PRICING IN PRIVATE BANKING - Orbium

PRICING INPRIVATE BANKINGWhite PaperAre you leaving moneyon the table?

Private banks have been seeking to cut costs, as the marketsslow down and spending increases to address additional regulatory requirements. Several industry responses have becomeevident over the past few months as margins have come under pressure. These include: Scaling up to spread costs (e.g. UBP through theacquisition of Coutts or LGT’s purchase of ABN Amro) Outright cost-cutting through headcount reductions(e.g. Credit Suisse) Exiting some local markets altogether (e.g. ANZ,Barclays)1However, a strict focus on costs is only one side of the margin equation and can only go so far in reducing the cost/income ratio without starting to affect current or futurerevenues.The alternative is to increase revenues, especially by takingmeasures that do not result in a corresponding rise in costs.1Although some have also decided to return.2Pricing: Are you leaving money on the table?

COST is noteverythingIncreasing revenues is often overlooked as a course of action due to the perception that it will require asignificant initial spend and the results may be less certain. In particular there is a perception that: for revenue initiatives to work, markets need to be supportive; or that management needs to be open to initially increasing costs, by acquiring expensive relationshipmanagers (RMs), for example.The lack of demonstrable success of strategiessuch as hiring RM teams in order to increaseassets under management (AUM) has put adamper on this practice and led to caution amongleading private banks.2014-20162RM GrowthAUM GrowthHSBC4%-4%SCB26%0%Julius Baer46%5%Credit Suisse23%6%UBS-14%5%2”Asia 2016 RM Headcount League Table”, Asian Private count-league-tablewww.orbium.com3

There are, however, additional revenue sources that do not require a costly investment (e.g. adding RMs) or theneed to wait for a market upturn.Orbium’s Front Office Revenue Enhancement offering focuses exactly on those opportunities where we canhelp clients uncover additional revenue by reviewing the existing practices of the bank, its people, processesand systems.Our offering includes: Pricing optimisation (“Are we pricing our services and products correctly and maximisingrevenues?”) Reviewing the RM model (“Are RMs preoccupied with internal tasks and what options exist forremoving or reallocating some of these tasks?”) Evaluating sales effectiveness (“What makes RMs effective at selling and how can this be sharedwith other RMs?”) A review of a bank’s value proposition (“Are we selling the right products and services to the rightclients?”)RM SalesEffectivenessHow do you ensure RMs bringin more AUM per sale, gaingreater share of wallet?PropositionOptimisationRM SalesEfficiencyWhat activities can be movedto other roles and whatactivities can be simplified orare redundant?4How do we make sure we areselling the right products andservices, in the right way, forthe right segments?Pricing: Are you leaving money on the table?PricingOptimisationWhat drives discounts and howcan they be reduced? How canwe improve our pricing modelsand governance?IN THIS PAPERWE FOCUSON PRICINGOPTIMISATION.

What are the benefits?Benefits from pricing optimisation can be substantialDisciplined,targeted pricinghas a significantIMPACT ON THEBOTTOM LINE Reduce revenue leakage: On a US 100bn AUMbook of business, even a 1bp reduction in theaverage discount can yield a US 10m revenueuplift. This compares favourably with the cost ofsuch an undertaking, which typically only requires indepth data analytics, interviews, strengthening RMsupport in some areas and/or the implementationof a revised price list. Benefits tend to consistentlyoutweigh the costs of such an exercise. Innovate and correctly position pricing: Thereis much to emulate in other sectors, includingpharma or the fast-moving consumer goodsindustry, which have mature pricing strategies.Best practices include value-based pricing(including using focus groups), which allowsbanks to maximise pricing on a per-segmentbasis, much more so than is currently the casein private banking.www.orbium.com5

