McKPrivate Banking Survey2011

EMEA Banking Practice

2011 McKinsey Private Banking Survey

First signs of renewal

1EMEA Banking PracticeEuropean Private Banking Survey 2011

McKinsey & Company’s annual Private Banking Survey, first launched in 2002, seeks to provide comprehensive information on the private banking industry. The survey covers all relevant markets: Western Europe, Central and Eastern Europe, the Middle East, Asia, and Latin and North America. The total number of banks participating in the survey has increased to more than 160 this year.

This document provides an overview of the 2011 survey’s key findings for Western Europe. The issues it raises are discussed in more detail in other McKinsey publica-tions and at regular events held by McKinsey’s Private Banking practice.

The participating banks cover a range of sizes and business models, and in our European sample 77 percent are private banking units of universal banks, while the other 23 percent are specialists. Some 68 percent operate “onshore” and 32 percent “offshore.” The banks provided detailed economic data based on their 2010 results, and qualitative data on their organization, product and service offering, delivery model, risk management procedures, and cost management efforts.

Players allocate revenues and costs within their private banking operations and between their private banking activities and parent companies in different ways. Although these differences have been clarified, as much as possible, through inter-views with the participants, some variations may nevertheless remain and may distort the final results. The increased number of participants this year may induce a slight sample bias on occasion, affecting the comparability of this year’s results with those of previous years. Sample comparisons have been made where appropriate.

Survey participants are entitled to customized benchmarking and feedback ses-sions and have access to more detailed information than is presented here, but within the bounds of confidentiality governing the data supplied by individual participants. McKinsey would like to thank everyone who has participated in the 2011 survey for their valuable contributions, which will help us to gain a better understanding of the economics surrounding the private banking industry. The survey will run again in 2012.

Foreword


Overview

Private banking has a long-standing reputation as one of the most attractive seg-ments in the financial services sector. Historically, it has enjoyed very healthy pretax profit margins of 35 basis points (bp) of assets (and more than 35 percent of revenue), attractive growth rates (annual asset growth for the period 2003 to 2007 averaged 10 percent), limited capital requirements, and significant excess liquidity.

Following a difficult year in 2009, when net inflows were negligible and margins and profits were at record lows, industry observers expected a significant recovery during 2010. Buoyed by a rebound in capital markets from the “crisis” levels of 2008, there was indeed a significant improvement in the private banking sector’s fortunes last year – but the picture is less rosy than many had hoped. Despite improvement in key aspects of its economic performance, the industry is actually far from a full recovery. In addition, changes in customer demand and regulatory requirements put pressure on players to renew their business model.

Some banks have started to respond with more structural changes to their business model, among other things by changing their “offshore” value proposition and cus-tomer focus as well as their advisory offer. Still, performance gaps between leading institutions and laggards are significant and suggest that many private banks are having difficulties in adapting to the new, more demanding environment.

Private banking: First signs of renewal


Private banking had a good year in 2010, with the industry’s economics improving in key dimensions thanks to positive asset growth of 9 percent (the second consecu-tive year when asset growth increased by this amount). The industry, however, has become less profitable with profits last year still 30 percent lower than in 2007.

Overall the forces described in the last two years are no less pertinent today and continue to drive the renewal of the industry: i) pressure on industry profitability; ii) pressure on offshore; iii) customer and regulator demand for changes in the value proposition and product offering; and iv) significant gaps between the performance of individual private banks.

1. Assets grew, but profitability far from its peak

Private banks in Western Europe increased their assets under management (AuM) in 2010 by 9 percent on average. The industry’s profit pool went up 35 percent, profit margins rose from 20 bp in 2009 to 24 bp in 2010, still 11 bp below the highs of 2005–2007. Cost/income reached 71 percent, compared to 64 percent in 2005–2007 (Exhibit 1).

Assets grew, thanks to the capital market bounce

Net inflows were not the main source of asset growth in private banking in 2010. In fact, net inflows were only 2 percent on average (compared to about 1 percent in 2009), confirming that customers are only slowly returning to the industry and that it is taking time to restore trust.

Improvement in key economics, but far from full recovery

Exhibit 1


Indeed, inflows last year were still low by historical standards – consider the 7–8 per-cent achieved during the 2005–2007 period, for example. The lack of wealth creation in 2010, combined with investor interest in real estate and other tangible assets, all contributed to these low inflows.

