Thursday, January 24, 2013

Managing an effective segmentation strategy in Asia's fragmented wealth management market

The turbulent stock markets and unprecedented regulatory changes are squeezing the profit margins of wealth managers as a result of making higher regulatory investments in processes and technology while at the same time, clients prefer to hold cash/deposits and avoid sophisticated structured products.

In Singapore especially, some of the wealth managers are either scaling down their operations by exiting certain markets or moving the back-office functions to other cheaper offshore locations.

Consequently, wealth managers are quick to downgrade/upgrade a client to a lower/higher segment when the AUM (Asset Under Management) reaches a threshold for a change in segment. While wealth managers are actively managing their costs, there is seemingly lack of a COHERENT strategy on how to deepen the client's share of wallet. With revenue from existing clients slowing down in a challenging environment, wealth managers turn to client acquisition as a strategy to raise short-term revenue without reviewing critically of the performance of its existing client segmentation strategy.

Most wealth managers segment their clients by Assets Under Management (AUM). It can either based on current or potential assets or both. According to a 2009 global private banking wealth survey by PWC, more than 80% of the respondents segment their clients by currents assets and a growing number of wealth managers are including potential assets in their segmentation strategy. This clearly reflects the recognition of revenue potential from the clients.

The growing sophistication of high net-worth clients means that segmentation by assets size is no longer sufficient. The diverse nature in which wealth is derived in Asia and the investment culture of Asians mean that new segmentation criteria are required such as investment behavioral patterns, extended client profiles and total wealth.

A complete segmentation strategy requires the development of a holistic approach based on the 2-Step Segmentation Framework. See diagram below.



The dynamic nature of segmentation means that no single criteria dominates a segmentation strategy.  Broadly, segmentation criteria are classified into 3 broad areas, namely, Financial, Customer Profile and Behavior. The holistic approach is based on the fact that wealth managers should define their segmentation strategies based on the 3 aspects of a customer. To execute the defined segmentation strategy, it must incorporate and aligned its pricing framework, products/services offering, business capabilities and organization structure together.

1) First-Step
  • Financial
The ability to accurately capture the total wealth of the client determines how the wealth manager can increase the client's share of wallet. The type of assets that are held by the client are also critical in determining how wealth manager target the right investment solution to the client. Most wealth managers are capturing the current assets of the client. However, few are able to capture the actual size and type of assets held outside the institution including those in real estate and commodities.
  • Profile
In the 2012 Asia-Pacific Wealth Management report by Capgemini and RBC, entrepreneurship and commerce were sighted as the main source of HNWI (High Networth Individual) growth. The importance of identifying source of wealth growth is more pertinent than merely focusing on source of wealth. The dynamic and diverse nature of the asian wealth market means that wealth manager must understand where wealth markets and specific industries that are experiencing high growth.

Increasingly, customer-based profiling using client key life events such as company's IPO, business acquisition/divestment, marriage, retirement to target specific client segments. Services such as estate planning, philanthropy, trust services are areas where wealth managers can leverage and extend the relationship with the client.
  • Behavior
There has been increasing interest in defining a behavioral-based segmentation. For example, Barclays Wealth is using a psychometric model in its investment profiling to determine the investment style and risk profile of the client when it comes to making investment decisions. The idea of using such model is based on studies that clients attach emotions and financial beliefs when making investment decisions. Such profiling techniques are relatively complex and have not gained much industry practice although most wealth managers agree that this is the way forward. The implications of such detailed profiling mean that wealth managers are in a unique position to establish a deeper relationship with the client and provide a very targeted investment solutions that addresses their investment objectives.

