Swiss wealth managers strive for growth as the panacea to cure all ills. A new study shows: the doctrine is potentially ruinous.
It is telling that headhunters aren't too worried about business dropping off due to the pandemic: the industry will return to growth once the worst of the crisis passes, is the conventional wisdom. And growth in the Swiss market means poaching teams from rivals, as new private bank Quintet has been copiously doing from UBS.
Higher volumes, more scale and pricing power, and thus a lift in profits: that represents the traditional strategy in Swiss private banking to counter rising costs and eroding margins. In neighboring Germany, 15 private banks came to a very different conclusion, in a survey conducted by consulting firm DPC (in German): the banks found they are barely profitable in the business of catering to the wealthy, and expect a revenue prospects to worsen.
Debunking Growth Imperative
Germany's wealth managers, which have traditionally generated thinner margins than their Swiss counterparts, list an almost identical list of woes: more regulation, clients growing more sensitive to pricing, low to negative interest rates, and digitization. While some German wealth managers view growth as the way out, DPC's strategists seek to debunk this theory.
«Many firms expect to master the challenges they face through growth, through poaching employees and clients from rivals.» However, the expected lackluster rate of growth of the wider market as pressure on margins rises will simply lead to a turf war and bloat personnel spending, according to DPC. «On the whole, this will not lead to success for the industry.»
Focus vs Growth for Its Own Sake
The fallout from the crisis on wealth managers isn't yet clear, but will underscore the paradigm shift identified by the German consultants. Holding fast to the current growth strategy means risking tipping into losses at the next market collapse, they note.
Instead of growth for growth's sake, DPC advocates focus. Viewed in Switzerland as a niche strategy, DCP insists that every private bank should consider: what do we stand for? Is the firm a full-service provider – like UBS or Credit Suisse – a distribution bank which outsources everything except its core business, or a specialist with genuinely exclusive expertise?
Human-Led Advice
As soon as the focus is clear, process follows: services, pricing, employee development, digitizing workflows – and throttling growth. This ensures that growth doesn't happen at the expense of profitability.
On digitization – DPC titled the study «Success Models for a Digital Future» – the authors are reticent. They favor a hybrid model in which humans lead the advisory process. The consultants see some room to move in the details, away from the core business.
At a Crossroads
«The digitization that is necessary should be viewed an opportunity to make administrative and regulatory topics for efficient and focus on advice – which always was the industry's virtue and should continue to be.» The study's authors repeatedly emphasize that the private banking industry needs a rethink.
«Wealth management is at a crossroads between marginalization and growth – what happens next is up to the decision-makers.»
