James Edsberg, Gulland Padfield
Today’s private banks face an unprecedented convergence of pressures from three directions. Each requires management teams to respond by creating the culture and capability inside their organisation to align their business around the clients they can best serve.
Pressure on the Client - RM relationship
The profile of the wealth management client has evolved profoundly over the last decade. All the evidence suggests that client needs and expectations will continue to change in almost all segments. And the evidence from inside banks of higher turnover of client-advisor relationships suggests that institutions aren’t keeping up. Clients are more ‘multi-banked’ than ever before. They continue to reduce the proportion of assets they are willing to commit to a single provider. In a flat, weak and uncertain market the sector is experiencing more client defections arising from poor client service than from weak portfolio performance. Today’s clients are more closely scrutinising of what constitutes ‘value’ as they become savvier, better informed and expect loyalty to be rewarded.
Increased pressure from competitors:
Many of the leading global players have yet to take the systemic leap towards a client centric business model. Yes, the task of identifying where they can build loyalty and deepen client relationships has started but in many of the best brands it is far from complete. Competitive pressure is coming from developments in the several areas. First, and after years of poor analysis and experimentation banks are improving their approach to workable segmentation. You can’t be client centric unless you have identified which clients are the ones you should serve. Better CRM analysis and market studies are helping. Second, the heat from competitors in the war for talent is intense. Nowhere is this more apparent that in Asia where creating and hiring high quality of talent is a major issue. Third, again after years of neglect and client and RM frustrations, firms are investing in their technology infrastructure and reporting platforms. Fourth, several are also focusing on better pricing discipline by RMs. In some players, this has been shown to improve margins by 5 – 12bps over 6 months.
Senior management is under renewed pressure to make tough decisions:
The single greatest challenge on the business is how to balance the costs of delivering high levels of client service with efficiency and scalability. To some, a strategy of client centricity directly conflicts with the needs of the business to be scalable. It needn’t. The answers to where, how and why to shape the business model lie in a deeper understanding of your chosen segments. The need to adapt operating models to meet new and changing regulation compounds this scalability challenge. In a recent study, CEOs estimated regulation has consumed 10 - 20% of turnover in their businesses.
Busting three myths about Client Centricity:
Client focus has never been more important than it is today. And the term ‘Client Centric’ in the last 18 months has now become a familiar part of the lexicon of strategy. But it’s worth pointing out some common misconceptions which can lead those who want to deliver it, down a dead end.
Myth 1: Client focus means paying attention to any client and every client.
It doesn’t. Being client centric means focusing on the right clients for you and your business. As one executive of a leading global bank puts it, “By trying to do everything for everyone, we realized we weren’t doing anything for anyone.” The step before better client focus should always be better client segmentation.
Myth 2: Client focus is synonymous with client service.
For too long, the delivery of client focus was seen as the exclusive responsibility of the CMO and the RMs. But until client focus is seen as something which touches all parts of the organization, the alignment which clients require, and the scalability which executives want to achieve, will take longer and be less effective.
Myth 3: All elements of the client’s service experience are the same.
They’re not. The trick is to know which elements of service you should focus on and which truly drive loyalty in different segments and markets.
A framework to define and create the Client Centric Private Bank
Given these challenges, how should Private Banks transform their performance and profitability through a client centric approach to strategy?
Our research over the last 12 years among the management teams of leading wealth management firms suggests that they value a over-arching framework to tackle how they deliver profound client focus to their organisation. Our analysis of the leading players suggest that there are 6 areas of the bank which, when aligned to its clients and markets, drive transformation across the strategic planning and implementation, structure and operations through to the firms culture remuneration and brand.
We developed this framework into an on-line diagnostic which enables executives to plan, prioritise and analyse in real time the six drivers of Client Centric profitability for their own institutions and compare their progress against an anonymised benchmark of comparable firms in the industry. The diagnostic comprises 12 questions, takes 5 minutes to complete and is publicly available online at www.clientcentricindex.com
Taking the first steps towards Client Centric transformation – 3 critical initiatives for Private Banks
The results from the Client Centric Index give a fascinating snapshot of how the industry globally is responding to the pressures on it. Specifically, it has identified three critical initiatives which Private Banks should focus on among others, to become Client Centric:
1. Close the ‘insight gap’ as a catalyst to Client Centric transformation
There is a lack of high quality market and client analysis inside Private Banks. Data inside banks tends to focus on which clients buy what products. That fact that satisfied clients switch demonstrates the need for fresh approach to understanding client relationships. Firms can make better use of the valuable time spent engaging with the client. The right kind of research (i) identifies client’s needs today and in the future (ii) uncovers what drives client loyalty (iii) identifies clients at risk of defecting, and (iv) highlights opportunities to deepen relationships.
2. Define your client segmentation strategy
Increasing share of wallet will not come from building any and every relationship but from targeting the right client segments for your business strategy. Comprehensive client insight will help build more accurate client segments that go beyond arbitrary geo-demographic categories and traditional wealth band segmentation. Although it is a challenge to develop a segmentation strategy across a complex bank, more can be done to take account of other drivers of client decisions, including behaviours, evolving client needs, risk appetite and profitability.
3. Simplify and rationalise product offerings
The boom times saw a period of sustained product proliferation for banks. There was too much trial and error. This ‘guesswork binge’ has left banks with 100s sometimes 1000s of product lines many with a tiny number of costly-to-serve clients in each. A more considered and client focused approach is needed to product development to ensure great profitability. Research shows that there is a positive correlation between the proportion of new product ideas rejected and overall profitability of a business. The successful institutions are shaping products specifically for each target client segments – and trialing concepts in the market pre-launch and reducing speed to market.