The holy grail of banking in Asia is mining the riches held by the ever-expanding high net wealth market, but this has not proved the get-rich-quick scheme many banks may have hoped for, thanks to the high salaries of Asian relationship managers.
New research just out from McKinsey, called Navigating the new era of Asian retail banking, reveals that while Asia is on track to become the second largest wealth management market in the world by 2015, "private banking economics in the region remain challenging".
One of the biggest challenges is matching the profits earned in traditional markets, such as Switzerland: average profit margins (as a percentage of assets under management) are relatively low relative to Europe and the US and have been on the decline, dropping from 20 basis points in 2008 to 11 basis points in 2011.
On the flipside, operating costs remain high, although they have started tapering. And the blame, it seems, can be laid at the door of employees who are expensive, and don't deliver the same return on investment as their peers in other regions.
McKinsey says private banks’ costs have risen 'significantly due to rising RM compensation, paired with lower RM productivity and higher servicing requirements'.
"Even as RM compensation has increased – the result of heightened demand for talent – RMs have become less productive due to less-entrenched client relationships, which make it harder for them to capture client assets. In fact, the average assets under management per relationship manager in Asia is about 20 % below the European average."
A major concern of many banks and recruiters in Asia is the lack of suitably qualified and skilled relationship managers who have good local language skills and established books of business. And it is not easy for relationship managers from the investment banking divisions of the large institutions to move into wealth management, even though the number of available candidates from this business segment has grown since the global financial crisis.
Craig Brewer, director of banking and financial services for Hudson’s Singapore office, says the surge in private banking expansion in Asia in recent years resulted in aggressive headhunting that pushed up salaries. And he believes that this is not a sustainable solution to the talent shortage, given the small universe of good wealth management people in Asia. "The growth strategy can't just be based on paying people more," he says.
McKinsey offers an insight into just how big this market is. It estimates that in China alone, the total number of high net worth and ultra-high net worth individuals - those who have investable assets of USD$15 million or more - will grow around 20% per annum from 2012 to 2015, to reach well over two million. And taking a range of 30 to 200 clients per relationship banker as a benchmark, according to Brewer's estimates, China alone would need between 10 000 and 70 000 RMs by 2015.
Brewer says there is no quick fix to cover this market, as Asian-based banks can't just bring in foreign wealth managers to meet the demand.
"It is a very difficult market to recruit in now. The typical RM brief we get from a client stipulates that candidates must have market segment experience, the appropriate language skills and a portfolio of clients. But the problem is that high net wealth clients don't like RMs who change jobs and companies every two to three years. So potential candidates aren't moving anymore because they know their clients won't move with them."
Brewer says the success of private banking in Asia will hinge on where the client-facing staff will come from. And he believes that the smart banks will 'grow their own' - by taking graduates into their organisations and training them alongside experienced wealth managers.
"They have to bite the bullet and spend the time and money to bring RMs up, whether they are starting a wealth management operation in Asia from scratch or building an existing platform out."
One of the key concerns will be staff retention to discourage the rampant job-hopping in Asian financial services. Brewer says that it is only a matter of time before private banks start thinking about creative remuneration to keep employees - and more importantly, keep clients happy.
This is key as the McKinsey survey shows that many high net worth individuals in the largest market of all, China, are not happy about the private banking services they receive.
"Only 16% of private banking customers “highly agree” that they are fully satisfied with the level of private banking services they currently receive. Another 8% are clearly dissatisfied, while 30% are indifferent. Likely as a result, nearly half of all private banking customers allocate as little as 20% or less of their investable assets to their primary bank. Yet more than half say they would allocate 40% or more of these assets if the bank could fully satisfy their personal financial needs."