By Steven Seow, head of wealth management, Asia at Mercer
A decade before the Global Financial Crisis, relationship managers (RMs) entering wealth management in premier and private banking thrived thanks to generous ‘structured sales incentive programmes’ known as SIPs.
Most of the these RMs were young and driven high-performers from the retail banking world, lured by quarterly incentive payouts, which often meant their take-home salary was upwards of three times their base pay.
Banks fighting for market share in the growing premier and high-net-worth segments were only too happy to oblige.
Then came the crisis, and everything changed, as we all know. Or did it?
Making a clean sweep
The Turner Review, published in March 2009 by the Financial Services Authority in the UK, stated there was a ‘strong prima facie case that inappropriate incentive structures played a role in encouraging behavior which contributed to the financial crisis’.
Following public outcry new regulations compelled banks to do away with structured or commission-based incentives for private bankers, replacing them with discretionary annual bonuses based on the overall growth and profitability of the business.
Mercer’s 2016 Global Financial Services Executive Compensation Snapshot Survey found that most financial services companies are taking significant steps towards fostering a sound risk culture among their staff.
Of the companies surveyed, 62% have carried out initiatives to penalise misconduct and non-compliance to a ‘great degree’, 60% can show evidence of setting the right tone at the top, and 58% are communicating clear risk culture objectives.
Discretionary bonuses for private bankers and SIPs for RMs have become increasingly aligned with other attributes such as compliance with regulation and client satisfaction, as opposed to being driven by revenue alone.
However, relationship bankers responsible for the premier segment within the retail banking industry for most of Asia continue to be paid structured quarterly SIP payouts.
HSBC leads the charge
One bank stands out in transforming the status quo soon after the financial crisis – HSBC. It is the only bank to have done away with structured SIPs in its retail banking wealth management division. It’s interesting to consider whether HSBC’s performance has been impacted by this decision.
On the face of it, the answer would appear to be no. Although it was largely expected that most banks would follow suit, we are yet to see that happen over the past three years.
However, with increasing regulatory scrutiny rising fast in the wake of the 1MDB scandal, it’s fair to say restructuring of incentive payouts is no longer a question of ‘if’ but ‘when’. Banks, whether global or homegrown, have proactively taken steps to change the tendency of short-termism and excessive risk taking among RMs.
RMs in private banking now tend to focus on ‘customer lifetime value’ and on developing their knowledge of various investment products.
Misalignment of interests
SIPs on the retail side, however, tend to motivate RMs to generate revenue, particularly from the investment advisory business, which generates transactional revenue rather than getting RMs to act in the best interest of clients. Structured SIPs for RMs in retail banking for the premier segment are therefore misaligned with the shift towards increased governance.
Nor do they sit well with the key tenets of meritocracy and performance management, as they encourage RMs to focus purely on the revenues they bring in rather than client satisfaction and regulatory compliance.
This structure has also created a widening gap between the skillset and profile of RMs in retail compared with those in private banking and wealth. Integrating these two employee segments once the incentive structures are homogenised and everyone shifts to discretionary incentive structures won’t be easy.
The fundamental shift in the retail banking business under way due to technology will only exacerbate this talent challenge for retail banks.
This article appeared in the October issue of the Citywire Private Wealth magazine.