About IB

“Consulting-driven Theory” of Xue Ruifeng: “Entrustment + Consultant” Based Transformation of Private Banking of Industrial Bank

Time: April 16, 2015 Source: 21st Century Business Herald

The Private Banking Department of Industrial Bank (IB) was established in 2011, with 18,000 customers now.

While the number of customers grows quickly, General Manager Xue Ruifeng of IB Private Banking Department also feels the leaping pressure. How to retain customers among market competition and how to satisfy the diversified needs of customers in the areas including financial management, family trust, overseas investment, child education planning, heath management, and wealth inheritance both have to do with the future development prospect of private banking of the bank directly.

For this reason, IB Private Banking is make transformation quietly inside, shifting its business model from “product-driven” to “consulting-driven”. “We want to return the private banking to the essence of entrustment and consultant”, said General Manager Xue frankly.

However, the transformation cannot be finished in one step. IB Private Banking is confronted with a range of reforms such as business innovation, assessment of employees’ performance, system building and service upgrading.

In the opinion of Mr. Xue, the return of private banking model to “consultant” and “entrustment” is helpful to change the impression of the outside to private banking in an intangible manner.

He said: “Some people just simply think that private banking is to manage wealth for the rich. In fact, it is not necessarily true”. At present, most of the rich people are the first generation of entrepreneurs in China, and they face the test of passing on wealth and choosing successors for their businesses. While pushing the appreciation of their family wealth in combination with financial products, private banking can also, by way of management consulting, help their businesses to complete succession successfully, so as to keep the stability of business operation in a better way.

  Consulting-driven: returning to the essence of private banking

21st Century Business Herald: As the business model of IB Private Banking is shifting from “product-driven” to “consulting-driven”, what feeling do you have? What challenges will the business transformation bring to business operation of IB?

Xue: “Consulting-driven” model is not a new one invented by IB. In fact, it follows the development tendency of private banking service. In essence, the private banking service is not an upgraded version of wealth management, but rather a whole set of comprehensive financial service solutions offered according to the diversified needs of customers, which include financial planning, investment consulting, investment consultant, investment management, wealth protection and inheritance, overseas business, etc.

Nevertheless, in the initial development period of private banking in China, banking institutions would, considering the limited variety of financial products, often employ the product-driven business strategy, namely first launching different types of wealth management products and then attracting customers to purchase them. In business practice, this business mode has been proved to be defective gradually. On one hand, it restricts private banking service to the category of wealth management, thus hindering the application and development of other financial service solutions. On the other hand, it cannot meet the diversified needs of customers, and can result in losing customers easily.

Now, we shift to the consulting-driven model and give prominence to the development of investment under entrustment and investment consultant service, with a view to returning private banking to the essence of “consultant” and “entrustment”.

In actuality, there are quite a number of business challenges resulting from business transformation. In terms of performance assessment, the Bank used to put more stress on how many products a customer manager has sold, how much those products sold are worth, and how many business incomes could be gained from those products. Now, we care more about the service satisfaction and retaining ratio of customers, whether they are willing to fully entrust more wealth under our management, whether they are willing to try our new services...

In terms of product strategy, while intensifying innovation in wealth management products, we have also made service innovation centering on main needs of customers in the three aspects of increasing wealth, enjoying wealth and passing on wealth, attempting to launch such services as family trust, special purpose trust, offshore trust, and discretionary assets management. 

21st Century Business Herald: When mentioning the family trust, we discover an interesting phenomenon. Different from other private banking institutions which first launched their family trust service in cities of the first tier, why did IB choose Xi’an as the first city to launch the service?

Xue: This happens to be a coincidence. Then, our Xi’an Branch had a private banking customer who had a strong desire to handle the family trust service, so we took Xi'an as the first pilot city. Now, over 10 customers in Beijing, Shanghai, Guangzhou and Shenzhen as well as many cities of the second tier have signed the letter of intent for family trust with us, and nearly 10 customers have entered the substantial contract stage.

In actual operation, we also discovered that, compared with Europe and America where the family trust is mainly for passing on wealth, the service in China would also give consideration to other objectives, such as fulfilling future old age payment planning and future tax planning via the distribution plan of beneficiaries. Inside IB Private Banking, we call it the “family trust of Chinese version”.

21st Century Business Herald: Now the legal environment for family trust in China is not well-established. For instance, the lack of registration system for trust assets and under-developed taxation system both restrict the development of family trust. Which innovative financial measures do you employ to solve these problems?

