The advent of new European regulations aimed, supposedly, at protecting investors are driving banks to rexamine segments and pricing models. We talk to a firm dispensing advice on the issues.

One of the biggest recent wealth management trends in Europe is how banks have changed client segments and investment minimums to deal with the post-2008 regulatory onslaught.

And as the old saying goes, where there’s muck, there’s brass. As banks and other wealth management players adjust, consultants are busy advising them. As already described here recently, one such firm, Millenium Associates, has established a platform called CATCH through which declared assets affected by M&A and re-segregation can be shifted around as efficiently as possible.

Another example of a business working in a related field brought on by regulatory, as well as other commercial, changes is Simon-Kucher & Partners, a global strategy and marketing consultancy. The business says it is regarded as the “world's leading pricing advisor and thought leader”. (There is no false modesty here, clearly.)

This publication recently spoke to Petra Knüsel. She is the private banking and wealth management partner at the firm. Based in London and Zurich, she leads the UK private banking practice.

One particular force keeping this firm busy is the MiFID 2 regulatory package of the European Union that requires EU-based firms to be more transparent about their fees. In theory, this is designed to make financial advice more impartial and less prone to conflicts of interest. For example, Liechtensteinische Landesbank recently moved to scrap commission and trail fees and adopt a more transparent pricing policy from 1 July. (See that item here.)

In some respects, Knüsel said, the EU regime is broader than the Retail Distribution Review reforms in the UK that kicked in from 2013. (In the case of the RDR, it has been associated with banks such as HSBC and Barclays hiking investment minimums for clients, prompting worries about the “advice gap”.)

So what are firms doing?

“We expect that at least as far as European countries go, MiFID 2 will come in by 2017 by the latest. By then, banks need to have changed their pricing. In the Netherlands, for example, they need to be compliant with this already,” Knüsel said.

“The Netherlands has similar rules to the UK, while the rest of Europe will be moving to a commission-free environment through MiFID 2. Switzerland, although not part of the EU, has a very similar set of rules to MiFID 2 coming in,” she said.

“Mainly, banks really try to keep the current level of services and increase prices on other services…..they try to introduce new structures in pricing. Banks are trying to align price with value more robustly. For example, [there is] the introduction or increasing of service fees, raising minimum fees to reflect higher costs-to-serve for lower value clients or the introduction of performance fees to reflect value more effectively,” she continued.

MiFID 2 is designed to close perceived gaps in investor protection under an earlier version of these regulations. For example, firms must say whether investment advice is provided independently or not; they mustn’t accept inducements from third parties regarding providing investment advice. They must also carry out suitability and appropriateness assessments in more cases and comply with stronger investor protection rules for professional clients and eligible counterparties.

The MiFID 2 regime has prompted a number of studies about client segmentation and business models. For example, a 92-page study was published last year from Roland Berger Strategy Consultants, a global firm. Among its conclusions was that “in our experience, profitability does not depend on total FuM (funds under management) but rather on the client focus, asset mix and certain regional factors. Global integrated banks can enjoy economies of scale if they manage their complexity costs optimally, but they do not automatically enjoy cost advantages over local private banks”. A number of other consultants – many of whom have given their thoughts to this publication in recent weeks – see MiFID and other regulations influencing client segmentation policy with varying levels of severity.

Fees

In the face of all this, Knüsel said, banks have introduced fixed service fees and asset-based fees: “Many major banks have done this, especially in Switzerland.” However, she declined to name which ones in particular, for client confidentiality reasons.   

What other trends is her firm seeing? Well, she said, there is more thematic segmentation of clients going on (this is not necessarily always driven by regulation but by other considerations).

“Yes…it is a clear trend that they [banks] try to introduce,” she said. “Banks use segmentation across the whole product design and pricing process so, for example, Julius Baer developed a three-tiered product structure based on perception of features by different client segments,” she said.

“In future, we expect banks to become smarter in their segmentation approach, for example using segmentation to mitigate against discount leakage by providing better guidance to relationship managers,” she added.