Creating an integrated client relationship model is a precondition for delivering maximun value from private clients, but it requires complex change across the entire wealth management organisation, write Alan Mathers and Jayne Houlihan*
The high net worth market is undergoing dramatic change. Private banks and private client asset managers face increasingly aggressive competition in their traditional ultra high net worth (UHNW) market:
- More and more players from the mass and sub-affluent markets are moving into the UHNW niche
- Client loyalty is diminishing
- Products and services are becoming commoditised and margins are dropping fast.
These factors - allied with rapidly evolving technologies - are radically impacting the value chain.
Under pressure
The net impact of this change is that private banks (which in this article is a term that may be applied to private client asset managers in general), are coming under increasing pressure to extract ever greater value from client relationships, while managing costs effectively.
In today's evolving market, the traditional model, in which the relationship manager is at the core, managing the full interface to the organisation, is no longer sufficient to meet the increasingly sophisticated demands being made by clients and by the value chain change. In addition, with figures such as £165,000 per annum for experienced relationship managers, and project experience on activity analysis across the industry confirming that less than 17 percent of client managers' time is typically spent in face-to-face client activities, questions are being raised around the ability of the traditional model to continue to deliver sustainable growth in shareholder value.
Such sustainability is achievable through realigning the business model to an integrated solution, in a way that reverses the balance of time that relationship managers spend in direct client interfaces and revenue generating activities -from 17 percent to 83 percent. This 'new' model requires a reassessment of the organisational design and supporting infrastructure, and the implementation of such change is complex as it impacts the whole company.
The components to consider are:
- Aligning the organisation and relationship manager team to target only those relationships delivering maximum actual and potential value
- Integrating the organisation to support and to 'lock-in' these
value-creating relationships
- Delivering the complex business model infrastructural and cultural change that underpins the above two points.
Value-creating relationships
Prioritising attention on value-creating relationships maximises the benefit the firm receives from its investments in client management activities.
Project research demonstrates that, in a typical private banking organisation, the top five percent of clients account for 170 percent of profits. Therefore, relationship managers need to be enabled to:
- Accurately identify and define between both the profit-generating relationships and the profit-eroding relationships
- Maximise the creation of new profit-generating relationships
Focus their energies and the organisational investment in the propositions for these accounts.
- This focus is achieved by having a clear understanding of both the client's requirements and the bank's profitability drivers.
Traditional segmentation approaches tend to focus one dimensionally, that is on the client's requirements or the bank's profitability assessments - not the balance of the two. This is where the change is required. This is particularly complicated because clients are becoming more demanding in their requirements, for example:
- Increasing product complexities
- Increasing channel choice and sophistication
- Increasing proliferation of financial service relationships that any individual holds.
Balanced against these are the bank's commercial imperatives. These include:
- Clarity and access to the economics and dynamics of the varying client profiles and the different relationship propositions
- An understanding of the overall lifetime profitability of each client relationship and of how individual clients impact profitability.
It is only through having access to appropriate information in the right form at the right time, that the organisation can decide who to target, and the level of sophistication of the proposition that can feasibly be provided to deliver the required return on investment. Traditionally, client managers carried this out very effectively through a less formalised, personal knowledge of the market and the client. However, in today's complex world, they need the support of advanced data analytics to maximise the quality of these decisions.
By understanding, at a detailed level, the relationship preferences of the individual, and relating these to similar detailed analytics on the organisational ability to deliver profitably, the bank can build the first element of an integrated client relationship model - a clear focus on value-creating client relationships.
Integrated support infrastructure
Having achieved this degree of focus, the organisation needs to build the second element of the client relationship model - an integrated support infrastructure which expands the firm's capacity for client management. In other words, an infrastructure which maximises the number of value-creating client relationships that the bank can manage, which embeds relationships into the organisation and which ensures maximum value extraction over the long term. This means integrating three elements:
- An organisational structure best suited to meeting the client's needs, and to maximising client management capacity
- Business processes that lock relationships into the firm and encourage
value-creation
- An IT environment that provides client insight, enhances client work and reduces non-client work.