Overall AuM in private bank portfolios received a 7 percent boost from the perfor-mance of financial markets, continuing the positive market trend that began in 2009. This rebound has now almost offset the 18 percent decline in the value of customer portfolios experienced during the depths of the crisis in 2008.

Nonetheless, the first six months of 2011 demonstrate that despite the recovery, mar-kets remain uncertain and volatile and may remain so in the near term.

However, the long-term growth prospects for the private banking industry remain pos-itive, even in developed markets. The uncertainty around economic cycles, inflation, and currency risk increases the need for financial advice and should therefore support the share of private banks in the pool of total assets held by high net worth individuals. Demographic trends, the need for retirement solutions, and postponed liquidity events (as illustrated by the lower number of mid-market M&A transactions in recent years) should fuel further growth in personal financial assets despite a likely tougher tax environment.

Revenue margins remained flat and are unlikely to recover fully

Revenue margins slipped from almost 100 bp at the peak of the cycle to 84 bp in 2009 and 83 bp last year. Our survey suggests three root causes of this margin malaise: risk aversion, deposit margins, and brokerage fees.

Risk aversion. Portfolios in 2010 remained heavily concentrated on lower-risk asset classes: last year’s allocation of 26 percent to equity and 56 percent to fixed income, cash, and cash equivalents was largely unchanged from 2009. For comparison, the share of equity was 34 percent in 2005 and 2006.

Deposit margins. Cash and cash equivalents represented 30 percent of asset alloca-tion at the end of 2010 (1 percentage point lower than at the end of 2009) compared to 24 percent in 2006. The 9 bp drop in deposit margins over the year resulted in an interest margin of 48 bp, and was a result of growing competition among banks for cash as their clients sought the safe haven of liquidity. It has had a material effect on the income of private banks: on its own, this fall in deposit margins hit revenue margins by 2.5 bp (on top of the 4.5 bp fall between 2008 and 2009). The continued search for liquidity means this reduction is unlikely to be reversed in the foreseeable future.

Brokerage fees. Customers’ reluctance to trade actively continued to affect the bot-tom line. Private banks earned 18 bp of brokerage fees in 2010, similar to 2009 (which was one of the lowest levels ever). The fall in trading activity between 2008 and 2009 hit revenue margins by 2.5 bp, and there has been no recovery in 2010. It remains to be seen whether customers’ “wait and see” attitude will change given the uncertain economic environment that has characterized 2011 so far.


Net impact of lending was neutral. On one hand, banks continued to increase their lending margins, from 85 bp in 2008 to 90 bp in 2009 and 92 bp in 2010 (still short of 2007’s high of 95 bp). With interest rates for refinancing at record lows, there was cer-tainly scope for private banks to make higher-margin loans to their customers. On the other hand, loan loss provisions reached three times their 2007 level, at 32 bp of lend-ing volume in 2010 (25 bp in 2009).

On a more positive note, banks experienced a small increase of their recurring rev-enues as the share of advisory and discretionary mandates in private banks’ portfolios went up slightly (Exhibit 2).

Cost containment efforts paid off in 2010

The average cost margin in 2010 was 59 bp, down from 64 bp in 2008 and 2009. In other words, the cost reduction programs undertaken by European private banks are starting to bite (Exhibit 3).

Absolute costs were flat in 2010, against the almost 9 percent growth in the asset base during the year. Major progress was made on sales and marketing costs and in back-office, IT, and other overhead expenditure.

Sales and marketing. These costs, 46 percent of the overall cost base, fell by 3 bp to 27 bp in 2010 (2 percent absolute cost decrease). The number of relationship manag-ers (RMs) remained broadly unchanged in 2010, while assets rose 9 percent (including net inflows of 2 percent). As a result, the average AuM per RM reached EUR 154 million,

Exhibit 2


up from EUR 140 million in 2009 and EUR 143 million in 2008. Productivity also increased from EUR 1.17 million of revenue per RM in 2009 to EUR 1.27 million in 2010.

Investment management. Cost margins here remained flat at 6 bp in Europe, imply-ing an increase of absolute investment management costs of 8 percent. Private banks continued to upgrade their advisory and investment skills, with clients tending to ask proactively for advice and making greater use of their banks’ investment expertise before making investment decisions. Banks also faced the challenge of having to comply with enhanced regulatory requirements and new internal quality standards.

Back-office, IT, and other overhead costs. Cost margins in this category fell by 2 bp (0.5 percent increase in absolute terms) and have now fallen by 3 bp since 2008 and by 4 bp since 2006. Private banks have increasingly been able to take advantage of econo-mies of scale to absorb their 2010 growth without increasing costs significantly. This has been achieved despite an increasingly complex regulatory environment and the difficul-ties inherent in implementing new legislative requirements with existing systems.

