Rising Compliance Costs Worry Wealth Managers

Increasing compliance costs are keeping Asian wealth managers up at night, according to a PwC survey. Wealthy women are also an important demographic to keep an eye on.

Wealth managers and private banks in Asia cite increasing compliance costs as their one concern over the next two years, according to a PwC survey released yesterday.

They are struggling to keep with the pace, scale and cost of current and planned regulatory changes such as the Foreign Account Tax Compliance Act (FACTA), set to implemented in January 2014. Respondents estimate that risk and regulatory compliance will account for 10% of their annual revenue in two years’ time, up from 7% today. (Reputation was their biggest worry in last year’s survey.)

Despite wealth accumulation returning to pre-2008 levels, the region’s wealth management industry is facing significantly margin pressure caused by “increasingly stringent and costly regulatory requirements”, as well as uneven growth across geographic markets and subdued client activity, the survey notes.

Emily Lam, PwC’s private banking and wealth management leader based in Hong Kong, tells AsianInvestor. “The ability to understand and manage the avalanche of regulatory and risk issues, such as cross-border transactions, tax transparency and sales practices will require private banks to continue investing heavily in systems and training.”

The survey adds: “Given the quantity and complexity of the current and planned regulations, wealth managers are using advanced technology and surveillance tools to make changes possible.”

Ultimately, as regulation becomes more stringent and as client demand grows, much of the burden will on private banks’ client relationship managers (CRMs) who will need to learn new skills. As such, wealth managers are spending more money on CRM training. “[CRMs] will no longer by judged primarily by their ability to attract new assets under management, but also by how well they advise and service their clients and achieve profitability,” Lam says.

Wealth managers have varying levels of confidence in their CRMs’ abilities. While 80% of wealth managers are happy with their CRM’s ability to advise on mainstream investments, banking and financial planning areas, 61% are confident about their abilities in specialist areas, such as tax planning.

“A good CRM can read a client’s ambitions for the future,” says a chief compliance officer at a US-based wealth manager. “This includes anticipating potential changes in life stages and an understanding of implications from overall financing planning.”

Separately, PwC says demographics will become increasingly important for wealth managers, but argues that many have not taken adequate action to address this issue.

Most private banking clients’ in Asia represent the first generation of wealth. When wealth transfers from the first generation to the second, private banks surveyed say they will need to adapt to new methods quickly in order to keep this wealth.

For example, while the first generation of Asian families tend to prefer face-to-face meetings with their private banks, the second generation are more keen on communicating through technology, says Lam. Hence some private banks are working on enhancing technology and more flexible advisory channels, including using social media.

In addition, women represent a “significant but underleveraged growth opportunity,” yet 88% of firms do not plan to focus on their segmentation approach in this regards, PwC finds.

“Women tend to outlive their male partners and stand to gain control of wealth through not only their own efforts but also through inheritance and divorce,” Lam notes. “Furthermore, women are increasingly becoming business leaders in their own right and are often the decision-makers in next-generation transfers within family groups.”

Moreover, PwC notes that women often have different attitudes, life stages, risk appetites and decision-making criteria when they make decisions about their money.

They are more likely to make decisions collaboratively, with input and referrals from a number of friends and colleagues, as well as from social media and other research. PwC urges private banks to think outside the box, as the “traditional ways of approaching wealth management and client segmentation” will need to change.

PwC surveyed 200 private banks and wealth managers from more than 50 countries, with 24% of respondents based in Asian Pacific.

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