Ten years on since the global financial crisis hit its peak, Mishelle Thurai examines how client trust in private banking and wealth management has evolved since the crisis – and what the future holds for the sector.
Ian Woodhouse head of strategy and change for private banking and wealth management, at Orbium Consulting, says: “Prior to the crisis the industry had been very traditional, stable and resistant to change. It forced the industry to address a significant loss of client trust.”
Not only did client trust decline after the crisis but there was also “exposure to bad products and weak banks”, according to Woodhouse.
Duncan MacIntyre, CEO UK, at Lombard Odier, says “The financial crisis brought the entire financial services industry into the spotlight which challenged client confidence in the sector.
“This coupled with the subsequent low return environment meant that more than ever, private banks had to be able to prove their value to clients. The positive result is that the client is rightly at the centre of all we do and the conduct responsibilities we owe them.”
Deutsche Bank view
Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, comments: “Heavy usage of structured products and structured investment vehicles (SIVs) within the financial sector enabled even higher degrees of leverage in the run-up to the crisis, as these products were marketed globally. The deepness and seriousness of the crisis had strong and lasting effects on the private banking sector.”
Since the crisis, client trust in private banking has improved.
Woodhouse says: “Client trust has been progressively restored through combined actions from both regulators and the private banks and wealth managers.
“The regulators have helped through requiring that banks better understand a client’s suitability and appropriateness and deliver good outcomes through RDR and more recently Mifid II. Also, the new data and privacy rules like GDPR have further helped assure clients.”
Woodhouse adds: “In addition, the private banks and wealth managers have also significantly invested to rebuild trust through a greater focus on emphasizing both risk and return with their clients.
“Some have also adopted a fiduciary approach to product provision to avoid perceived conflicts of interest in providing clients with in-house products. All of these actions have together helped to rebuild client trust.”
Global economy today
Years on from the economic crisis and the global economy appears to be in a much better shape not only in terms of client trust but the corporate and household balance sheets too.
Nolting said that for Europe’s private banking sector it would have to distinguish between the following aspects, “The ECB is operating in much more complex environment with many individual countries and their respective economic and fiscal policies.
“The ECB, due to the European debt crisis, had to follow a broader approach and the low interest rate environment has caused private banks to need to review and update their operating model.”
The future for the private banking sector appears positive especially with the advance of technology and data analytics.
Strengthening the sector will occur through “the continuing usage of technological capabilities, fintech and related structural adjustments and the different demand structure and behavioral pattern of millennials”, according to Nolting.
Woodhouse adds: “We’ve just looked at this through surveying 50 C-level executives. They told us that although the industry has been remarkably resilient, they see the industry is now on the edge of moving into banking 4.0 as the industry comes out of a period of being distracted by the regulatory and restricting demands.
“They will now put traditional and new technology to work to take suitable products and services to meet the diverse needs of both traditional and also next generation clients with new needs.
“Going forward, client trust will be further strengthened as regulators will demand more transparency in pricing and a focus on wealth managers to evidence that they are providing fair value to clients.”
The plan for the future in private banking is to continue working on client relationships and this is achieved through more integrated and balanced business models. Woodhouse suggests that this will be accomplished by 2020.
“These will be more client focused and differentiated in the front office with more digitally enabled relationship managers. They will also invest in developing more and agile and industrialized operations and modern IT with both in house and with more outsourcing.” Woodhouse said. Intergenerational wealth transfer in the coming years is also likely to boost client trust in private banking
MacIntyre concluded: “Over this period there will be a huge transfer of wealth to the current group of 35-50 year olds, who will be more used to the benefits of technology than any generation before them and will expect to have greater oversight of their investments.”