Industry economics affected by regulatory change

Private banking profits are likely to face further pressure from regulation. In recent years, European and local regulators have concentrated their efforts on improving consumer protection, notably by trying to reduce the risk of mis-selling and by increas-ing transparency. Further, product regulation (on complexity and fee transparency) and the potential ban on product inducements may put more pressure on profitability in the private banking industry.

Exhibit 3


Some countries have already adopted radical new regulatory rules that will affect asset managers, distributors, platform providers, and networks in the industry. Following its Retail Distribution Review, for example, the UK’s Financial Services Authority plans to implement a new regulation on the retail sales of packaged investment products by the end of 2012. The review of MiFID is also likely to redefine some of the historical “rules of the game” at a European level.

Without anticipating the final outcome of such discussions at European level, product retrocession commissions, especially in some types of mandates, are under scrutiny. The direct impact on a typical European private bank could be equivalent to the loss of more than 5 bp revenue margin.

Private banks therefore need to upgrade their advisory offerings if they want to justify higher upfront management fees to clients, and invest more in better reporting, client information, compliance, and risk.

2. Offshore markets in search of growth

Offshore private banking has come under significant pressure over the past few years from stricter supranational regulations, and from individual government initiatives with-in Europe and North America. In 2010, offshore markets continued to experience chal-lenging economic conditions – however, after a harsh year in 2009, both Switzerland and Luxembourg showed signs of renewed appeal and managed to stop overall net outflows.

Exhibit 4


Net flows in offshore markets in Western Europe were stagnant in 2010, compared to a 3 percent increase in onshore net inflows. This followed a challenging year in 2009 when offshore outflows averaged 2 percent. This reflects a historical trend: over the last five years, onshore markets have outperformed offshore markets by 4 percentage points in terms of annual net inflows.

In 2009 there were significant differences between offshore booking centers, but in 2010 the results for Switzerland and Luxembourg were broadly similar with neither country attracting material net inflows but also not suffering from outflows (Exhibit 4).The underlying trends, however, are different. As in 2009, Switzerland’s asset base remained stable in 2010 thanks to emerging markets, especially Latin America and the Middle East, which provided double digit net inflows according to the banks who shared their clients’ country of origin with us. In Luxembourg, where Western European customers and Luxembourg-based structures account for 80 percent of assets, the 5 percent net outflows in 2009 was the worst performance in more than 5 years. However, the 2010 results suggest that banks are successfully structuring investment solutions that appeal to ultra-high net worth investors (UHNWIs), while the share of “Belgian and German dentists,” or similarly affluent clients, is continuing to fall rapidly (from 37 percent in 2009 to 33 percent in 2010). In addition, some European private banks also use Luxembourg as a hub to service non-Luxembourg based onshore investors across Europe.

Offshore revenue margins fell from 90 bp in 2009 to 88 bp last year. Onshore margins, meanwhile, fell by just 1 bp. Nevertheless, offshore revenue margins remain more than 5 bp higher than their onshore counterparts. One explanation for the slightly higher drop in margins was the drop-off in the affluent client base (a 4 percent outflow of AuM of offshore clients with less than EUR 0.5 million compared with slightly above

Exhibit 5


zero percent growth onshore) as the segment is generating higher revenue margins (Exhibit 5). With the traditional tax rationale for offshore booking centers increasingly coming under question, notably as a result of increases or projected increases in with-holding tax, the incentive for affluent customers to use these locations is weakening. Moreover, the “offshore” propositions that attract wealthier clients, such as structuring options, multiple booking center options, and sometimes relatively easier access to some alternative product types, are less relevant for the affluent segment.

3. Customer demand and regulatory requirements trigger changes in offering

The private banking value proposition and offering are adapting to changes in cus-tomer needs as well as to regulatory requirements.

The appetite for advisory is still growing

Last year’s survey confirmed the growing appetite of investors for advisory mandates (assets that are not discretionary but for which the client pays a recurring management or advisory fee and the transactions occur after consulting with the client). Assets under advisory mandates grew 11 percent from 2009, while assets under execu-tion/custody increased by 8 percent and assets under discretionary management increased by 10 percent (Exhibit 6). After two years of growth, advisory mandates now account for an average of 17 percent of total private bank assets, with a higher share (20 percent) in offshore markets. In onshore markets (10 to 15 percent of advisory), client demand remains slightly lower. A regulatory climate that aims to promote higher-quality independent advice will further encourage this trend.

