The changes underway in the wealth management industry are often described as "revolutions". It is true that those changes are disruptive in many ways. However, a look back at history shows that they can also be viewed more constructively, as a "renaissance" founded on a new regulatory environment and a shift in the market's geographical balance.
"The man of the future will be the man with the longest memory," according to Nietzsche. Indeed, remembering how the private banking industry has been affected by certain major shocks over time is very instructive. The term "revolution" is frequently used to describe the transformation sweeping the industry in recent years, in Switzerland and all markets that specialise in wealth management for non-resident clients. The revolution in banking secrecy, in regulation and in digital technology people are talking about is really spelling out the end of an era. However, we can also see these changes in a more constructive way, taking the view that they contain the seeds of a "renaissance" rather than the ingredients of a "revolution". This semantic nuance is crucial, because these two distinct visions imply different strategies.
An unprecedented crisis of confidence
Revolutions are always preceded by a series of crises. The finance and wealth management industry has not been short of crises in the last ten years: huge trading losses and defective controls, the subprime crisis, financial fraud, and a spate of convictions for regulatory breaches relating to tax, to international sanctions and to money laundering rules. This exposing of dirty laundry has triggered an unprecedented crisis of confidence, forcing politicians to take a tougher line with regulators and banks.
Before they actually lead to a revolution, crises often come hand in hand with denial, or blindness, which can give rise to inappropriate responses. When about to launch his revolutionary T model in the early 20eth century, did Henry Ford not used to say: “If I had asked people what they wanted, they would have said faster horses”? With hindsight, Switzerland's adoption of the Rubik agreements with the UK and Austria – an effort to maintain the doomed principle of banking secrecy – is a good example of that inability to foresee the effects of incipient change. When that change happens, it is invariably violent as powerful selective forces are unleashed. When climate or biological change happens, it causes the extinction or mutation of living organisms. When political upheaval or technological disruption occurs in the economic field, it similarly leads to disinvestment and restructuring. After a long period of growth, the Swiss banking industry has lost 20% of its institutions in the last decade. More than 60 banks have closed, supporting the idea that a brutal revolution is taking place.
Geographical and economic rebalancing
However, it is possible to view these changes in another way, drawing parallels with the Renaissance. The great explorations of that era and the discovery of new continents led to a drastic shift in the world's geographical and economic balance: established powers declined while others seized opportunities to increase their influence.
Switzerland has long been the centre of gravity for the world's wealth management industry, attracting a large proportion of the savings generated by post-war economic growth in the West. The rise of emerging economies, starting in the late 1990s, forced the industry to rethink its international strategy. Subsequently, tighter rules on accessing foreign markets and tougher cross-border policies transformed the competitive landscape and the scope of Swiss banks' activity. Banks have responded to the new situation in various ways. Some have actively sought to consolidate the sector by making acquisitions while others have rapidly retrenched; some have gambled on organic growth in foreign countries while others have refocused on their core markets. The industry remains in flux and its metamorphosis is ongoing.
The Renaissance provides another parallel, regarding new ways of disseminating knowledge. Gutenberg's invention of the movable-type printing press allowed much broader access to knowledge, enabling new elites to form their own views of the world. Knowledge gradually shifted from ecclesiastical communities, which previously had a near-monopoly over the production of manuscripts and therefore the spreading of ideas, to universities.
“Personalisation and advice: the key concepts in private banks' new value chain.”
The profusion of digital innovations we have been seeing in the last couple of decades represents the greatest advance in the dissemination of information since Gutenberg. This time, the shift is taking place from producers to consumers, with an immediate impact on the banking industry, whose products are essentially intangible. Now that information is accessible to everyone, models that involve banks acting as intermediaries have lost their value. In an increasingly transparent competitive environment, the only way for banks to stand out is in the way they process and interpret data. As a result, personalisation and advice are the key concepts in the banking sector's new value proposition.
In Italy, the Renaissance brought a clear break between medieval austerity and the advent of the humanist movement. Similarly, current trends in compliance and taxation are giving rise to a new system of values that is transforming the culture of companies in the financial sector. After decades of banking secrecy, private banks are now required to have investigative skills. Increasingly, they are taking the place of the public authorities in terms of preventing risks relating to money laundering, tax fraud, embargos and international sanctions. The public authorities are appealing to banks' sense of responsibility and ethics: examples are the "reason to know" principle introduced by US tax legislation (FATCA) and adopted in automatic exchange of information (AEoI) directives.
Change as a source of progress
Revolution or renaissance? For the wealth management sector, the concepts are two sides of the same coin, representing both aspects of any transformation, one disruptive, the other constructive. Seeing the changes currently underway as merely revolutionary means focusing on the threats, adopting defensive strategies, and adjusting actions in favour of short-term initiatives and other "quick wins" such as restructuring and M&A transactions. As regards communication, the "tone at the top" is often stark, conveying the need to resist an environment regarded as adverse. When change is portrayed as an inevitable by-product of decline, it is regarded as something merely to be endured.
However, the current period of disruption is unlikely to last. The shift in the geographical balance and the new regulatory framework have laid the foundations for a renaissance in the industry. Banks that have carried out fundamental reforms are already well positioned to benefit from that renaissance over the long term. It is time for banks to re-engage with themes that have been overlooked in recent years – such as innovation and partnerships – as part of their strategies. Communication is also crucial: banks should show that they are embracing change and see it as an opportunity for progress, as it was in the Renaissance era.
COO Private Banking