Regulations and Client Expectations Change Status Quo in Wealth Management Industry, Finds PwC

NEW YORK, June 20, 2011 /PRNewswire/ -- Status quo in the private banking and wealth management industry is changing as the focus shifts to client service and value delivery, according to a new PwC report published today, which includes PwC's 2011 Global Private Banking and Wealth Management Survey. According to the report, Anticipating a New Age in Wealth Management, new competitors are challenging the dominance of established firms, and the impact of new regulations and more demanding client expectations is forcing private banks and wealth managers to change the way they operate. Those who can master change will be in a position to win increased market share and lead the industry, says PwC.

(Logo: http://photos.prnewswire.com/prnh/20100917/NY66894LOGO )

PwC's 2011 Global Private Banking and Wealth Management Survey includes responses  from a record 275 institutions in 67 countries, the largest survey since PwC began publishing the biennial report in 1993.  It found that wealth management continues to be a lucrative business with untapped potential for significant growth if institutions can be agile in adapting to changing demands.  According to the report:

• Today's wealthy clients are cautious, smart, less loyal and expect a higher level of service and clearer value.
• Regulation has become the not-so-invisible hand, increasing the cost of operations.  
• Greater operational efficiency and effectiveness are required, not just to compete ... but to survive.
• Standing still is no longer an option, and institutions must now quickly adapt or face being left behind.

The report outlines the following five key areas where private banks and wealth managers face multiple pressures:

Performance and Change

The global financial crisis and recent scandals changed the DNA of wealthy clients.  They now have higher expectations of service and value; they are more active in managing their financial affairs; and they are paying increased attention to their wealth manager's performance and reputation in regulatory compliance and risk management. PwC's survey found:

• Wealth managers' average cost-to-income ratio remains stubbornly high, at an average of 71 percent. Only 28 percent reported cost-to-income ratios of less than 60 percent, and only 9 percent also achieved revenue growth in excess of 10 percent.
• Only 13 percent of organizations rated themselves as high performing in terms of transformative change.
• Respondents see new non-traditional competitors emerging and more than 30 percent expect significant consolidation over the coming two years.

"Transformation of the wealth manager business model is overdue, and this year's report shows new urgency for change from an industry that has not needed, nor been able to, adapt swiftly in the past," said C. Steven Crosby, PwC global private banking and wealth management, Americas leader.  "We found nearly universal acceptance by senior wealth management executives that standing still is no longer an option and that there is a need for wholesale changes in the way their organizations deliver value. Those that are ahead are looking beyond the pressures of today to address operational, cultural and technology issues that are standing in the way of future growth."

Markets and Clients  

Shifting patterns of world wealth between emerging and established markets and tougher regulatory oversight present challenges for some wealth managers and opportunities for others.  PwC's research found that:

• The relative growth rates between established and emerging markets now vary significantly, which is important when looking at the maturity of global markets (both on-shore and off-shore).
• Thirty-five percent of clients now demand controls reports, and 39 percent demand evidence of compliance performance track records from their private bank/wealth manager.
• Fifty percent of client assets leave the firm on intergenerational wealth transfers in many markets.  
• Respondents cited referrals from existing clients as the biggest source of new clients and yet, only 37 percent of CEOs believe existing clients would recommend them to new potential clients.

Client Relationship Managers (CRMs) and Human Capital  

Wealth managers agree that the shortage of talent is one of the biggest barriers to future growth.  Top quality people are becoming more valuable, more difficult to source and more expensive to train.  Wealth managers need new strategies, incentives and support to attract and retain qualified professionals, with links between performance and pay becoming increasingly important.  In PwC's survey:  

• Poaching talent from competing firms remains the top means of recruiting CRMs; however, given increasing institutionalization of clients, this is becoming less effective as a way of acquiring client assets and more about acquiring the experience a CRM brings.  
• Only 23 percent of CRMs bring more than 40 percent of client assets with them when changing jobs.  
• Forty percent of respondents rated their CRMs as only average or below in terms of their ability to meet client needs.
• Thirty-two percent of respondents said the main reason CRMs left their organization in the past two years was that they were encouraged to leave because of underperformance in their job.
• While 81 percent of respondents think their firm's relationship managers greatly understand clients' investment objectives, only 56 percent agree that they have a full grasp of clients' overall financial goals, retirement income planning needs (34 percent) or extended family issues (26 percent).
• Only 17 percent of respondents said their CRMs currently have an established relationship with the likely heirs of their clients, and intergenerational relationships will be key to institutionalizing assets.  
• The most profitable firms have, on average, far lower ratios of clients per CRM.  In the wealth bands between US $5 million and $10 million, there are 54 clients per CRM, but for those institutions with the lowest cost-to-income ratios there are only 26 clients per CRM.  

"The dynamics of global change are significant," added Crosby.  "Financial centers, market players, strategies and approaches are all shifting and evolving. Agility and client focus will determine the market leader of the post-crisis landscape.  Using technology intelligently will be key to staying relevant to clients."

Operations and Technology

Respondents are at different stages of their operational evolution. Many continue to run legacy systems and manual processes. Technology budgets are being directed to better support client relationship managers and the front-end client experience. In our survey:

• Only 17 percent of participants rated their front-office systems as excellent.
• Large financial organizations highlighted untapped revenue potential through increased collaboration and referrals from other business units within their organizations.  
• Sixty percent of respondents said their technology budgets have risen in the past two years, and 42 percent of respondents have increased their operational budgets.
• The infrastructure requirements of regulatory compliance create opportunities for technology firms and outsource service providers.

Risk Management and Regulation

The global wealth management industry is at the forefront of regulatory change, and wealth management firms are upgrading risk management systems and processes to better align risk and value.  They expect cross border standards, more stringent oversight of customer protections and demands for greater transparency will affect every aspect of the front-end client experience and increase costs.   PwC's survey found:

• Increased regulation and associated cost was cited as the No.1 challenge to business growth.
• Thirty percent of participants indicated that the regulatory environment will have a significant impact on their operating costs.
• Reputational risk was viewed as the top risk to the organization, ahead of ahead of market, credit and operational risk.
• Forty-one percent of CRMs were rated as having average or below average ability to meet client risk management and regulatory requirements.  
• Seventy-one percent of respondents have reviewed their risk management frameworks within the past six months.
• Despite the adverse financial impact, 57 percent of CEOs surveyed believe the new regulations are beneficial.

About the PricewaterhouseCoopers Global Private Banking and Wealth Management Survey

The PwC Global Private Banking and Wealth Management Survey was conducted between December 2010 and April 2011. Survey questionnaires were open to members of the private banking and wealth management community, and completed by 275 institutions in 67 countries, including 62 percent from Europe, 24 percent from the Americas and 14 percent from the Asia-Pacific region. The survey is not sponsored by any third party is part of PwC's thought leadership to the financial services industry.  Please visit www.pwc.com/wealth.

About the PwC Network

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

SOURCE PwC