Exhibit 6


The winners in 2010: third-party funds, balanced products, and ETF

Penetration of mutual funds slightly increased last year, and they now account for 26 percent of Western Europe private banks’ portfolios. Among these mutual funds, the share of third-party funds grew from 50 percent in 2008 to 57 percent in 2010 of total funds within the European private banking industry (Exhibit 7).

Despite a fairly stable product allocation on average, two types of funds performed strongly in 2010. First, balanced funds grew 16 percent. Next to the rise in advisory mandates, the growth in balanced funds confirms clients’ appetite for more holistic, multi-asset class solutions. Second, ETFs grew fast albeit from a small base (3.1 per-cent of AuM in 2010) among the small share of private banks that reported their ETF penetration. In these banks, ETFs now represent 12 percent of AuM in funds, up from less than 8 percent in 2009 for these players. However, the ETF penetration for the total private banking market is still likely to be lower.

4. Differences between players and business model

Within our sample of participating banks, the business model winners were boutiques and universal banks in their home markets onshore, and independent boutiques off-shore. Some 10 percent of the private banks in our sample experienced losses, and 32 percent suffered from outflows.

Exhibit 7


Large performance gaps should ring alarm bells for laggards

If divergence in the performance of offshore and onshore centers was one conspicu-ous trend in 2010, another was the wide gap between “leaders” and “laggards.” For the second year in a row, the average picture of a modest increase in net flows masks stark differences between those private banks leading the charge for new money and those that struggled in an increasingly tough environment (Exhibit 8).

Although the overall number of private banks that suffered outflows in 2010 was down on the 2009 number, some 32 percent of respondents still reported to us that they experienced outflows last year (compared to 44 percent in 2009). The average outflow for the bottom quartile was 5 percent in 2010. Such poor results should be a wake-up call to those banks to improve their quality of service and investment performance in order to retain existing clients and attract new ones. Ten percent of private banks are losing money in private banking activities (compared to 16 percent in 2009), indicating there is still room for improvement in their business model.

Boutiques and onshore universal banks strong in home markets

After two years of weaker performance in onshore markets, independent boutiques caught up with universal banks that can use their domestic retail and commercial banking network for internal client referrals. Both models achieved net inflows of 4 percent. At the other end of the spectrum, the foreign onshore players on average struggled in 2010, as in 2009, with inflows at a virtual standstill.

Exhibit 8


Boutique strength also shows up in profit performance. The profit margin of onshore boutiques reached 32 bp, close to its historical peak. By comparison, the figure for onshore universal banks is 32 bp as well, while foreign ventures of universal banks are at a low 6 bp.

Independent/specialist boutiques outgrowing offshore booking centers of universal banks

Offshore, specialist players outpaced booking centers of universal banks in terms of net flows (3 percent increase for offshore specialists versus 1 percent outflow for off-shore booking centers of international universal banks). Intermediaries have outgrown both models: their share in the books of offshore private banks has grown from 11 to 14 percent in the last two years.


In this changing and volatile environment, the renewal of the private banking industry that began in the wake of the financial crisis looks set to continue. Private banks that aspire to remain leaders, or become leaders in the future, should take five actions:

� Implement tactical initiatives to boost revenues

� Establish a lean and scalable platform that will improve customer experience and keep costs under control

� Develop next-generation (tech-enabled) customer interaction

� Renew the proposition around advisory building in segmentation and responding to regulatory changes

� Continue to reinvent the offshore business model

Take tactical initiatives to boost revenues

More systematic and disciplined top line management is a priority for private banks given that revenue margins are likely to stay under pressure for the foreseeable future. Targeted efforts to improve frontline effectiveness and optimize pricing can have sig-nificant results for the bottom line on a six to twelve month view. If done well, these efforts will also change the mindset and behavior of relationship managers, thereby laying the foundation for a sustainable impact over the longer term.

Frontline effectiveness

Achieving consistently high performance of the front line is a challenge for many European private banks. There is, for example, a striking discrepancy between the revenues and net inflows attributable to relationship managers in the top and bottom quartiles of European onshore banks participating in our survey (respectively at EUR 1.5 m and EUR 15 m per RM for those at the top versus EUR 0.5 m and EUR 4 m outflow per RM for those at the bottom). We have seen targeted frontline effectiveness programs produce sustainable revenue gains of 10 to 15 percent as well as a more consistent customer experience.