2) Second-Step

Client segmentation strategy is not just about the ability to classify the clients' attributes to accurately reflect the revenue potential. The ability to price a product/service to the right customer segment using the most effective business capability, marketing and an aligned organization holds the key to a profitable client segmentation strategy.
  • Products/Services
Whether it is a large private bank belonging to a universal banking group or a boutique private bank, the ability to define a suite of products that best matches the customer segment would not only bring down the costs of product development/maintenance but raised the profitability of the products.

    a) A structure approach to product shelf

The development of a core and satellite offering product model framework allows wealth managers to structure its suite of solutions according to the right customer segment.  This framework should be based on a combination of investment strategies against the profiled investment behavior of the client.

    b) Establishing a framework of product attributes

In the past, product attributes are merely instrument static information that provides relationship manager to search and capture a client order. However, these attributes are insufficient to ensure that the product matches the client needs. Attributes such as overall risk rating, product sophistication level, underlying asset classes (of derivatives and structured products) and investment strategies are information that supports an aligned segmentation strategy.
  • Business Capabilities
In a recent study by Scorpio Partnership and Sungard (FutureAdvisor Asia, 2012), the top 3 priorities in the development of wealth managers' business capabilities are Business Intelliegence, CRM (Client Relationship Management) and Risk Management.To be successful in increasing the share of wallet of the client, wealth managers must equipped their relationship managers with business capabilities that allow them to identify (data mining), plan and strategise (CRM) and propose the investment solution that meet the client's needs (Risk Management).

As the costs of acquiring the next dollar of the client asset increases, understanding the costs of running an effective segmentation campaign, through investment in good business intelligence capability, for example, is critical to continue growing the gross margin and reduce the cost/income ratio.
  • Organization
The third aspect to ensure top-of-the-line growth from existing clients is to organize the sales team to support the segmentation strategy. Wealth managers must recognise that there are two groups of relationship managers, namely, hunters and farmers. Hunters are those that actively seek new prospects and convert them to clients. Farmers are those that actively seek to deepen the share of wallet of existing clients. Wealth managers must not only be able to differentiate these 2 groups of relationship managers but to develop KPIs (Key Performance Indicators) that match the strength of the individual relationship managers and aligned with the appropriate segmentation strategies.

Any segmentation strategy must also take into consideration relationship managers' load balance. In the report by Scorpio Partnership and Sungard (FutureAdvisor Asia, 2012), China's number of clients per RM of 117.6 is above the global average of 85.8. Hong Kong and Singapore fared better at 49.8 and 75.3 clients per RM, respecitvely. Whilst these 2 key offshore booking centres are still below the global average, wealth managers need to strike a balance between increasing assets under management from new clients versus from existing clients. A high client/advisor will have a negative impact to the quality of service to the client.
  • Pricing
Wealth managers margins have been squeezed in the past 3 years due to increasing regulatory pressures, competition for talent and growing price sensitiveness of clients. The global financial crisis in 2008 have resulted in reduction in AUM and have subsequently forced relationship managers to give discounts without a structured consideration of the client relationship. Subsequently, exceptional approvals for waivers and deep discounts are given without due consideration to the impact on the bottom-line.

There is no one-size-fits-all model to manage pricing. A framework that establishes one's pricing model should be based on the 4Ps:

a) Pricing Strategy
Pricing Strategy defines the overall goal based on its business objectives (eg, target margin to be achieved), on how the wealth manager is going to position itself among its competitors, how it wants to be perceived by its customers and lastly how it going to achieve its objective through effective training and communication of its pricing strategy.

b) Price Establishment
Pricing establishment sets the principles in which prices are defined for its products and services. Principles includes pricing benchmarks against competitors and minimum pricing.

c) Price Management
Management of pricing includes defining discounting and approval guidelines and regular benchmarking of pricing against competitors and setting effective KPIs for products and services.

d) Pricing Data
The ability to mine pricing data from all the products and services facilitates the measurement of the effectiveness of the execution of the pricing model and allows quick fine-tuning of the policies.

In conclusion, to manage one's profit margin in a highly fragmented Asia wealth management market, a disciplined and structured approach is the key.

