Aimed at those interested in a summarised and broad overview of the private banking industry, this article briefly introduces what private banking is, its value proposition, trends, and developments that have shaped the industry in the past few years.
What is private banking?
Private banking consists of personalized financial services and products offered to high-net-worth individuals (HNWI), very-high-net-worth individuals (VHNWI), or ultra-high-net-worth individual (UHNWI) clients of a retail bank or other financial institution.
Figure 1: Different tiers and categories of wealthy individuals
In private banking, a relationship manager (RM) or private banker (PB) is assigned to each client to handle all matters of the client. PBs go beyond central deposits (CDs) and safe deposit boxes to address a client's entire financial situation. Specialised services include investment strategy and financial planning advice, portfolio management, customized financing options, retirement planning, and legacy planning.
As of 2021, Asia’s Private Banking League Table (ranked by AUM) has been mostly dominated by Western players, with the top 5 being UBS, Credit Suisse, HSBC, Morgan Stanely, and Julius Baer. Asian banks such as the Bank of Singapore, UOB, CMB, and Bank of China (Hong Kong) have seen strong CAGR growth in AUM, and are also within the top 20.
Value Proposition for Clients
Private Banks offer a whole suite of financial solutions to clients looking to grow and preserve their wealth.
1. Preferential pricing
As members of a private bank, clients can receive discounted or preferential pricing on products and services. For instance, clients can receive special terms or prime interest rates on mortgages, specialised loans, or lines of credit (LOC). They can also receive higher interest rates and be free of fees and overdraft charges and have more favourable foreign exchange rates on their transactions.
2. Investment advice and wealth management
PBs often fill the role most commonly associated with financial planners and advisors by advising their clients on investing, including everything from asset allocation to tax-loss harvesting to risk management. Clients have access to the bank’s in-house research department to generate insights for potential investment opportunities. Moreover, clients are granted access to products that are not available to retail investors, such as alternative investment solutions to provide superior returns for clients.
3. Estate planning
Estate planning refers to the preparation of tasks that serve to manage an individual's asset base in the event of incapacitation or death. For wealthy individuals, estate planning is crucial in preserving and growing their wealth for future generations to come. Thus, clients can confer with PBs on how to set up an estate plan.
4. Tax planning and philanthropy
PBs stay on top of important tax laws on the client’s behalf to reduce their tax burden. They may also provide access to professionals experienced in nonprofit management and philanthropic strategy to develop a specialized investment plan for contributions, which in some jurisdictions, can serve as a tax deduction as well.
5. One-Stop-Shop and Personalization
Overall, private banking offers the convenience of consolidated services, by having everything under one financial roof. Private banking clients receive enhanced services from their PB that act as a liaison with all of the other departments within the bank to ensure that the client receives the best possible product offerings and services.
More importantly, PBs are tasked to forge relationships with clients by understanding their needs. According to Boston Consulting Group, 54% of HNWIs become new customers due to the personalised experience and 86% maintain the relationship due to personalisation. Such is especially important in the Asia-Pacific market, where Asia-Pacific HNWIs (excl. Japan) who feel strongly connected to their primary wealth managers are most likely (95.7%) to consolidate their wealth with them, compared to 78.2% for the rest of the world. As such, the exclusiveness and personalised nature of private banking services is the selling point to clients.
Key Trends of Private Banking in Asia
1. Growing potential from the new generation of HNWI clients
The rapid economic growth in Asia has been the main driver for the continuous growth of the wealth management industry. While the West, particularly the U.S. remains the hub of the world’s richest, Asia is seeing faster growth in newly minted millionaires, and private banks are shifting their focus to this fast-growing HNWI segment (clients with AUM of $USD 1-5 million) that offer higher margins compared to UHNWIs.
Figure 2: Millionaire growth in major countries
For instance, Credit Suisse has reported that the number of Chinese millionaires is expected to double by 2026 to 12.2 million from 6.2 million in 2021, despite Beijing's national drive to ease wealth inequality and a sharply slowing economy. In response, HSBC Global Private Banking has launched its business in large Chinese Tech cities such as Chengdu and Hangzhou, to capture a bigger share of the local market. Morgan Stanely Private Banking has concentrated private banking services in Singapore and Hong Kong to cater to entrepreneurs’ family offices in these areas.
2. Automation and service digitalisation
Since the Global Financial Crisis, there has been a slew of complex financial regulations hitting the industry. High-profile examples include the EU’s Markets in Financial Instruments Directive II (MiFID II), which have placed operational strains on private banks, making it hard to manage cost and margins. In response, private banks have adopted Robotic Process Automation (RPA) for routine KYC and client onboarding processes, and digitalised back-office operations to reduce costs and improve efficiency.
On the client front, The World Wealth Report has reported shifting preferences of HNWIs in the digital era. Clients want instant information updates and self-service features such as viewing their portfolio details, account summaries, and changes in asset parameters in an instant. In response, private banks have rolled out various online platforms and interfaces to encourage self-serve. For example, in the Spring of 2020, DBS Bank launched NAV Planner, Singapore’s first digital advisor. Through DBS NAV, clients were provided a consolidated view of their finances and investments across financial institutions accessible via a single platform.
