Stirring up the perfect investment offering and pricing in a Post-MiFID II world

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Stirring up the perfect investment offering and pricing in a Post-MiFID II world

Private banks may have more in common with restaurants than you think…

In recent times, the private banking market has significantly changed, as MiFID II has had a wide range of implications for banks offering private banking services. The provisions of MiFID II fundamentally challenged the existing business models of private banks, changing the ingredients that are available to them. Unsure on how to react until recently, we now see that faced with entry into force of the regulation, the majority of banks have decided to offer a new menu. Changing ingredients and changing customers compel banks to review existing recipes, making strategic choices regarding the future of their business model.

In recent times, the private banking market has significantly changed, as MiFID II has had a wide range of implications for banks offering private banking services. The provisions of MiFID II fundamentally challenged the existing business models of private banks, changing the ingredients that are available to them. Unsure on how to react until recently, we now see that faced with entry into force of the regulation, the majority of banks have decided to offer a new menu. Changing ingredients and changing customers compel banks to review existing recipes, making strategic choices regarding the future of their business model.

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The results of Deloitte’s analysis show that services offered continue to range from execution only, advisory, and discretionary portfolio management but the related offer has become more diversified:

  • Execution only is becoming a part of the menu. Previously not put forward as such, execution only services are increasingly emerging as a packaged offering for a number of banks. In particular, banks with a client base with fewer total assets are using packaged execution only offers to attract clients and eventually upsell toward advisory or discretionary services.
  • Novelty is making the menu more exciting. Clients are being proposed newer and more innovative pricing models than in the past, as banks respond to the changes to which they are confronted. Discretionary portfolio management clients, for example, can now choose more traditional fee structures, such as broker and all-in fee structures, or more innovative performance-related all-in fees.
  • Clients who are willing to pay are offered a premium menu. Banks are increasingly differentiating between standard and premium offers; while some banks continue to propose only one type of offer for each service, a large number of banks are attempting to respond to the changing structure of the Luxembourg private banking market by creating a more segmented offer, which responds to the needs of individual clients.

Not all prices are adapted to the menu and clients

The majority of private banks have a clear strategy regarding the services and clientele they want to target. However, it is visible that not all actors have actually aligned their pricing with the strategy that they have defined.
The results show that the market is fragmented regarding the degree to which their pricing is aligned with their strategy. Some actors seem to have carried out significant analysis and definition work resulting in pricing grids that are aligned with their strategy. By contrast, other banks’ pricing is actually attracting clients that do not belong to their target segment, often resulting in a high cost to serve and low margins or pricing too high, dissuading clients in their target segment.  

Conclusion: Taste, evaluate, and review your menu to attract the right customers and increase profitability

Banks need to ensure that they adapt the prices accordingly. We have observed two-thirds of banks reviewing their pricing grids in the wake of MiFID II. Pricing should not be underestimated, but be seen as a key contributor to the implementation of the bank’s strategy, which can lead to a significant increase in profitability by driving the RoA of each individual customer.

As in the case of a restaurant, banks need to take a strategic approach toward defining their pricing strategy, looking both at the revenue side—identifying the clients that they want to target, their willingness to pay, and their perception of different pricing models—but also the cost side.

From the cost side, wrong pricing will attract non-target customers, which can have a negative impact on the bank’s bottom line by acting on both drivers through a number of reasons, including a diluted brand image, a potential inability to serve these clients adequately, or a high cost to serve.

In contrast, having an adapted pricing model will ensure that margins are adapted and increase the profitability of individual clients.

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