A number of frontline challenges persist in many institutions, including vague value propositions and segmentation (“we offer everything to everybody”), inefficient time management or processes (“our RMs waste too much time with smaller clients and administrative tasks”), skill gaps (“it takes too long for new hires to get to grips with the bank”), and poor organization (“our desk heads are not real coaches”).

The road to renewal


Frontline effectiveness

Defining “what” needs to be improved is more straightforward than how sustainable change can be achieved: processes for client acquisition, development, and retention need to be in place, client feedback needs to be collected and given sufficient attention, compensation and KPIs need to reflect the various objectives of the bank, and the skills and capabilities of many bankers need to be enhanced.

Many banks in the past have tried to address these issues individually, thereby failing to deliver the desired results. Such focused interventions do not alter the mindset and behavior of bankers. What is required is the careful design and piloting of a coherent set of actions, followed by a struc-tured rollout of the process to all teams. Any program should be tailored to the bank’s specific business model and organization structure.

Designing and piloting a frontline effectiveness program

The program is often designed on the ground in association with two or three private banking teams. To be effective, the program will typically consist of a mix of five components:

• Team choreography. Private banking teams often spend only 30 percent of their time with clients; they typically fragment their activi-ties and overlook “time sinks,” specific activities that waste time and could be avoided or streamlined. Optimizing the team’s choreography (who does what when, which time sinks can be avoided), agreeing clear time measures, and using structured brainstorming and analyses can help identify ways to make sure more time is spent with clients.

• Process redesign. It is often possible to identify some key processes that are not efficient and that do not optimize the client experience. By tackling two to four of these key processes in parallel with other interventions banks can create rapid and visible change for their cli-ents. Streamlining client on-boarding, along with account planning and retention, is typically chosen as a key priority: How can banks reduce the time taken by clients to open an account and fill in the paperwork so as to leave more time for advice? Zero-based or lean techniques can help in this respect.

• Organization. The roles of desk heads are often poorly defined and inconsistently applied. Efforts made to describe these in line with best practice, including coaching, can greatly increase the effective-ness of the front line. Further refinement of the roles of bankers and


assistants will further enhance productivity. Our analyses, for exam-ple, have not shown a correlation between the productivity of private bankers and the number of assistants they have. The segmentation of product specialists should also be reviewed and optimized.

• Performance management. Performance management goes beyond compensation and KPIs, and should reflect the daily interactions between team leader and bankers. This can take the form of brief daily “huddles” or team meetings, during which the team leader quickly reviews the plan for the day, pushing colleagues to explain how they have prepared for a client discussion and sharing one or two best practices.

• Capabilities and skills. Additional training or coaching on the adviso-ry process, on specific products, on price negotiation or on more basic skills such as “active listening” will need to be prioritized according to the situation.

Rollout

Once the program has been defined, tested, and well documented, it can then be rolled out with the support of coaches (trained in the pilot phase) to other teams in consecutive waves. This rollout typically includes some “must haves” (such as how a desk head can enhance performance manage-ment) and a number of standard analyses and coaching modules that can be tailored to any desk’s situation. The goal is not to fully standardize how a banker performs his or her role, but to inject common sense practices that will make them more effective. In our experience, some private banks have been able to enhance revenues per banker by 10 to 15 percent after six months.

Pricing optimization

Revenue margins vary significantly from private bank to private bank, even when adjusted for country, business model, and client wealth bands. Pricing, which can be adjusted quickly and has a direct impact on the bottom line, can therefore be a pow-erful lever to restore profitability at some banks. Based on our experience, action on pricing can generate between 5 and 12 bp of additional revenue margin within six to twelve months. Given that changes require minimal investment, this translates into a profit margin improvement of almost the same magnitude.


Tackling the pricing opportunity

Generally, we distinguish between two core levers: technical and commer-cial discounts, and price list optimization. The impact they have will vary based on the local characteristics of the bank, the market, and the regula-tory environment.

Technical and commercial discounts. The fastest way to deliver impact is to identify and correct “technical leakage”, or discounts. Technical leakage mainly stems from errors in IT system migration, poor quality data entry, or incorrect fee calculations. Commercial leakage comes from a lack of trans-parency on discounts granted by RMs, relatively loose discounting guide-lines, and incentive structures that focus on growth rather than profitability.

Creating transparency is an important first step in managing commercial discounts. Typically, it is possible to improve margins by 4 to 8 bp through stemming technical and commercial leakage. The impact tends to be higher in banks that have relatively undifferentiated price lists per client segment and where RMs enjoy more entrepreneurial freedom.

