PRICING INPRIVATE BANKING

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Are you leaving money on the table?

Pricing: Are you leaving money on the table?2

1Although some have also decided to return.

Private banks have been seeking to cut costs, as the markets slow down and spending increases to address additional regu-latory requirements. Several industry responses have become evident over the past few months as margins have come un-der pressure. These include:

• Scaling up to spread costs (e.g. UBP through the acquisition 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)1

However, a strict focus on costs is only one side of the mar-gin equation and can only go so far in reducing the cost/income ratio without starting to affect current or future revenues. The alternative is to increase revenues, especially by taking measures that do not result in a corresponding rise in costs.

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COST is not everything

Increasing revenues is often overlooked as a course of action due to the perception that it will require a significant 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 relationship

managers (RMs), for example.

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AUM GrowthThe lack of demonstrable success of strategies such as hiring RM teams in order to increase assets under management (AUM) has put a damper on this practice and led to caution among leading private banks.

2”Asia 2016 RM Headcount League Table”, Asian Private Banker, https://asianprivatebanker.com/2016-rm-headcount-league-table

Pricing: Are you leaving money on the table?4

There are, however, additional revenue sources that do not require a costly investment (e.g. adding RMs) or the need to wait for a market upturn.

Orbium’s Front Office Revenue Enhancement offering focuses exactly on those opportunities where we can help clients uncover additional revenue by reviewing the existing practices of the bank, its people, processes and systems.

Our offering includes:

• Pricing optimisation (“Are we pricing our services and products correctly and maximising revenues?”)

• Reviewing the RM model (“Are RMs preoccupied with internal tasks and what options exist for removing or reallocating some of these tasks?”)

• Evaluating sales effectiveness (“What makes RMs effective at selling and how can this be shared with other RMs?”)

• A review of a bank’s value proposition (“Are we selling the right products and services to the right clients?”)

IN THIS PAPER WE FOCUS ON PRICING OPTIMISATION.

How do you ensure RMs bring in more AUM per sale, gain greater share of wallet?

RM Sales Effectiveness

What drives discounts and how can they be reduced? How can we improve our pricing models and governance?

Pricing Optimisation

What activities can be moved to other roles and what activities can be simplified or are redundant?

RM Sales Efficiency

How do we make sure we are selling the right products and services, in the right way, for the right segments?

Proposition Optimisation

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Benefits from pricing optimisation can be substantial

What are the benefits?

• Reduce revenue leakage: On a US$100bn AUM book of business, even a 1bp reduction in the average discount can yield a US$10m revenue uplift. This compares favourably with the cost of such an undertaking, which typically only requires in-depth data analytics, interviews, strengthening RM support in some areas and/or the implementation of a revised price list. Benefits tend to consistently outweigh the costs of such an exercise.

• Innovate and correctly position pricing: There is much to emulate in other sectors, including pharma or the fast-moving consumer goods industry, which have mature pricing strategies. Best practices include value-based pricing (including using focus groups), which allows banks to maximise pricing on a per-segment basis, much more so than is currently the case in private banking.

Disciplined, targeted pricing has a significant IMPACT ON THE BOTTOM LINE

Pricing: Are you leaving money on the table?6

Our experience has shown us that significant revenue improvements are achievable. However, trying to optimise your pricing is not without pitfalls:

1. Introducing a reduction in discounts needs to be carefully implemented otherwise there is a risk of client attrition. As an example, RMs need to have had the opportunity to prepare and test their client conversations and have the right responses to the inevitable objections and discussions that will ensue.

2. Our experience also tells us that a pragmatic and phased approach tends to yield better results. Short term: immediate changes should be piloted on new business, for instance, leading to fewer discounts being given away. Feedback is also important to constantly improve the sales messages and positioning used to justify the price changes, before a wider roll-out. Medium term: longer time frames should be applied to achieve similar reductions in discounts for the existing book of clients.

3. It is also clear that there are valid and justified reasons to give discounts and this practice should not be completely removed. In cases of additional AUM being driven by discounts

THE ORBIUM PRICING OPTIMISATION APPROACH

or where the cultural norm is to negotiate, a wholesale ban on discounts would clearly be counterproductive. Addressing concerns with key stakeholders is also critical because many are opinion-makers and can block changes.

