wealth management is an extension of the other businesses they do,” he explained with examples.
The ‘sweet spot’ for a foreign bank in India would be different from an independent private wealth manager. Global banks have the resources to do lending, which an independent wealth manager cannot do.
Similarly, “if you don’t have product manufacturing, then what’s your sweet spot? I would say, it is not that middle part. It is probably lower. If you start going to people with more than US$ 5 million, you need to have your own products,” says Srinivasan.