Price list optimization. The main objective of price list optimization is to develop a list based on quantitative benchmarking of individual price points as well as findings from qualitative benchmarking regarding struc-ture, transparency, and layout. Typical challenges include long, unstruc-tured price lists, complex calculation logic, cross-references, and large numbers of non-core products. By comparing target price lists with their own realized margins and prices, banks can derive quantitative adjust-ments to their own lists. In addition, they should selectively complement the price list with price innovations. For example, performance-based pricing – common in the fund management industry – has been applied by some private banks to their discretionary portfolios. The typical improvement from price list optimization tends to be in the 5 to 8 bp range, the particular outcome depending on the starting point and local price list differences (often driven by regulation).

Institutionalizing pricing and frontline involvement

A critical element in implementing pricing levers is winning over the front line at the outset. It is vital to provide training on the new price list, processes and guidelines covering issues such as customer prioritization lists and sales stories, discount reports (for transparency), and approval processes.

Any leeway given to RMs to set prices on a client-by-client basis should be balanced with tighter and simpler discounting guidelines. Incentive sys-tems should be adjusted to steer RMs towards the listed price. Private banks should create transparency around money left on the table and emphasize the importance of having consistency of pricing across client segments.


Establish a lean and scalable platform to deliver better customer experience and cost control

Customer experience and cost management remain two priority areas for private banks in an environment marked by tighter revenue margins and operating costs in IT, risk management, and regulatory compliance that look set to escalate.

In 2010, the industry maintained its absolute cost base, while assets grew by 9 per-cent. This is the first time in recent years that private banks have simultaneously contained costs and increased assets. Although some crisis-driven cost reduction programs have started to bear fruit, survey participants report the impact of these initiatives has been less than they had expected. Their aspiration, they told us, was to reduce costs in absolute terms by 10 to 15 percent.

Marketing budgets and discretionary bonuses were easy targets for many private banks during the crisis. Selected institutions, however, have started to address more structural cost issues, thereby establishing the foundations of a more scalable business model.

These structural cost levers include changes to the frontline organization, the product offering, core processes and the operating model, corporate functions, and the busi-ness portfolio. Many private banks have so far been relatively unaffected by the sort of operational changes, such as lean, near-shoring and offshoring, and outsourcing, that have taken place in other areas of financial services. Banks based in multiple countries are increasingly sharing functions across individual markets. Some have developed blueprints to establish common standards for private banking across these territories, a development that will facilitate new market entries, and also merger integration.

Pulling on these levers will allow private banks to establish scalable platforms. Scale plays a decisive role in driving cost efficiency, especially for back-office, IT, and over-head functions. Our survey shows that the cost margin of players with less than EUR 5 billion in assets is more than 50 percent higher than players with more than EUR 30 bil-lion in assets. Some two thirds of the difference can be explained by the higher relative cost of investment management, IT, operations, and overhead functions.

Develop next-generation (tech-enabled) customer interaction

More than half of the clients of some retail banks no longer visit a branch and many interact significantly through alternative banking channels than face to face. While the amount of advice involved makes private banking different in this regard, the industry nevertheless lags when it comes to technology-enabled customer interaction.

Even though we do not expect Internet-only private banks to capture a significant share overnight, we do believe that private banks will need to take accelerated action on several fronts:

Web experience. Recent benchmarking of online platforms of private banks shows a wide disparity on three dimensions: the availability of market information (e.g., some banks make available to clients a significant part of the information available to bankers), the abil-ity to tailor the investor experience, and the ability to transact or service an account.


Multichannel integration. Many retail banks are far ahead of their private banking counterparts in seamless multichannel integration, enabling clients to trigger a meet-ing with an advisor from any other channel, or informing an advisor from information requests by a client online.

The hybrid customer. Even if many private banking clients will continue to turn to their private banker for advice and product purchases, a growing number is looking for infor-mation on the web (product comparisons, for instance). Many private banks have yet to decide how to shape the perception of, and deal with, these better-informed clients.

Interaction with bankers and specialists. While technically challenging 10 years ago, video-based interaction between advisors – or between bankers and clients, on one side, and product specialists, on the other – is now fully feasible. We expect signif-icant piloting of new solutions, from traditional videoconferences to web-ex sessions, in the near future. A select number of banks is also piloting ways to enhance physical interactions, through, for example, the use of tablets to share customer information or browse a segmented offering.

