The Advisory Mandate in Private Banking: Diversification and complementarities

The advisory mandate in Private Banking seems to be finally on its way after a long incubation. It has grown considerably and has recently become a material part of the private banking sector. Its introduction in banking is significant and will therefore require the active participation of many in the industry. The asset manager adds a greater dimension to the process while maintaining his primary role as a financial advisor. Indeed, the train is finally "en route" and numerous management boards are eagerly awaiting the results. We should soon witness the definitive emergence of a new element in private banking.

The advisory mandate in private banking is a potentially significant and obvious source of revenue. So, why did we have to wait so long to legitimise its existence? Recent studies show that discretionary mandates, often assimilated into Swiss private banking, account for a relatively small percentage of customers: between 10% and 30% in some instances. The remainder is made up of passive and self-directed clients as well as those referred to as being under informal advice management. With reasonable certainty, we can estimate the number of clients who could opt for an advisory mandate to be around 30 to 50%. Extrapolated on the number of asset management establishments in Switzerland, that adds up to be a significant number indeed. Let us take a closer look at this odd situation.

Up until now, the private banker went quite far in its efforts on customer service. There have been times when he was virtually the master of its clientele, moving from one institution to another with them in tow. The private banker was often the customer's personal asset manager as well. Little wonder that this relationship was consummated by the sacrosanct discretionary mandate. Once the relationship pleased the client and the latter realised that his money's purchasing power remained protected in a stable geo-political environment, no one had anything to say about the situation. It was in this context that Swiss private banking flourished. Then however the context began to change and brought with this evolution a host of risks and opportunities. On the one hand, those financial markets that formerly did poorly, gathered forces once faced with new competition. Fewer transactions, reduced volumes, and greater supply than demand - the pressure on revenue was now a reality, while costs only made an already restrictive legislative environment worsen. Costs derived from external requirements are estimated to date at 8%. As if that were not enough, the VHNWI (very high net worth individuals) and even the HNWI asked for special conditions, playing in the stadium of new competition. In a snowball effect, many major firms revisited their fees and their asset managers were obliged to negotiate.

Over the last few years, firms in this sector sought to lower costs – they optimised the process, reengineered the organisation, and automated everything in sight with much success. At the same time, and without intending to generalise, the world enjoyed a period of relative economic and political stability. The fiscal initiatives launched by several governments were successful, but the financial free-flow came with a price for the traditional off-shore asset management model. The private bank's role, its revenue structure as well as its company-client relationship all changed. As if by chance, the business volume of M&A companies increased during the same period, and the word on everybody's lips was critical mass, which had to rise quickly and stay there. The press quite recently said that virtually all major firms were looking for acquisition opportunities. It also stated that the bid/ask ratio in transaction prices was still too high - a bleak picture to say the least.

As in any crisis, the most determined and resilient managed to come up with new ideas and initiatives. Statisticians highlighted the under exploited market of clients without a mandate. Those in marketing began to segment this clientele in order to identify how to create new sources of growth and profitability. The specialists came up with more sophisticated and inventive products, producing results in keeping with their innovative appearance. Private Banks accepted the idea of including a sales component in their activities. Managers began to reconsider their growth curves and the corresponding performance analysis correlated ratios that usually go with them. The advisory mandate idea thus became a reality - the structure was in place, or at least its blueprint. The next step was to get the industry players on the field. For most, this meant affecting a virtually revolutionary manoeuvre while trying not to lose in experience what was to be gained in the first place. Some managed to pull of this feat. They opted for prudence, taking the precaution of explaining, as much as necessary, in clearly structured phases, the changes they hoped to achieve. They managed to convince their manpower that be of the measures' importance. In re-orientation processes of this sort, there will always be some moderate but immediate success, without being to draw any conclusions about the long-term future of such results. Sometimes, a nice, good crisis facilitates the introduction of new options. One has to admit that transforming a traditional private bank into an advisory bank with sales targets is no piece of cake. The management team model is certainly among the most effective, enabling the integration of sales profiles within private banking, making members assume shared responsibility, and even going as far as to delocalise portfolio management competences. For banks, the advisory mandate phenomenon is doubly compounded by reinforcing the client's attachment to the firm, a longstanding challenge that is finally being overcome. As far as contracts are concerned the advisory mandate, being somewhere between free advice and a discretionary mandate, requires the formal contribution of legal council. The bank can demand additional sources of revenue to compensate for its advisory services, but the client will ultimately decide. The reality demonstrates that a truth as simple as this has to be finely detailed in a contractual agreement to avoid any misunderstanding during its implementation. The manager's first sale will therefore be the signing of the advisory mandate, a stage not without risk for those who formerly provided free advising services and must now add a fee to the dynamics of the relationship. For them, as well as for all the others, the goal will be to emphasise their research services leading the way on markets that formerly were anything but inspiring, to promote what the designers of undeniably advantageous products have achieved, to show marketing experts that the target group was indeed adequate, and, last but not least, to attain the ever ambitious financial objectives set by management. After this christening, the asset manager will have to maintain the activity volume expected from his clients. Soon the hunter in him is unleashed. He starts each day by sniffing out new opportunities, choosing the best adapted, knowing how to argue and conclude the deal. The catch will go to whoever adds the right kind of style to these sales characteristics. Another profile, which the jargon refers to as the "farmer" type, is likely to succeed just as well as the hunter, but he will elect to go about it differently through putting things in place to ensure a long relationship. There is no specific recipe, but a high sensitivity to the client relationship is of utmost importance.