Through leveraging AI and big data in portfolio analysis, PBs are also provided with a more granular and comprehensive understanding of the client’s trading behaviour and preferences. These digital capabilities open new ways to reduce cost-to-serve and enhance customer experience.
3. Surge of ESG sustainable investing
In recent times, client demand for ESG investing is rising. Although wealthy investors in Asia lag their peers elsewhere, with just 32% currently investing along ESG lines, Accenture’s research shows penetration will likely more than double in Asia in the next 12 months.
Figure 3: ESG investing activity among HNWI in Asia Pacific
Furthermore, the demographics of wealth are shifting with the new generation of wealth clients (millennials) being more environmentally conscious and seeking ESG investment opportunities for their portfolios. To cater to this new investment need, banks are developing ESG-focused thematic mandates with a clear proposition for sustainable investing. Some banks even produce ESG-endorsed reports in order to prove the ESG compliance of their investment products.
The rise of Family Offices
For some HNWIs and especially UHNWIs, family offices (FOs) serve as an alternative to private banks. Clients could staff their FOs according to their needs, hiring from a range of specialists such as bankers, analysts, and lawyers. Being not subject to the same regulations as private banks, FOs are able to provide much more customization and other financial and non-financial needs at a lower price.
It is worth noting, that FOs do not serve as a complete replacement for Private Banks. Oftentimes, FOs work together with Private Banks to access different investment products, financing, and wealth management solutions.
Singapore as a family office hub
According to data from the Monetary Authority of Singapore (MAS), the number of FOs in Singapore jumped fivefold between 2017 and 2019 and almost doubled from 400 at the end of 2020 to 700 a year later. Singapore’s strong financial sector, coupled with an exemplary regulatory environment, political stability, and good tax incentives contribute to Singapore’s allure to FOs. Besides Asian FOs, an increasing number of non-Asian families are coming to Singapore to either set up FOs or satellite offices to support regional investments; Ray Dalio is one such person.
Family offices’ added value proposition
FOs’ added value proposition over private banks is its emotional connection with its clients. According to Capgenimi’s 2022 World Wealth Report, HNWIs say their relationships with traditional WM firms are often transactional. While conventional firms meet their service needs, the overall experience lacks valued emotional connection and personal understanding.
HNWIs also indicate that private banks deliver low value, with one of the main catalysts being unmet expectations around fees. For instance, 27% of HNWIs were not comfortable with fees charged in 2021, primarily because of high rates and low transparency, and the perception of inadequate value and performance for what they paid. 64% want fees based on investment performance, service quality, and a pay-as-you-go model, which calls for firms to move away from AUM-based pricing to more innovative structures.
Disruptors in Private Banking: Robo-Advisors
On the topic of fees, there has been a recent rise of low-cost robo-advisors platforms attempting to disrupt the private banking industry. Powered by algorithms, robo-advisors remove the need for a human advisor to impart financial advice to a client. Originally targeting the wider retail investor market, these algorithm-driven advisors are now entering the low-end wealth management market, managing $980B assets in 2019, and expecting to manage $2,552B assets by 2023.
For instance, Kristal.AI, a top robo-advisor that operates in Singapore, Hong Kong, India, and UAE, recently launched a private wealth tier on its platform. Under this tier, clients are offered dedicated advisory services, and access to alternative investments and structured products at less than 1% of total AUM. Syfe, another top robo-advisor with a heavy Asia presence, has a private wealth tier that grants clients of minimum SGD$500k investment in-depth financial planning, non-retail investments, and even a dedicated wealth advisor at just a 0.35% fee of total AUM.
The strategies of such firms are to target the non-consumption market - lower-end and fringe HNWIs, who do not want to pay the high management fees of private banks, or cannot use their services because they do not quite have the minimum amounts or do not understand the products they offer. Moreover, firms seek to focus on overserved customers of private banks. Individuals in their mid-career (Gen-X), or small companies do not need the sophisticated services of investment management companies and are eager to pay less for less complicated and more convenient products.
Figure 4: Private banks versus robo-advisors
Faced with such competition, private banks are starting to innovate their product offerings. As touched on previously, many firms are now offering digital platforms for clients. Firms have also started to change their fee structures, offering sliding fees according to clients’ needs and wealth, and even undergoing acquisitions of robo-advisors.
While the private banking industry faces headwinds of the rise of lower-cost alternative wealth management solutions, like robo-advisors, demand, and growth of the industry remain very strong, mostly fuelled by the growing number of HNWIs in the region who still see private banks as an exclusive club for the wealthy and status symbol. As such, the allure of private banks is unlikely to be replaced and existing firms are expected to remain stable and strong amidst emerging industry disruptors. Nonetheless, it is crucial for private banks to innovate, and perhaps even revise their cost structure to remain competitive in the long run.