Succeeding in the UHNWI Business – Challenges and Opportunities for Private Banks

December 07, 2018

Succeeding in the UHNWI Business

For banks, ultra-high net worth individuals (UHNWI), i.e. those with at least USD 50 million in assets, represent a growing opportunity. However, serving them also introduces a number of challenges. Once the right infrastructure and capabilities have been established, the key question is: How can banks improve value selling and monetize their services effectively?

North America continues to be home to the world’s highest concentration of UHNWI, and the US government’s new tax regulations are likely to persuade more of them to move their money back onshore. Meanwhile, the number of UHNWI in Asia has significantly increased, particularly in China with its steadily rising wealthy population. Markets in countries such as Thailand, India, Indonesia, and Malaysia have also attracted banks with their growing pools of UHNWI. As regulations expand and complexity increases, clear focus will be crucial to ensure banks benefit from these changing market conditions and the opportunities they present.

UHNWI management challenges and talent scarcity

Serving UHNWI is challenging for private banks, particularly when it comes to offering a suitable standard of customer service. The increasingly sophisticated UHNWI customer base and their professional representatives, namely family offices and external asset managers, not only have stronger buying skills and negotiating power, they also expect more of the bank. They demand better value proposition, good service quality, and appropriate offerings.

In order to differentiate themselves and meet clients’ increasing expectations, banks provide exclusive services to UHNWI, such as access to club deals, events, or philanthropists. Private banks set up specialized entities across the globe, which offer international capabilities at a local level and enable UHNWI to receive consistent service. These UHNWI desks are also able to focus on developing customized solutions that are in line with clients’ needs, such as wealth protection or customized investment advice.

Meanwhile, talent shortage is a growing issue for banks, making it more difficult and more important to hire the right people. It is essential for banks to have teams with expertise in a diverse range of topics, such as trusts or taxes, so that they’re able to deal with clients in different jurisdictions. Having staff with the right set of skills and abilities makes it easier to establish long-term relationships with clients and, ultimately, provides banks with a competitive advantage. Better incentives help retain talented staff and strengthen employees’ relationships with both clients and the bank.

Margin pressure: Greater transparency, wealth transition, and digitalization

As banks are increasingly required to disclose their fee structures, clients are becoming more aware of the costs associated with their investments and this, in turn, puts pressure on banks’ margins. Moreover, institutions around the globe have identified UHNWI as a very attractive client segment and key opportunity, and the resulting competitive pressure further squeezes margins. Some banks are broadening their focus and are looking into reentering the HNWI segment. In any case, for both segments, monetization strategies should take a holistic approach and move away from product-based pricing to relationship-based pricing, which allows both banks and clients to better plan their revenues and costs. Smart strategies consider the entire client relationship, including all assets and liabilities.

Another topic putting margins under pressure is wealth transition. More and more wealth passes from one generation to another. The new generation is often less willing to remain with their family bank and instead decides to pursue other, non-traditional options. Banks should think carefully about how they cater to UHNW millennials, whose wealth profiles, interests, and philanthropy differ from those of previous generations. It’s clear that their number is growing and they will become the core UHNWI pool in the future.

Online trading platforms and digital advisory services are becoming more and more important. One of the major benefits of digitalization is that it helps reduce the cost-to-serve and increases trading volume. At the same time, these platforms enable banks to get closer to clients through reporting, analytics, and marketing, which improves interaction. Online services are crucial because clients expect the same degree of innovation from financial services firms as from tech giants, such as Google or WeChat. However, following a cost-based pricing approach would involve lowering prices and therefore margins. The only way to avoid this is to understand the clients’ value drivers and willingness to pay.

While banks may encounter numerous obstacles in UHNWI banking, it is possible to transform these challenges into opportunities. Ultimately, success requires considering the big picture and taking everything into account, from building strong, cross-generational relationships to acquiring the right people to build these relationships with. Value selling and innovative monetizing strategies are key elements that need to be supported by digitalization. The following list of key questions can help any institution overcome the obstacles they face in addressing this client segment:

  1. What are the clients’ key value drivers and how much are they willing to pay for them?
  2. How can we structure our service offering based on the latest findings from behavioral economics?
  3. How can we use digitalization to help our front staff improve their sales performance?
  4. How can we ensure we achieve our target margins for our key clients?
  5. What can we do to avoid risks related to misunderstandings in pricing and incorrect client billing?