In today's high-speed Internet permanently connected world, how can technology facilitate the success of the advisory mandate in private banking? In theory, nothing could be simpler. The processing of the enormous amounts of information collected about the client and his financial situation will lead to the implementation of means that generate a proactive attitude rather than one that is reactive, whilst always remaining very professional but passive at the same time. By definition discretion-oriented Private Banks possess a great deal of information on their clients - the occasional bi-product of regulatory requirements (KYC, Anti-Money Laundering), the result of division analysis and of course of the historic relationship customers have always shared with their bank.

Though the term has pretty much been banished, Client Relationship Management (CRM) is making a place for itself in private banking as long as a ‘vertical’ approach can remain. Experience has shown the limitation of the traditional horizontal CRM approach which is limited by the one-to-one relationship and the confidentiality considerations that have been part and parcel of the private banking sector. Financial data is for the time being relatively concentrated on available assets, and sometimes on the assets available in only one bank. Asset managers ask their clients more and more about the assets they have deposited in their competitors' vaults or to open an extension to advising on personal or estate financial planning. The genius behind this consists in combining the linkage of these personal and financial data sets in an environment that can generate targeted courses of actions to be taken. We must not lose sight of the fact that we are in private banking and that these steps will provide the management team with adequate suggestions - a specific list of clients to contact for specific reasons at a specific point in time. The management team will set these measures to music by adding its own sensibilities and experience. Technology therefore remains an omni-present source of support for getting things started - access to the necessary and adequate data, maintenance and management of workflows, stimulation tools, and quality reporting that will help to conclude the initial steps with adoption of the advice proposed by the bank. Furthermore, this same technology will also help with management and compliance to verify the correct application of guidelines and to measure growth in business activities.

Et voilà - our bank is well positioned to conquer the market. With regards to growth in productivity, characterised by the 50% of clients outside of discretionary and self-directed asset management, the sales process will be applied to existing clients to move them towards a more dynamic segment. Some pioneers are going to take risks by systematically approaching future clients (let us call them prospects to respect the commercial jargon). In this area, the process can either be very fast or require a formidable degree of tenacity. In the case of the second scenario, the manager and all the members of the bank occasionally or frequently in contact with the prospect are going to progressively put together a mass of information that will facilitate the prospect's metamorphosis into a client. To achieve this in a structured manner and provide an exploitable basis, one will have to be quite disciplined and have at his disposal tools that facilitate data collection. One will especially need a close collaboration with others in the bank, based on common objectives. On the D-Day, when the application procedure for opening an account is launched, one will be able to sit back, breath easy, and enjoy the fruits of this labour. The customer will have already been classified according to the KYC norms currently in effect, the documentation for opening an account will be simplified, and everything will come together to leave both parties with a profound sense of satisfaction, free of the burdens formerly imposed by current legislation. This model will then demonstrate the desired domino effect. The customer will feel appreciated and looked after by his banker who calls him and gives him advice - indispensable steps to keeping one's clients. The management team, in turn, will then note a renewed dynamism among its customers. Indeed, it will feel rewarded knowing that its customers trusted and followed its advice and will therefore seek newer, greater challenges. As for the bank, it will have more loyal customers and will enjoy new sources of income - flat fees, advisory fees, transaction fees, performance fees, and so on. As indicated earlier, the extrapolation of this scenario within the parameters of a bank, a banking group, or even a country represents a significant source of revenue. If we take Switzerland for example, we need only to consider 1 - 2% of the private clientele's assets under management to see the magnitude of this model's potential.

The challenge that Swiss private banking will have to surmount will be the delicate positioning of these additional services, while knowing very well that there will be a comparison with European neighbours which have offered similar services in domestic mass affluent management for some time. Private banking will make the difference by highlighting its historically-renowned know-how.
The challenge will also be manifested in the development of customer relationships. Through betting on success in this area, we will have the opportunity to witness the emergence of a new line of services in private banking. Acknowledging this will bring new challenges, and again it be the most inventive and innovative firms which will have the opportunity to achieve even greater successes.

Contact