Pivot, tweak or pounce: Strategic challenges in wealth management

Strategic challenges in wealth management

The private banking sector used to have a reputation as being rather cozy as well as lucrative. No longer. Multiple developments in the last few years have driven major change. Clients and providers alike now have dramatically different constraints and expectations. The opportunity remains to develop sound, profitable business. But clear strategic decisions are needed.

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Pivot, tweak or pounce

Private banking and wealth management have always been attractive business sectors. Wealthy individuals not only have more money, but they also require specialist investment management support, income protection and tax advice for which they are willing to pay a significant price. The numbers of such individuals are growing, despite the financial crisis, both in developed markets and particularly in high-growth emerging markets, such as Asia and Latin America. From the bank’s perspective, wealth management carries low credit risk and, as a result, requires lower regulatory capital. A high proportion of revenue comes from recurring fees. With low overheads and limited need for an extensive branch network, this adds up to traditionally profitable business. 

Change and challenges

But the wealth management business is changing and will change further in the wake of the crisis and as regulatory changes begin to bite. One significant challenge is that margins are coming under increasing pressure. While assets under management have recovered since the financial crisis in 2008, increases in adviser remuneration and other expenses have resulted in a higher cost-to income ratio. This trend is being exacerbated by current market conditions, as investors prefer capital preservation products, which generate low fees for the wealth managers.

Investors are also becoming much more demanding of their relationships with wealth managers. In a world where returns are low, assets have suffered losses and trust has been damaged, clients are far less willing to take the performance of wealth managers for granted. They want more vigorous action to generate returns; they want strong frameworks for risk management and wealth protection; and they want transparency and justification over fees and charges. They are increasingly wary of bespoke products and in-house funds; they are looking for portability and low-cost asset classes such as exchange-traded funds. The internet offers them the ability to compare the performance and costs of service providers in an instant.

On the policy and regulatory front, profound changes in attitudes to financial services are still working their way through. The industry is under greater scrutiny and greater pressure to reform itself than ever before. Traditional banking privacy is rapidly being destroyed as banking secrecy in offshore centers and in traditional private banking locations such as Luxembourg and Switzerland is being blown away by a combination of regulatory and fiscal authorities. The Foreign Account Tax Compliance Act (FATCA) will require effectively full disclosure of all accounts held by US nationals anywhere in the world. Tax authorities are increasingly extracting account information from domestic institutions and passing it over to counterparties in other jurisdictions. Specific regulatory initiatives, such as the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID) II in Europe as well as the complex set of new regulations emerging under the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US are all having serious ripple effects throughout private banking.

These pressures all increase operating costs and require extensive and expensive investment in information technology, systems and processes. The demands of compliance, reporting, more active client account management and other factors can no longer be satisfied with traditional back-office systems and low-technology customer relationship channels. 

The industry is under greater scrutiny and greater pressure to reform itself than ever before. Traditional banking privacy is rapidly being destroyed as banking secrecy in offshore centers and in traditional private banking locations such as Luxembourg and Switzerland is being blown away by a combination of regulatory and fiscal authorities.  

Strategic options

Wealth management firms that want to survive these increasing pressures and succeed in the new environment have a number of options available. The least radical, but most challenging to accomplish, would be to sustain the existing business model attempt to drive it back to acceptable profitability. This is what we term the ‘tweak’ strategy. It involves rationalizing unprofitable clients and increasing revenue per client by cross-selling a broader range of services and products. On the operations side, it means ruthlessly streamlining processes and driving up efficiency across the whole front-to-backoffice chain. It will be especially challenging to reconcile the costs of necessary investment with improving profitability and to satisfy increasing client demands while streamlining and automating the relationship.

A second approach is to look much more strategically at the future business and regulatory environment and at the longerterm requirements for success in order to reconfigure the business accordingly. We refer to this as a ‘pivot’ strategy. This may involve disposing of unprofitable businesses or client books; developing and focusing on particular niche products or market sectors where high value can be added; and perhaps changing the geographical target of operations to focus more closely on areas such as Asia, which have the most rapid growth in high-net-worth (HNW) individuals. 

Finally, churn in the marketplace is likely to increase and open up other opportunities. More stringent regulatory capital requirements may force multinational parents of private banks to dispose of assets in the course of optimizing their balance sheets, especially in the case of smaller companies where the fixed cost of implementing new regulations becomes too burdensome. On the other hand, the sector is still significantly fragmented. Industry estimates suggest that the 20 largest wealth managers, who have a little over US$11 trillion of assets under management, only account for around 10 percent of the total private wealth available to be targeted.1 The current turmoil is likely to stimulate consolidation of the industry. Those who are determined to expand their presence, especially in developing markets, should find significant opportunities to do so, but need to be prepared to act – to pounce – when necessary. 


Significant potential remains, despite the pressures facing the industry. The Boston Consulting Group estimates that over the 5-year period ending 2016, private wealth will reach US$151.2 trillion, with an overall compound annual growth rate (CAGR) of 4.2 percent.2 Within this total, growth in HNW and ultra-high-net-worth (UHNW) households is expected to be more rapid, at 6 percent and 7.5 percent, respectively. These investors are relatively more resilient than average retail investors. They have deeper pockets and access to timely and sophisticated advice, which also helps them ride out market cyclicality better. They remain an attractive prospect.

The big opportunities will increasingly be found in Latin America and in Asia. The Julius Baer Group, which currently derives one-third of its assets under management from developing markets such as these, expects this proportion to grow to over 50 percent by 2015. HNW individual wealth in Asia-Pacific region is forecast to grow at over 10 percent until 2016. More significantly, only around 17 percent of Asia’s HNW individuals have wealth management relationships with their banks. Thus, a large pool of HNW individuals remains untapped.

This is not to say that success will come easily. New regulatory requirements will mean stronger processes for risk management, customer protection and capital management. Business models will have to remain flexible and responsive to rapid changes in the global distribution of wealth. The days of easy profits in private banking may be over, and rightly so, but significant opportunities remain for those who are prepared to grasp them. 


In most Asian countries, the market share of Western banks is very low, and this has not changed much over the last 5-10 years.

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