Jonathan Chocqueel-Mangan, managing director of the consultancy Tyler Mangan, discusses the changes private banks and wealth managers will need to satisfy the requirements of the regulator’s Retail Distribution Review.

Jonathan Chocqueel-Mangan, managing director of the consultancy Tyler Mangan, discusses the changes private banks and wealth managers will need to satisfy the requirements of the regulator’s Retail Distribution Review.

Launched in June 2006 by the FSA, the Retail Distribution Review sought to fundamentally change how investment related products were sold and distributed to retail consumers in the UK.  Despite a number of subsequent revisions, the RDR is a comprehensive initiative forming part of the FSA’s strategy to boost consumer confidence in the financial services industry.

Laudable aims

In essence, the RDR sets out laudable aims: to ensure that advice is truly independent and reflective of investor needs; to enable people to understand fully the products and services that they are being offered; to establish a transparent payment structure that eliminates bias in the recommendations that advisers make to consumers; and to ensure that advisers are properly qualified and knowledgeable about their products, services and customers.  But the devil is in the detail, and reactions have been fierce and often angry, reflecting the scale of change that the RDR will bring about.  Indeed, in its recent Retail Conduct Risk Outlook the FSA itself expressed concern that the RDR posed an implementation risk for private banks in particular that could adversely affect customers.

But while the RDR represents a significant challenge for all retail financial services providers, it has some particularly severe implications for private banking and wealth management companies.  Many of the larger private banks are owned by far bigger parent organisations that have much bigger problems to solve within their retail and commercial businesses.  The private banking business units have been left in many instances to “fend for themselves”.

A daunting challenge

Furthermore, there is evidence that some private banks and wealth management firms have yet to understand properly the impact the RDR will have.  The RCRO, published by the FSA in February, found examples of inappropriate targeting of affluent and mass affluent clients and offering unsuitable products based on poor risk profiling within the private banking sector.

For the smaller or more independent firms, the challenge is equally daunting.  Well-established business models based on management fees (driven by an ever-rising market) and product sales commissions have led to a relatively high fixed cost base, little market differentiation and chronic underinvestment in systems and processes.  In addition, expenditure on people and training has been limited, leading to a population of advisors which, as one chief executive kindly put it, “lacks the diversity to match the customer base”.  As he also noted, less kindly:  “It was a bull market, we got fat and lazy.  We only have ourselves to blame.”

The problem for the private banking industry is obvious.  With ever-changing population demographics, the rise of younger and more sophisticated entrepreneurs, and a tougher investment climate, private banking’s reliance on relatively narrow revenue streams is for some an existential threat.  According to data from the FSA, the value of investment assets held by private banks in 2009 stood at £131 billion (around $214 billion), generating a total revenue of £1.87 billion.  The FSA also reported a 24 per cent decline in fees and commissions relating to one-off sales of investment products such as VCTs or hedge fund structured products, typical of private banking clients.  These statistics suggest that a private banking downturn has been in evidence for a while.

Consolidation coming?

So what are likely to be the structural implications?  Over the last 15 years the market has become very fragmented, with IFAs, boutique providers, clearing banks and boutique firms all competing to provide wealth management services to a relatively small proportion of the population.  So firstly, the RDR is likely to drive a certain degree of consolidation in the industry.  One CEO of a wealth management firm told me that he gets two or three calls a month from small, usually regional firms, who are looking to move their customers, staff and themselves to a “safe haven” where responsibility for the required investment can be borne by broader shoulders.

Secondly, for the firms emerging from the consolidation, there will need to be some sharp remedies to stop revenue leakage and cost inefficiencies.  This may require having to “speculate to accumulate”, investing in proper IT systems and business processes. 

Finally, there is likely to be a radical review of private banking business models.  A number of current activities, particularly in the middle- and back-offices, will be stopped and probably outsourced, including operations, settlements, and even fund management.  Instead private banks will become sales and service organisations, offering a front-end that adopts the perspective of the buyer, rather than the seller.

This will mean that private banks and wealth management firms will be embarking upon significant programmes of change, and the stakes are high.  The level of investment over a relatively short period of time is unprecedented, while the volume and complexity of the change, ranging from process improvements, systems implementation, product and proposition redesign and organisational restructuring, has not been encountered by many senior executives within the industry before. The implications for failing to adapt in time are potentially catastrophic, not only for the providers but for customers.  After all, no one doubts that there is a need for tailored wealth management solutions for the high net worth population.

In truth, the real challenge of the RDR lies in building up the capability of private banking management.  For while the new processes and products can be designed and specified, implementing them successfully will require leadership skills that few retail banks, let alone wealth management or private banks, have been able to attract and develop in the past.  As ever, success will rest on the shoulders of a critical few.

Jonathan Chocqueel-Mangan, Managing Director of leadership consultancy Tyler Mangan, has worked closely with a number of private banks and financial services institutions, advising on infrastructure development and change management.  He can be contacted at jcm@tylermangan.com