Michael Krinner, Head Advisory Europe at LGT, talks about conflicting goals when it comes to individual advisory services and cost efficiency, and about problematic advisory models.
Michael Krinner, MiFID II has had a far-reaching impact on the advisory business in private banking. Where does the sector stand today, almost two years after its implementation?
Many banks still find themselves in a predicament: on the one hand, the new rules have massively increased the requirements relating to individual advisory services. Relationship managers must today take a large number of additional criteria into account, for example, the suitability of an investment product or so-called target market conformity.
At the same time, margin pressure is forcing the banks to also focus on internal cost-efficiency for advisory services – which are in actual fact hardly scalable – and to generate at least a minimum of economies of scale.
«The challenge lies in reconciling efficiency and the individual advice»
Many banks have therefore digitalized their processes and systems and in many cases, also centralized them. The challenge lies in reconciling efficiency and individual advice.
What can banks do to ensure that their internal efficiency programs do not conflict with private clients’ demand for individualized service?
The most important thing is to avoid internal target-related conflicts that arise from the traditional profit center approach. Because if several business areas are in competition for revenues from the same clients, and every area wants to maximize its profit targets, the quality of advice suffers, and both the client and the bank are dissatisfied.
«Standardization must not result in the client feeling they are being advised individually»
To ensure this doesn’t happen, the incentive system must be rethought. In other words, relationship managers, advisors and portfolio managers must be measured against common goals instead of having separate targets. If that is achieved, then there is definitely room for maneuver in terms of efficiency gains, for example by centralizing functions such as risk monitoring or the generation of investment ideas as well as harmonizing and in part standardizing advisory processes.
What needs to be taken into account when doing so?
Standardization must not result in the client feeling they are being advised individually. Extreme standardization, like in the case of advisory model portfolios from which the relationship manager is hardly allowed to deviate, or very narrowly defined investment universes, significantly limit advisory services and diminish the advisory experience for the client.
«At LGT, we work with portfolio-based suitability models»
This ultimately results in unsatisfied clients and relationship managers. What I also find problematic are the product-based suitability models where the only products that are recommended are those that fit with the client’s predefined risk profile. This results in a large number of what are actually attractive products being excluded from the outset.
What is the alternative?
At LGT, we work with portfolio-based suitability models, i.e. we don’t look at a product’s risk in isolation, but rather in the context of the individual client portfolio. We do this because it is quite possible that a product – measured against the client’s profile – is too risky, but in the overall context of the portfolio, does not increase the level of risk or might even improve diversification while at the same time offering attractive possibilities to generate returns.
This approach, therefore, provides a high level of flexibility in client advisory services. In combination with a comprehensive and reasonable measure of risk, relationship managers have entirely new possibilities when it comes to risk management for advisory clients.
Where do you see the advisory business going in the future?
The banks must further develop the traditional advisory business and adjust to changing client needs. Specialized advisory services, e.g. for private equity and private debt must, for suitable clients, become as much of a given as the integration of sustainability, or ESG criteria.
«The challenge will be to take advantage of these possibilities and align them with internal processes»
ESG in particular often remains under the radar but offers an abundance of possibilities for individualization that are perceived by clients as offering real added value. The banks will not lack opportunities for individualization in the future.
The challenge will be to take advantage of these possibilities and align them with internal processes. The banks that will continue to be successful in the future will be those that offer clients an individualized advisory experience and not those that have maximized their internal efficiency.
Michael Krinner has been Head Portfolio Advisory Europe at LGT since 2016. Prior to that, he held a number of leadership roles at Credit Suisse Asset Management.