Renew the proposition around advisory and segmented offering

In the last two years, changes in regulatory requirements and investor needs have required private banks to start the renewal of the industry’s value proposition around advisory and client-centricity. In a recent survey of relationship managers, 53 percent of respondents stated that they would expect the industry to shift towards more tai-lored, client-centric advice and solutions over the next three years.

Advisory offering. Private banks need to develop their advisory mandate offering and rethink their investment policy. Changes in regulation, in the financial and economic environment, and in customer confidence are increasing demand for more structured and transparent advice and create an opportunity for banks to respond to it.

There is a double challenge here: first, many advisory offerings and investment policies need to be strengthened or redesigned. Second, they need to be delivered consis-tently by the front line.

The redesign of advisory offerings should happen on several dimensions:

� Regulatory compliance. Increasing demands for suitability and appropriateness and fee and risk transparency all require more in-depth up-front profiling, continu-ous updating of profiles, and a more dynamic exchange of information with clients over time. New regulation is redefining the nature of complex products and control-ling to whom they can be sold – a development that will create additional burden on bankers and their systems.

� Economic and financial environment. The financial crisis and continued instability has dramatically increased the need for better risk information and tailored solu-tions. Better risk information includes more transparent reporting of counterparty


risks (on repos and ETFs as well as traditional fixed income products), and signifi-cantly enhanced simulation capabilities and information (e.g., simulation of portfo-lio sensitivities to specific events like euro inflation, dollar inflation, or even a euro collapse scenario). Tailored product solutions could include, for example, currency hedges for a more volatile environment, a broader set of inflation-linked products or solutions, combined or not with principal protection.

� Investment policy. Many banks are reviewing the traditional view of investor profile and fixed asset allocation and the selection of investment solutions. A few changes being introduced by market participants include moving from fixed asset alloca-tions to include risk budgets, introducing discretionary building blocks in advisory offerings, and separating the portfolio in multiple blocks with very different long-term goals. The underlying products are also continuing to change: active-passive polarization, core-satellite investments are slowly gaining in importance.

The above changes represent an opportunity to expand private banks’ share of fee-based advisory mandates, which enjoy significantly higher revenue margins than exe-cution-only mandates (96 bp versus 70 bp). The average share of advisory mandates of top quartile banks by revenue margin was 30 percent (against an industry average of 17 percent). The top quartile of banks as measured by revenue margin increase in 2010 were increasing their advisory penetration by 12 percent. Discretionary man-dates, currently accounting for 22 percent of assets and capturing average revenue margins of 110 bp, also suit the new environment. They grew at an above-average rate of 10 percent in 2010.

Segmentation. Further client segmentation remains one of the most important ways for private banks to meet demand from customers and regulators for client-centric solutions, while at the same time maintaining tighter margins overall.

Two-thirds of the clients of an average private bank in Western Europe had assets below EUR 1 million, and just 3 percent had assets of more than EUR 10 million. While affluent clients account for 22 percent of assets, the 3 percent of wealthier clients (with more than EUR 10 million assets) make up for 40 percent of assets and 20 percent of revenues. With tighter margins and stronger differences in investment behavior and profiles, private banks must not only introduce more differentiation to their value prop-osition (in terms of product, services, and pricing), but also adapt their delivery model to segmented client needs and economics.

In order to serve affluent clients economically, banks have started to address sev-eral issues. First, universal banks are starting to work on internal incentives so as to ensure that clients are moved on a regular basis to the appropriate segment. Second, many banks are focusing their offering on more standardized solutions like fund-based, multi-asset class discretionary mandates, often without the option to grant price discounts. Third, some banks serve their affluent clients through dedicated RMs or teams comprising more junior staff, are increasing their client loadings (up to more than 250 clients per RM), and allow only limited client access to specialists in the bank. As an illustration of the differences in banks’ models for serving the affluent segment, top quartile banks achieve double the revenue margin of their bottom quartile counterparts.


The UHNWI segment has become gradually more sophisticated and demanding, due among other things to greater involvement by the next generation or clients’ ten-dency to hire bankers into their family offices. Leading private banks have reacted by introducing dedicated UHNWI desks and RMs with lower client loadings (on average, usually with less than 30 clients depending on their size). Within these teams some banks have also introduced separate RMs or specialists for sophisticated family office clients. Others have specialized by source of wealth with RMs focusing on particular industries. Our survey shows that almost half of banks have dedicated UHNWI teams. Some banks have introduced dedicated family office teams or RMs; these outgrew their peers with 21 percent vs. 15 percent growth in UHNWI assets in 2010. As for the product side, leading banks try to excel by providing direct access to their in-house research analysts, portfolio managers in the asset management unit, and capital markets desks in the wholesale bank. Direct access to the best of the bank and the capability to structure solutions that fit the individual client’s needs will enable banks to capture margins with UHNWIs close to the industry’s average margins for HNWIs. Of course, this opportunity is only open to a select few banks in the industry.