THE ORBIUM PRICING OPTIMISATION APPROACHOur experience has shown us that significant revenueimprovements are achievable. However, trying tooptimise your pricing is not without pitfalls:1. Introducing a reduction in discounts needsto be carefully implemented otherwise thereis a risk of client attrition. As an example,RMs need to have had the opportunity toprepare and test their client conversationsand have the right responses to the inevitableobjections and discussions that will ensue.2. Our experience also tells us that a pragmaticand phased approach tends to yield betterresults. Short term: immediate changes shouldbe piloted on new business, for instance,leading to fewer discounts being given away.Feedback is also important to constantlyimprove the sales messages and positioningused to justify the price changes, before awider roll-out. Medium term: longer time framesshould be applied to achieve similar reductionsin discounts for the existing book of clients.3. It is also clear that there are valid and justifiedreasons to give discounts and this practiceshould not be completely removed. In casesof additional AUM being driven by discountsFact Baseor where the cultural norm is to negotiate, awholesale ban on discounts would clearly becounterproductive. Addressing concerns withkey stakeholders is also critical because manyare opinion-makers and can block changes.4. Last but not least, we have found manyendeavours are quickly overwhelmed with toomany different views and too much analysis, andcan become too slow or costly if the approach isnot highly structured, disciplined and focused.Our end-to-end approach is designed to help navigatethese and other pitfalls when trying to achieve revenueuplift from reductions in discounts. We work to:1. Establish a fact base: how much the bankdiscounts and where (by region, by product,by client or RM group)2. Investigate the root causes for discountingpractices3. Identify actions that help reduce discountsand are supported by the wider bank andthe frontline.Root Cause AnalysisActionable InsightsStakeholder InvolvementBenefitsRaw DataQuick Wins12 weeks (Illustrative)6Pricing: Are you leaving money on the table?

1. Fact BasePrivate banks first need to establish the scale of theproblem i.e. understand how much revenue is beingleaked through discounts and identify where the leaksare most damaging. Often there are many smallerrevenue leakages occurring, however experience hasdemonstrated the importance of targeting the largeropportunities. Such an approach keeps the scope ofthe project manageable and ensures a sharp focus ondelivering results.With results in mind, working with our proprietaryinternal tool (Askari) our consultants can very quicklycleanse data, merge data sets from multiple systems,identify outliers and missing data, convert currenciesetc. and auto-generate summary views of wherediscounts take place and how much revenue is beinglost (see examples below).Within 2-3 weeks (given available data of sufficientquality) we can show analysis of average discounts by: RM teams (e.g. NRI team, UK team, Malaysia deskor alternatively by years of experience and tenure atthe bank) Client segments (e.g. high net worth vs.ultra-high net worth; individuals vs. trusts vs.corporates; entrepreneurs vs. professionals etc.) Geographical regions or booking centres (e.g.London vs. Zurich vs. Hong Kong vs. Singapore) Product or fee types (e.g. equities vs.funds; discretionary vs. advisory mandates;transactional vs. relationship-based fees).The purpose is to get theorganisation aligned on aCOMMON FACT BASEthat everybody agrees withIn-HouseFunds3rd PartyFundsBrokerageDerivativesLombardUsing Askari, we can further detail the analysis bysubsets (e.g. brokerage by asset class or RM teamsby years of experience) to help drive the analysisand determine focus areas for the next phase of theinvestigation.MandatesWhile quantitative analysis is important, experienceshows that it is critical to have context and understandwhat led to some of these practices. Hence the factpack (as described above) is supplemented by someexternal benchmarking and a review and understandingof the internal context in which the pricing was set andmaintained (e.g. whether KPIs include a measure ofprofitability and/or price enforcement).250200150100Example FactPack anceNew YorkLActualDiscretionaryCustodyHong naryCustodyLombardDerivaties0Brokerage50While benchmarking is not the focus of the exercise,it is important to understand pricing practices and theceilings and floors that exist among competitors. It is,of course, very tricky to make like-for-like comparisons;often differences in prices can be explained bydifferences in feature and service levels. For instance,differences in advisory fees may be linked to widermarket access (e.g. execution and custody of moreexotic markets), wider or specialised research, staremployees etc. Hence while benchmarking clarifieswhere in the market a given bank’s prices fit, it is nothelpful in setting or maximising pricing because oftenproducts and services are not directly comparable.www.orbium.com7