4. Last but not least, we have found many endeavours are quickly overwhelmed with too many different views and too much analysis, and can become too slow or costly if the approach is not highly structured, disciplined and focused.

Our end-to-end approach is designed to help navigate these and other pitfalls when trying to achieve revenue uplift from reductions in discounts. We work to:

1. Establish a fact base: how much the bank discounts and where (by region, by product, by client or RM group)

2. Investigate the root causes for discounting practices

3. Identify actions that help reduce discounts and are supported by the wider bank and the frontline.

12 weeks (Illustrative)

Raw Data Benefits

Quick Wins

Stakeholder Involvement

Fact Base Root Cause Analysis Actionable Insights

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Example Fact Pack Outputs

1. Fact BasePrivate banks first need to establish the scale of the problem i.e. understand how much revenue is being leaked through discounts and identify where the leaks are most damaging. Often there are many smaller revenue leakages occurring, however experience has demonstrated the importance of targeting the larger opportunities. Such an approach keeps the scope of the project manageable and ensures a sharp focus on delivering results.

With results in mind, working with our proprietary internal tool (Askari) our consultants can very quickly cleanse data, merge data sets from multiple systems, identify outliers and missing data, convert currencies etc. and auto-generate summary views of where discounts take place and how much revenue is being lost (see examples below).

Within 2-3 weeks (given available data of sufficient quality) we can show analysis of average discounts by:

• RM teams (e.g. NRI team, UK team, Malaysia desk or alternatively by years of experience and tenure at the 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).

Using Askari, we can further detail the analysis by subsets (e.g. brokerage by asset class or RM teams by years of experience) to help drive the analysis and determine focus areas for the next phase of the investigation.

While quantitative analysis is important, experience shows that it is critical to have context and understand what led to some of these practices. Hence the fact pack (as described above) is supplemented by some external benchmarking and a review and understanding of the internal context in which the pricing was set and maintained (e.g. whether KPIs include a measure of profitability and/or price enforcement).

While benchmarking is not the focus of the exercise, it is important to understand pricing practices and the ceilings 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 by differences in feature and service levels. For instance, differences in advisory fees may be linked to wider market access (e.g. execution and custody of more exotic markets), wider or specialised research, star employees etc. Hence while benchmarking clarifies where in the market a given bank’s prices fit, it is not helpful in setting or maximising pricing because often products and services are not directly comparable.

The purpose is to get the organisation aligned on a COMMON FACT BASE that everybody agrees with

In-House Funds

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Pricing: Are you leaving money on the table?8

2. Root Cause Analysis

Root Cause Analytics

Tools

Beyond our pricing repository, we have also built tools to facilitate and speed up the analysis of likely root causes. We have built dashboards for all of the drivers of discounts in our repository and can quickly identify those with strong correlations and outliers.

Knowing where the most material discounts take place is not the only information needed to allow a bank to address the practice. The drivers behind the discounting also need to be understood. This is because:

• There may be a solid business reason – discounts given to persuade clients to place additional AUM with the bank. This may, in fact, reflect the need to improve existing AUM tiering

• There may be different actions that can be taken to counter discounts; understanding which one applies can save a lot of money e.g. communication and sharing of best practices, instead of IT or wider organisational changes

• Addressing discounts alone may not be effective if the underlying issue is with how prices are set in the first place.

Hence clarity on what is driving the discounts is key to implementing measures that do not damage the business and are not unnecessarily costly.

As mentioned earlier, even when focusing the root cause analysis on the areas with the biggest identified discounts, many competing views often exist across the bank as to what drives those discounts; investigating them all can quickly overwhelm the analysis.

Based on insights from previous assignments, we know what to focus on. This experience is documented in the Orbium Pricing Repository, a collection of our insights derived from work in the pricing space. The repository includes:

• Typical drivers of discounts • A repository of innovative pricing solutions and

approaches, also drawn from other industries • Compilation of pricing practices and levels based

on publicly available price lists.

The Orbium Pricing Repository

INPUTS1. CLIENT RESEARCH

How much of the client research data (preferences tastes, trends, brand strength, customer perpection, needs) is taken into consideration for pricing setup?

2. COMPETITOR RESEARCHHow much of the competitor research data (similar

products, fee structures, services) is taken into consideration for pricing setup?