Reinvent the offshore business model

Offshore markets are experiencing the pressure of change – but the performance of European offshore centers in 2010 in preventing any net (out)flows of funds suggests that a number of banks are succeeding in reinventing the offshore business model.

Offshore banks need to continue to take action on three fronts:

� Manage risk. Starting with a clear view of the impact of different regulatory sce-narios (from the implementation of OECD Article 26 to full automatic information exchange), private banks need to work on stabilizing their business. They can mitigate the highest risks by, for example, stopping new business in high-risk areas and by using bank-wide risk and compliance guidelines and practices, training, and communication. Clients also need to be guided through the most urgent top-ics (e.g., the self-declaration process, compiling relevant data, transferring assets). For banks with both an onshore and offshore presence, the sensitive handling of these issues will make a big difference to how well they are able to hold on to their existing assets.

� Continue to improve economics. Offshore banks still operate with favorable pricing, their average revenue margins more than 5 bp higher than onshore banks, notwithstanding a higher share of UHNW clients for offshore banks (close to 31 percent of assets vs. 22 percent for onshore banks). Higher fee transparency and the gradual loss of tax advantages and – to some extent – secrecy will inevita-bly put additional pressure on the economics of offshore banks in future.

� Prepare proposition for new reality. Banks also need to decide on a cross-border strategy and understand the implications for their current business model (con-cerning, for example, target markets and coverage models, value proposition and positioning, required skills and capabilities, the portfolio of subsidiaries/locations, e.g., divestitures, run-downs, and new business and sales practices by country/booking center and/or product type, for end customers and intermediaries).


Today, covering a market requires expertise in customer needs and the regulatory environment of that particular country. RMs have to be familiar with local regulations, tax systems, and investment opportunities. The bank needs to be able to provide mar-ket-specific advice and tax reporting. The higher cost-to-serve by market suggests banks should focus on fewer markets if they want to manage the operational risks and economics of their offshore business. Given the importance of this segment, it will also be important to upgrade the products and capabilities necessary to serve UHNWIs. This will involve, among other things, upgrading structuring skills and providing access to alternative asset classes and to multiple booking centers.

It may be an interesting opportunity for some banks to specialize in serving external asset managers and intermediaries in the offshore space. According to our survey, that segment grew its share of the assets of offshore banks from 11 to 14 percent in the last two years.

* * *

In 2010, private banks enjoyed their second successive year of asset growth based on strong capital markets performance. With margins still at low levels and continu-ing changes in regulation, customer demand, technology, and the competitive land-scape, the renewal of the private banking industry is underway and is set to continue. Private banks prepared to adapt to these changes – and willing to commit to making themselves more distinctive – will guarantee themselves a strong place in this more dynamic environment.

EMEA Banking PracticeJuly 2011Copyright © McKinsey & Company, Inc.

Selected Partners from McKinsey’s Private Banking Practice:

EuropeFrédéric VandenbergheDirector, BrusselsPhone: +32 (2) 645 4189E-mail: [email protected]

Felix WengerDirector, ZurichPhone: +41 (44) 876 8444E-mail: [email protected]

Jens HagelPrincipal, ViennaPhone: +43 (1) 5370 6102E-mail: [email protected]

Sébastien LacroixPrincipal, ParisPhone: +33 (1) 4069 9325E-mail: [email protected]

Middle EastHans-Martin StockmeierDirector, DubaiPhone: +971 (4) 312 4568E-mail: [email protected]

United StatesSalim RamjiDirector, New-YorkPhone: +1 (212) 446 7393E-mail: [email protected]

AsiaJan BellensPrincipal, ShanghaiPhone: +86 (21) 6122 3213E-mail: [email protected]

For any queries regarding this publication, you can also contact:

Thomas BriotPrivate Banking Practice ExpertPhone: +32 (10) 434 442E-mail: [email protected]

Paul MidyEngagement ManagerPhone: +33 (1) 4069 1481E-mail: [email protected]

McKPrivate Banking Survey2011

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