Times are tough for Asia’s wealth management industry, and those firms that cannot adapt to new realities look set to fall by the wayside or be swallowed up by rivals. Facing rising costs, narrowing margins and competition from independent boutiques and family offices, many private banks must change their business models, note industry players.

A central problem is that most of the income for Asian private banks comes from brokerage and leverage provision, rather than advisory or discretionary business, said Bryan Goh, Singapore-based chief investment officer at Swiss wealth manager Bordier. This is “not ideal”, he noted. “Brokerage is highly cyclical and volatile, while leverage involves capital at risk.

“The future of brokerage can be seen in the history of equity sales: low-single-digit basis point commissions,” added Goh. “The future of leverage provision can be seen in prime brokerage, where only clients of a critical size are now entertained, as their scale and profitability pay for sophisticated risk management and engagement.”

Smaller private banks are most vulnerable in the current environment, as they lack the breadth of offering and the deeper pockets of their larger peers.  

Firms that have implemented a “hybrid approach” – straddling investment banking, private banking and other areas – and treating family offices as institutions rather than individuals are better placed than most, noted a Hong Kong-based executive at a European single-family office. By definition, that means the larger banks with more universal offerings.

“Smaller private banks have an expiry date if they don’t adapt to the changing fee model,” added the executive. “They were useful in the past when they could offer products and accessibility to stock markets. But what’s their value-add now?

“They can show you some deals, but they will be smaller deals,” he added. “And if a small private bank shows you a product, you know there will be fees hidden somewhere, and if you go outside to look around for that product, you can probably find better pricing.”

There is also a threat from the other end of the size scale, with the rise of independent wealth managers in certain markets. China is a notable example, where the likes of Jupai Holdings and Noah Holdings are seeing rapid asset growth and eyeing expansion outside their domestic market. Larger private banks, such as Julius Baer, and even private equity firms – witness JD Capital – are taking note and moving to get in on the action.

One upshot of all this is that the wealth management industry is seeing a growing trend for consolidation in Asia and elsewhere. Recent examples include Coutts selling its international operations to Swiss firm Union Bancaire Privee last year and Societe Generale its Asian private bank to Singapore’s DBS in 2014. The Asian wealth arm of British bank Barclays is also now on the block.

“[The consolidation trend] will continue, as banks look at their domestic and international operations and weigh up where they should focus their strategies,” said Mark Smallwood, Asia-Pacific head of franchise development and strategic initiatives at Deutsche Asset & Wealth Management.

“We’ve seen this in the past few years, with various European banks selling off businesses in other parts of the world, including Asia,” he added. “Banks are under immense pressure to focus on their core competencies and adjust to regulatory demands on their capital base.”

Nor are the largest players immune: Credit Suisse, Deutsche Bank, HSBC and UBS have all undergone substantial restructurings of their wealth divisions in recent years.

Ultimately, ‘right-sizing’ a private bank, as with most businesses, begins with self-awareness and defining its nature and core strengths, noted Bordier's Goh. “It involves defining clearly the businesses it is in and those it will not engage in. Failure to do this will lead to over-resourcing and wastage.”

And presumably, in today’s increasingly competitive environment, to acquisition or bankrupcty.