3. COST TO SERVEHow large of a factor is the cost to service/

cost of product used in the consideration for pricing setup?

4. INTERNAL EXPERTISEHow much of a factor is internal expertise/

RM experience used in the consideration for pricing setup?

5. PRICE REVIEWS/RESETSHow soon are price reviews/resets done after price setting? Hpw frequently do they occur? Does one precede the other?

6. PRICING STRUCTUREHow are prices structures in terms of fees, tiering, booking centre demarcation, trail fees?

7. PRICING GOVERNANCE & OWNERSHIPHow is price setting decided i.e. by booking centres, RM teams, central decision making team?

8. PRICE MONITORINGHow is pricing discipline being ensured?

Hypotheses Notes Client Segment RMs Products Markets*

Are discounts related to assets under management of each client?

• AUM bracket vs Incremental AUM value e.g. 0-500, 500-750 mn vs 501, 502, 503 mn...

• Discounts by AUM vs discounts by AUM potential

• Referral (Retail vs Corporate vs IB) vs Fresh lead

• Business owners, Media, Government, Professionals, Inherited, Corporates, Trusts, Individual vs Joint, Charities

• Risk Questionnaire, RIsk profile (1-5)

• Different levels of granularity (portfolio, person, overall strategy e.g. wealth accumulation vs wealth preservation)

• Risk tolerance vs Risk capacity

• Transactional vs relationship-based

Are discounts higher for clients who are brought in through referrals?

Are discounts related to types of assets disproportionately owned by the client group?

Are discounts dependent on the profile/source of wealth of clients?

Are discounts related to the risk profile of the client?

Are discounts higher with recurring clients?

Are discounts higher with longer-term clients?

Are higher discounts a result of legacy pricing for the client (as a result of the merger and integration of another bank)?

✓

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Pricing: Are you leaving money on the table?10

External: It can be equally challenging to convince clients to accept the new pricing regime. However, there are exciting innovations taking place in the banking industry in relation to pricing solutions and approaches – from the simulation and implementation of new price lists to time-based discounts. We have captured our collective experience of the many innovative ways in which clients can be persuaded to accept new pricing structures as part of the Orbium Pricing Repository. We leverage it when designing ways and means to help the bank and its clients transition to the new regime.

To make change happen IN THE FRONT OFFICE, you need RM support

Once the analysis has been completed, it will be clear what action the bank needs to take. For example, there can be additional training for RMs to help them avoid discounts. However, both internal stakeholders (i.e. RMs) and external stakeholders (i.e. clients) have to adopt and support the change as well.

Internal: To effectively and efficiently implement the changes, it is important to have the entire organisation support the need to do so. Example considerations include:

• Testing solutions through workshops with RMs and ensuring that they are workable and client impact is minimised

• Successful change also necessitates a change to KPIs, in line with the old adage that “what gets measured, gets addressed”

• Carefully choosing opinion-makers, such as key RMs and leaders from the booking centres, ensures that change is instilled from within. Change agents are often very effective in helping to introduce new practices among their colleagues and peers

• Leveraging lower-cost tactical changes to create funding for more-costly strategic ones. This ensures that momentum is maintained and existing projects are not displaced.

Although it can be challenging to improve pricing, using our three-step structured approach can help set banks on the path to reducing revenue leakage and to gaining the advantage of targeted and innovative pricing. This can help drive margins higher despite the more challenging market environment.

Therefore, there is a need for many private banks to revisit their current approach to pricing. Given the margin pressures banks face, the time to act is now. Don’t leave money on the table.

3. Actionable Insights

About Orbium

Orbium helps banks and wealth managers realise their strategy and execution priorities. Widely recognised for exceptional commitment, the firm helps clients to realise revenue growth and efficiency gains through innovation and industrialisation. By effectively blending business and technology consulting with software products and strong partnerships, Orbium enables clients to focus on what matters most: their own success.

The firm has over 500 employees located in the world’s key financial centres: New York, London, Zurich, Geneva, Singapore, Hong Kong, Frankfurt, Düsseldorf, Luxembourg, Paris, Sydney, Berlin, Warsaw and Manila.

www.orbium.com

Contact

Piotr ZboinskiSenior Manager, Management Consulting Services, APACpiotr.zboinski@orbium.com

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