Private bankers urge move to fee-based model

SINGAPORE - Private banks in Asia may need to shift to a fee-based model as margins continue to come under pressure and a lack of quality talent drives costs higher, panellists at the Private Banker International Wealth Summit said yesterday.

"Private bank CEOs in the region have this as one of the topmost (issues) on their minds because we clearly feel that our business model is threatened by us relying only on execution fees," Rajesh Malkani, head of Private Bank East, Standard Chartered Private Bank, told reporters after the session.

Margins of private banks are being crimped in Asia. Another conference speaker, Serge Forti, CEO, Singapore, BNP Paribas Wealth Management, highlighted the rising cost-to-income ratios of Asia's private banks. Many have unsustainable margins, with the average cost-to-income ratio now very close to 90 per cent, he said.

Yet, opportunities abound for the industry in Asia. The region's wealth is growing at a pace of 11.1 per cent, compared with 4.3 per cent globally, according to the Boston Consulting Group's Global Wealth 2012 report. Asia's high net worth individuals are also under-served, with less than 20 per cent of their wealth professionally managed, compared with 40 per cent in developed markets.

However, competition to manage that wealth remains keen. "Not only is there rampant price discounting given to the RMs (relationship managers), because Asian clients do pressurise RMs to cut their pricing, there is now also the practice of rebates happening in the bond market, which I for one completely disagree with," said Tan Su Shan, DBS Bank managing director and group head of wealth management.

"There will come a push point and we're probably nearly there," she said in response to a question from the audience of 220 participants on whether private banks ought to shift to a fee-based model.

But this will not happen overnight, said Mr Malkani, who only expects a significant change in five to 10 years. But he sees a transparent mechanism of charging advisory or management fees as the only way for private banks in Asia to rebuild clients' trust. It will also help private banks meet higher regulatory standards, Mr Malkani added.

Fee-based models of private banking are already common in Europe, the US and Australia, but much of Asia's wealth is newly created and clients, being active traders, tend to pay their private banks based on the transactions involved in managing their assets.

"Clearly it is for us to convince the clients of the value proposition," said Mr Malkani. Standard Chartered Private Bank now has an "experimental" team in Singapore operating on a "fee and profit-sharing" model, instead of the traditional execution fee model, and some clients have warmed to the idea.

Another challenge is the industry's perennial struggle against a "huge shortage of talent". Mr Malkani said the industry needs 500 to 1,000 new relationship managers every year but the reality is nowhere close to that. Standard Chartered is now "investing heavily" in grooming talent both from within the bank as well as from other sectors - such as lawyers and accountants.

But Ms Tan says the situation is "much better now" for DBS, which has seen an increased supply of talent from banks that are restructuring and moving out of Asia.

Private Banker International's (PBI) survey of the top 20 private banks in the Asia-Pacific region showed that assets under management (AUM) slipped to US$1.099 trillion last year from US$1.105 trillion in 2010.

PBI editor Nicholas Moody observed that foreign banks saw a larger fall in AUM growth, while Asia-based banks held up well. "DBS remained the highest ranked Asian-headquartered private bank with $39 billion in AUM, although Standard Chartered and Bank of Singapore are breathing down its neck," he said.