Scale may be increasingly important in private banking, but smaller wealth managers with focused offerings and strong discretionary businesses will be able to survive, argued industry observers. In turn, size alone will not guarantee success, they added; firms must also adapt to technological changes.

“It’s not just size [that counts], but what lies within,” said Vineet Vohra, Singapore-based practice leader at Arete Financial Partners, a management consulting and investment advisory firm. “For banks managing mainly discretionary portfolios, it’s possible to do business with relatively low assets under management. Firms with just $5 billion to $10 billion can have a stable, viable existence.”

This goes against conventional wisdom, which suggests private banks in Asia now need at least $30 billion in AUM in the region to survive. This is partly because a larger asset base helps cover the ever-rising cost of compliance.

Advisory v. discretionary costs

However, compliance costs are substantially higher for advisory portfolios than discretionary ones, noted Vohra, who has worked in wealth management at HSBC, ANZ and Citi.

Advisory operations entail recommending investments and trades to clients, which requires a large team and stringent suitability checks. Discretionary portfolio management (DPM) business needs fewer staff, because investments are made within pre-agreed parameters without needing confirmation from the client on every transaction.

Vineet Vohra, Arete

Swiss firms Lombard Odier and Pictet, for instance, are heavily focused on DPM, said industry observers, so both are viewed as small but viable private banks in Asia.

However, most private banks operating in the region generate the biggest chunk of their revenues from advising clients and trade execution. But such business is facing growing competition from digital trading platforms, which has driven down fees.

The rise of external asset managers and multi-family offices is another trend that has led to increasing competition and smaller margins for private banks in Asia.

Quest for higher income

In recent years, in the quest for higher fees, private banks have made a concerted push towards a combination of advisory and DPM business.

“With the cost of business going up, private banks are getting selective about clients,” said Steven Seow, Asia head of wealth management at consultancy Mercer.

Banks are increasingly focusing on offering more bespoke services to wealthier clients, as doing so is particularly cost-efficient. “As a percentage of assets, the basis-point spent on servicing a $10 million account is lower than on a $1 million account,” said Vohra.

So far, however, progress has been slow. DPM as a proportion of AUM in Asia remains quite low – at around 10-20% – for most private banks in the region.

One key reason for that is most Asian private clients tend to be first-generation, self-made entrepreneurs who want full control over their investment decisions. However, the next generation of Asian wealthy is expected to take a more favourable view of handing money to professional managers.

Consolidation set to continue

In the meantime, consolidation is expected to continue apace given current market and regulatory conditions.

“The ones that will find it toughest to survive will be those with predominantly advisory offerings," said Vohra, "as these involve higher compliance costs.”

Indeed, most recent sales in Asia’s wealth management space have incorporated sub-scale advisory portfolios, he noted. Some of the buyers have been players with a strong discretionary focus acquiring advisory-led businesses, added Vohra, citing LGT’s purchase of ABN Amro’s Asian private bank and EFG’s acquisition of BSI.

Such buyers can afford to purchase because they have stable incomes, and they want an earnings boost from the advisory business, despite the higher compliance costs it entails, he noted.

Be that as it may, consolidation alone will not overcome the challenges of rising costs and volatile revenues, said Vohra. “One small bank buying another small bank won’t create a self-sustaining larger bank.”

Scale in itself will not be sufficient – changes in business models will also be needed, in relation to automation, segmentation and so on.

Private banks need to change the way they do business, agreed Mercer’s Seow. “The use of technology will become more pervasive. And we are not talking robo-advisory; it’s about using technology to address the multiple dimensions that make up client-banker relations.”