Thursday, October 11, 2012

Customer experience in wealth management


In a recent circular (Selling of Investment Products to Private Banking Customer, 12 June 2012) to the chief executives of financial institutions in Hong Kong, the Hong Kong Monetary Authority (HKMA) clarified some of the issues raised by the Hong Kong private banking community about the "compliance and regulatory" requirements related to the selling of investment products to high net worth individuals. Similarly, the Monetary Authority of Singapore (MAS) (26 Mar 2012, "Role of Life Insurance and Financial Advisory Services" by Managing Director, Ravi Menon), highlighted the importance of "placing the customer first".

These two recent announcements highlighted the increasing regulatory pressures placed on Asia's wealth managers to raise the standards of the advisory processes when servicing their wealthy clients. Given these challenges, the paradox of a customer experience goes against the notion that clients' needs are different and require tailored solution and services.

Customer experience does not solely lies on the final product or service that the client receives. The consistent effective delivery of a product/service to the client is the essence of customer experience. The development of a customer experience strategy needs to take into account the following.

Vision
1)  Having a clear vision and mission
Customer experience is a process of how an organization should consistently deliver a quality product/service to the client. Starbucks and Amazon are two great examples how customer experiences are delivered to the customer consistently. The products may be different across different region/countries, but the process in which the client request and receipt of the final product and service is very much consistent and predictable.

Wealth managers must have a clear vision and mission about what customer experience meant for them. One wealth manager that I know defines customer experience as a consistent and predictable advisory process where clients, regardless of which branch they visit or which RM they meet , will receive a consistent service that results in a product or service that is aligned with their risk profile and wealth planning needs.
 
2) Articulating a clear vision across the organization
Executing a successful customer experience strategy requires a clear understanding across the verticals and horizontals of the organization. Executing a customer experience strategy is not limited to those who meet or service the customers only. The middle and back office organizations are required to align with the front-office. For example, for sales team which service wealthy families and individuals, servicing requirements can be different. Understanding these differences and its impact reinforce the consistency of product and service delivery.

Channels and Technology

3) Aligning the channels strategies
Relationship manager is not the only channel that client interacts with the institution. Identifying the channels (such as internet, branch and helpdesk) and aligning their corresponding strategies with the customer experience strategy are critical for a successful implementation.

4) Impact of new technologies

The use of social media and the rapid adaptation of smartphones and tablets by RMs need to be further researched and understood to support the delivery of a consistent customer experience. The use of tablets and electronic forms to obtain clients signatories and provide online submission without handling multitude of physical forms for investments/compliance reasons serve to create a unique customer experience whilst enhancing efficiency and service standards.

Business Processes

5) Business Process Redesign
Any customer experience implementation cannot go without a review of existing business processes across the organization. However, any business process redesign should not focus on just efficiency alone. The use of LEAN or Six Sigma tools should not be used as a standalone methodology to execute a customer experience strategy. In addition to efficiency, wealth managers must take into account of the following during the redesign:

a) Customer Life Cycle
At every stage of a customer life cycle, such as prospect, a new customer, active customer and an exiting customer, customer experience must be embedded in the respective business areas and processes. This includes areas like client on-boarding, needs analysis, investment proposal/execution/review, wealth planning, just to name a few.

b) Customer Segmentation
Customer segmentation in the wealth management is critical to maximize profitability, raise ROA (Return on Assets) and efficiency. However, it is critical to apply a consistent business processes across the different customer segments even though individual tasks/activities can be variant.

c) Regulatory/Compliance
Wealth managers must continue to address the issues of risk profiling, client and investment suitabilities, KYC and AML. It is critical that these issues are addressed and incorporated into the business processes. Regulatory and compliance should not be isolated and treated as separate areas outside the scope of customer experience.

At the end of the day, executing a customer experience strategy is the beginning of a customer experience journey where the organization truly places the customer at the heart of the organization.

