Supporting an Effective Risk Culture in Private Banking/Wealth Management

“Each customer is unique”, starting from this perspective, the most recurring promise of the private banking / wealth management players becomes: “Each of our solutions is unique”, which sounds good, but behind this promise there are a lot of risks. If everything is unique, then it is almost impossible and extremely expensive to keep the overall situation under control. While much less exciting, the most serious promise to the client should be: “We are able to keep your risks under control”, and this promise becomes reliable, if the private bank/wealth management unit’s risks are also under control. That is why two of the biggest challenges in the private banking /wealth management area are related to: 1) How to combine risk management’s need for standards and the private banking/wealth management promise of customization; 2) How to comply with the rapidly evolving regulatory environment, which implies being able to invest in terms of risk culture, risk management and risk control, while maintaining an appropriate cost-income ratio. As a result of increasingly prudential regulation, combined with the AML landscape, plus the input on product and customer suitability, the pressure on wealth managers is growing fast, as are IT and HR expenses. In this chapter, our proposal is to adopt this double risk-based view, looking at the main trends in private banking/wealth management. In our view, the choice of business model is the strategic starting point, according to the ECB: “The key risk that stands out relates to banks’ business models and profitability.” (ECB, Banking Supervision: SSM priorities 2016). In the following two paragraphs, first of all, the private banking/wealth management promise of customization is combined with the monitoring of risks, in a MiFID 2 perspective. Secondly, the private banking/wealth management business sustainability is placed under the observation.