Xue: Under the current legal environment in China, the private banking at home can hardly draw on the practice of Europe and America, for instance to isolate risks of trust assets and pass on wealth via financial instruments such as fund and insurance products, and special purpose vehicle (SPV).

At present, a comparatively feasible operation method is to add some contract clauses in the period of designing framework for family trust in China, so as to isolate the trust assets from the risk of bankruptcy and shutdown of individuals (or businesses established by individuals).

Currently, we are exploring the discretionary assets management and start to integrate family trust into the service for common development. In the early period of business development, we will focus on our current private banking customers. Meanwhile, we are studying the capital threshold.

  “Management accounting” makes up the financial shortcomings of private banking

21st Century Business Herald: You started strategic cooperation with Lombard Odier of Switzerland in last March, and now both parties have cooperated with each other for nearly a year. Which specific progress has been made?

Xue: The strategic cooperation between us and Lombard Odier is mainly focused on three areas: First, product cooperation. We will develop and issue a banking QDII product in collaboration with Lombard Odier, which will mainly be invested in the investment portfolios under the management of Lombard Odier. Now, the product development is in progress.

Second, service cooperation. Considering that about 1/3 of our private banking customers have assets abroad and overseas investment and wealth inheritance are highly demanded, we will recommend some suitable customers to Lombard Odier, who will help them achieve value preservation and appreciation of assets and wealth inheritance. 

Third, exchange and sharing of ideas and experience. In their development of over 200 years, Lombard Odier has survived 43 financial crises of various types safely. We are also learning from their experience in risk control management experience.

Generally speaking, the risk control management model of Lombard Odier is very rigorous. Compared with some private banking institutions in Europe and America who will adopt the practice of estimating a composite loss risk for each investment portfolio, Lombard Odier employs the following method: It will list out the maximum loss extent separately for each types of assets in each investment portfolio, then suppose various financial crisis scenarios, and work out the most appropriate asset allocation tactics, so as to ensure that the investment portfolio will suffer loss as small as possible.

Now, we hold a workshop on first-kind asset allocation each quarter, and make timely adjustment according to changes in the macroeconomy and financial market, so as to avoid investment risks.

21st Century Business Herald: After 8 years of development, many private banking institutions made great progress in the areas of product innovation and service upgrading. Which shortcomings should be made up in the next step in your opinion?

Xue: In recent years, private banking has developed at a fast rate, and innovated products and service emerged one after another. Nevertheless, it remains a problem whether these business innovations can bring profits to the private banking per se.

The profit assessment systems of domestic banks are still relatively extensive. For instance, with regard to the private banking, some institution will calculate how many business revenues have been earned, and then deduct the business operation cost including HR, thus educing a general amount of profits or losses. This method of calculation may not necessarily give an objective assessment to real operation situation of private banking service. 

In the mature financial markets in Europe and America, a private banking institution will often introduce the concept of “management accounting”, namely a range of rules established by the bank, to calculate the specific cost of each private banking service offered in the front, middle and back stages. On that basis, the bank judges whether there are really profits in the transaction and at which links the work efficiency can be improved and capital cost can be saved. The greatest challenge is how to work out reasonable rules for the apportionment of cost in the front, middle and back stages. Generally, no business revenues will be generated in the middle and back stages, so it requires in-depth communication and evaluation between different departments to apportion the cost accurately in each transaction of private banking service.

At present, we have tried to introduce the management accounting model into private banking and estimate the real profit situation of private banking by making comparison among customer deposits, mortgage loan, wealth management, and family trust planning with regard to the business revenues brought by them and the corresponding cost. After all, based on the “Pareto principle”, the 20% high-end customers served by a bank ought to produce desired returns. In addition, only when the private banking enters the orbit of sustained profits, will the bank put in more capital resources to further improve its own service quality.

21st Century Business Herald: How is IB Private Banking positioned as a part of the retail banking system? And what plans does the Bank have in the future?

Xue: IB Private Banking is now still an important part of the greater retail banking system of the Head Office, sharing resources with other departments in the retail banking line in many areas such as marketing team, product family, technological system, and service network. Meanwhile, the business performance assessment of the Head Office over the private banking line is inclining to a “would-be business division”, or a quasi-business center or profit center, giving differentiated authorization in the areas of finance, personnel, product threshold and risk management.  Recently, we are also further accelerating the reform of business line system and mechanism, and actively exploring an organizational model suitable for high-level and professional private banking service.