Monday, October 1, 2012

After working through several crises, here are my three secrets to career-planning success

It has been widely reported that Credit Suisse is moving part of its back-office operations from Singapore to cheaper locations like India and Poland. Job cuts are very much a reality of globalisation and economic cycles. Given this, career planning in financial services has never been more important.
Having been in the financial industry for over a decade, I have experienced crises like the dot-com bust, 9/11, SARS and the global financial crisis firsthand. Career planning demands a multi-faceted approach. It’s a strategic exercise involving both the external environment (growth and threats) and the internal (individual weaknesses and strengths).
Most of us are conscious of our own weaknesses and strengths. There are many corporate and government programmes that support employees in undertaking personal development plans. These are usually aimed at raising your productivity and increasing employability. However, assessing the external environment is an exercise not many of us do too often.
Career planning should always take into account the firm’s financial performance, its business strategies/goals and the general industry outlook. Here are my tips for mapping out a successful career in financial services:

1) Scratch beneath the surface

First, a proper understanding of the business environment facilitates the identification of trends and opportunities. For instance, some people assumed the sector suffered from huge cuts across all business segments after the financial crisis. This certainly wasn’t the case. For example, in the wealth management sector, family offices and external asset management companies experienced moderate to robust growth as a result of wealthy families and individuals switching their relationships away from private banks.

2) Exhaust your internal possibilities

Within a firm, various business functions grow at a different pace. While cuts go on in one area, expansion could continue in others. Internal transfers and overseas postings offer opportunities to advance your career and can provide a fresh perspective. If mobility opportunities are limited, seek out internal projects. These offer you the chance to understand and learn new processes and systems in preparation for the next wave of growth.

3) Get very social both within and without

It used to be difficult to connect to financial professionals within your current firm or externally in other financial institutions. However, with the onset of sophisticated professional social networking tools, it is now easy to reach out to your peers, not just within your country or region, but globally. These professional connections allow you to anticipate key changes and provide access to career opportunities. With a clear understanding of the industry and the right networking tools, exciting prospects for career progression are yours for the taking.


This article is re-posted in www.eFinancialcareers.sg

Friday, August 31, 2012

Impact of Family Offices and EAMs to the Private Banks in Asia

Lately, Asia has been witnessing a rising number of family offices and External Asset Managers (EAM) setting up their businesses here. Private banks here have been quick to setup EAM desks and family offices to address the challenges from these new market entries.

While these actions are to a certain extent a stop-gap strategies to address the threats from these competitors, there is a need to understand the medium to longer implications of these new entries to the existing private banks.

a) Shift to transaction and custodian services

With the attractiveness of offering independent advice, Ultra High Networth Individuals (UHNWI) and families, with net assets in excess of USD50mio, are looking towards EAMs and family offices for wealth planning, advisory and discretionary services. Future demand for private banking services by these customer segments will tend to be more transactions and custodian-related with the private banks.

b) Changes in client relationship management

With the available choices of EAMs and family offices services, some of the UHNWIs and families will tend to establish relationships with one of these institutions away from establishing relationships with multiple private banks. From the private bank perspective, EAMs and family offices will tend to be the primary contact rather than the client themselves. Client relationships for these segments, will move from a primary to a secondary role.

What is next for Private Banks?

It is not doom and gloom for private banks with the entries of EAMs and family offices. There are opportunities if the right strategies are embarked.

1) Improved execution services for products and services
To attract clients to the private banks, private banks must offer state-of-the-art execution platforms for clients, EAMs and family offices. One such area of improvement is order management. Existing platforms need to be overhauled or upgraded to reflect the growing sophistication of investment products demanded by investors. STP, transparent pricing, accurate client reporting and ease of retrocessions calculation are among the areas ripe for improvements.

2) Effective client relationship management
In the past, an effective client relationship is about how one understands the client and execute a proposal that meets the needs of the client. However, private banks can no longer ignore the importance of the social network. Private banks must incorporate some form of social network with the EAMs and family offices. This form of enterprise network allows the private bank, EAMs and family offices to link up in a B2B (business-to-business) network for prospect introduction, transactions/products enquiries and marketing. Lombard Odier, a swiss-based boutique private bank, established a social network (http://www.e-merging.com/) linking EAMs and family offices to their network.

The use of EAMs and Family Offices in Asia is still at its infancy stage compare to Europe and US. However, demand for EAMs and family offices are set to rise in the coming years and private banks must evaluate their business strategies to ride on this growth.