First, the firm's organisational structure must reflect client needs. Many banks manage 'products' through 'functional' rather than 'relationship- based' structures. Instead, they need to move to a client relationship-based management approach in order to:
- Eliminate 'silos' and create an effective sole point of contact
Traditional portfolio management, banking and advisory silos, sitting in separate distinct pockets, confuse the client and fracture the
organisational relationship
- Use partners to ensure the bank focuses only on core competencies
Where appropriate, outsourced 'business service providers' can enable the demands for growing product complexity and scale to be met more effectively. Likewise, alliances and partnerships provide the means to comprehensively service a diverse client base (where the bank itself is unable to source all products) - by identifying 'best of breed' products and an optimal mix of joint providers, seamless propositions can be created in co-operation.
Private banks need to ensure that processes focus on activities that drive value-creating client behaviours. Switching to relationship-focused processes can help embed relationships into the organisation. For example:
- Streamlined administration that improves the client experience (such as processes that eliminate non-client facing activities for client managers, maximising time spent with clients)
- Product development processes that ensure quick time to market for innovative ideas (both internal and partner propositions)
- Regulatory compliance processes that eliminate bureaucracy.
This involves understanding more clearly which processes drive which behaviours - and then ensuring that value-creating activities are maximised and value-eroding ones minimised. While the objective may seem simple, implementation requires new information collation mechanisms and changes to management data and may question the traditional presentation of profitability.
Finally, the business needs to be integrated into a relationship-focused IT environment. Technology is critical, but implementations tend to fail by not focusing on the fundamental driver: the purpose of IT in a private banking firm is first and foremost to enable relationship optimisation. It should provide:
- Access to accurate and timely data, providing real client insight
Clients expect the adviser to understand their financial picture, including decisions the client is taking outside the organisation. Therefore a 'single client view' is critical - incorporating even the new product innovations that often do not fit easily on existing systems architectures. 'Aggregation' tools offer an opportunity for one manager to retain control of the overall relationship, even when the client uses more than one provider. Real-time, value-adding customer insight across all access points is key and can enable the bank to extract value even at the commoditised end of the value chain (using banking and broking data to deepen the relationship).
- Innovative systems to enhance client work and reduce non-client work
Both back office and client facing systems can support the client relationship. Any remaining opportunities must be seized to improve administrative support for the relationship, for example trade order management, client reporting and auto-reconciliation tools. At the client-facing end, new wealth management and portfolio analysis tools are available - decisions are needed quickly as to which of these tools truly add value to the relationship.
Delivering the change
Achieving a shift in the organisational focus (accurately targeting the right clients with the right proposition), and integrating the support infrastructure (the organisational structure, business processes and IT environment) involves major, complex change for a private banking firm.
This gives rise to challenges: managing the impact on clients, on staff (particularly the cultural shift necessary to face the rapidly evolving market) and on shareholders - a recent survey estimated that 60-70 percent of all corporate change programs are regarded as having 'failed.'
But it is achievable with the right skills. Critical to successful implementation is the ability to deliver the changes through sophisticated project and program management. Achieving swift and complete organisational change is possible using the following fourfold approach:
- Making the change essential
Setting out a clear vision (defining the values, culture, roles and responsibilities, processes and benefits behind the changes) that, at the outset, will enable everyone involved to understand where they are headed and allow them to focus their own efforts on getting there
- Making the organisation ready
Establishing effective program management to provide structure, accountabilities, standards and disciplines, cutting through complexity to give clarity to everyone about how they fit in
- Making the change happen
Progressing transformation actions and mobilising and equipping implementation teams has to be carried out, while at the same time achieving a balance between changing and running the business. It must minimise implementation effort and disruption at the coal face, particularly in the highly service quality-conscious private banking environment
- Making it stick
Embedding the new environment, processes and structures, and confirming the benefits. People management is key throughout this process - banks should identify the right skills and competencies, and gain employee commitment through regular communication.
Shareholder value growth
The potential rewards of an integrated client relationship model are immense. Our experience suggests that increasing client management time spent on value-creating activities to 70 percent plus can enable an increase in revenue amounting to more than 400 percent. This strategy provides the basis for long-term success in a still lucrative UHNW market by:
- Strengthening the client/client manager relationship
- Building an enduring bond between the client and the organisation by 'locking in' relationships
- Creating a firmer basis for client retention when individual managers depart
- Enabling private banks to leapfrog their new competitors and retain
pre-eminence in the UHNW market.