Friday, August 3, 2012

The "Network Effects" of successful organizations

Recently, while clearing some of my old magazines, I came across an article in Businessweek ("The Web's Walking Dead", Sep19-25, 2011 Issue) describing how some of the technology companies like Yahoo and AOL who used to be the darling of consumers and investors are now in tatters.  Other tech companies like Nokia and RIM came to my mind. While it is easy to pin the blame on poor product strategy and execution or even management, what is interesting in the article was the mentioned that these failures were due to the lack of the "network effects" that is necessary to remain successful.

Technology sector is a highly competitive one. Any one who has an great idea and a great product can market to the consumer with ease. If successful, the business will grow. But, this is the point where the similarities between a successful startup and a successful organisation stop.

So what are the "network effects" for a tech company to be successful? To understand this concept, it is easier to give a few examples. The mention of Apple, Oracle, Amazon, SAP, Cisco and Microsoft will strike cords with many of us who knows these companies for many years. There are 3 common features found across these organizations:

a) A successful suite of products backed by strong external community developers, functional and technical expertise.
If one look at the likes of SAP, Cisco or Oracle, there are many communities (across regions) to support the local sales, product and technical support because these organizations recognize that the way to expand the reach is to create opportunities for anyone to pick up the product knowledge and instantly becomes a "walking billboard" for the organization.

b) Establishment of a strong supply chain linking the suppliers to the end consumers
Apple and Amazon recognized that consumers want to acquire the best product at the most competitive price. Besides offering its own products for sale, Amazon evolves and started to look for suppliers who can offer a better pricing than itself and link it up with consumers via its website. iTunes and App Store creations help to create a global marketplace that stimulates the entrepreneurial activities that indirectly demands the products and services for sustainable growth.

c) The need to recognize that there are inherent limitations within the organization
Management is always quick to highlight successful business stories to investors and employees to boost the stock prices and company morale, respectively. But management must also recognize that there are inherent limitations in the organization that impedes the growth. Besides, organic growth or M&A, the 3rd option is to grow is explore the community by understand the intricate network that it has build and tap those opportunities.

With the rise of social media, organizations need to understand the how to bring various stakeholders together and continue to grow its business.

Tuesday, March 13, 2012

Understanding the efficiencies of wealth management front-office activities

There have been many numerous literature about how technology capabilities can increase the efficiency of the relationship managers and operational staff. However, few research have been focused on understanding the efficiencies of relationship managers.

A relationship manager generally covers (but not limited to) the following activities -
1) Prospect management and development
2) Client on-boarding
3) Client book development
4) Client servicing
5) Compliance-related activities
6) Operational issues
7) Human Resource

In addition to the usual ratios such as front/back or cost/income. It is important for organization to review a relationship manager's activities holistically and identify the amount of time spent on the various activities. The objective of such an exercise is not about removing the responsibility of the RM from performing selected activity, it is about striking a right balance and getting management to understand the complexity of managing the costs of the front-office.

Tuesday, January 31, 2012

Wealth Management - Keeping up with the regulatory challenges

Recently, Singapore launches the private banking code of conduct. A set of guidelines put up by the Association of Banks in Singapore. The code of conduct seek to define a set of standard best practices in competency and market conduct when serving HNWIs (High Net-Worth Individuals). Similarly, Hong Kong regulators are looking to refine the requirements for financial institutions in gathering evidence whether a person qualifies as a high net-worth professional investor.

With the increasing regulations imposed in key wealth management centers around the world, private banks are facing rising operational and compliance costs in meeting the higher standards in regulatory standards. While organization-wide training, technology and operational changes are necessary, sales management is also an important area on how private banks can continue to grow despite the heightened regulatory environment.


Sales managers help to identify changes to the advisory processes for the relationship managers and enhanced the overall client experience. They are the middle men who worked both with the relationship managers and the products and services teams to identify new opportunities to meet the clients' needs.

This is the key to standing out in the competition.