Finding the recipe for success

The Asian wealth management market is a complicated hybrid of layers and segments, each with their own risk profiles. Managers have tough decisions to make on which countries to focus on, which groups within these countries to target and lastly how to approach these potential clients. Perhaps making the situation even more complex is a fundamental dearth of experience and talent in wealth management among organic Asian managers and investors. So with clear opportunities beset by these challenges, how are the private banks moving in this market? No country in Asia is generating more excitement among wealth managers than China. They speak of growing markets in India, South Korea, Singapore and even Vietnam, but China is clearly where the big money is, particularly among its high net worth individuals and family run companies. There is less interest in the mass affluent market, as the numbers around high net worth individuals and family companies are staggering. Managers at Société Générale and HSBC estimate there are more than 200,000 millionaires in China and this number is expected to grow by 13 per cent in the next year. Of that there are over 100,000 individuals with more than $15m of investable capital. In the region alone, UBS projects that investable liquid assets of affluent households in Asia Pacific ex-Japan will grow by 11 per cent per year from 2008 to 2012, compared to the global rate of 5 per cent. Christine Ong, chief executive officer of UBS Wealth Management, Singapore, says: “In size, China’s wealth pool is second only to that of Japan in Asia Pacific. Entrepreneurs are the dominant client segment and, typically, they seek a holistic wealth management offering based on strong advisory capabilities.” This conviction is shared by HSBC’s Asia Private Banking chief executive Monica Wong, who describes China’s wealth management market as young and entrepreneurial. She recalls a 36-year old Shanghai billionaire who is an entrepreneur that she has been working with since he was 28. Under the radar Chief executives of wealth groups, such as Ms Ong and Ms Wong, are targeting different levels of assets, but the mass affluent market seems to be less on their radars. HSBC’s Asian private banking unit explicitly does not deal with the mass affluent market, with this sector more frequently overseen by the bank’s retail division. The firm generally expects a level of $5m to start a relationship with a private banking client, while Société Générale is starting from a somewhat lower base of $1m. UBS says that usually the minimum to open an account is SFr1m ($975,000). With targets relatively clear, getting out and winning these clients is another story. Currently much of the Asian and Chinese wealth management industry is run by local banks such as DBS and Bank of China. The latter recently started its own distinct wealth management business. However, according to many managers, these banks are primarily holding companies that are simply not as effective or experienced as private banks in Europe and America. Luring wealthy clients away from the local banks is difficult as the industry is highly segmented, even within the various groups. For example, some of China’s high net worth and ultra high net worth individuals will be interested in taking more risks because they are younger and have a longer and more flexible investment horizon. However some are much more conservative because as entrepreneurs, they believe they are already taking a sizeable risk just by running their own businesses. Different mindsets “For the Chinese market onshore China is very different from Hong Kong for instance. There is a different mindset and different risk profile,” says Alex Fung, chief executive officer for Hong Kong and North Asia at Société Générale Private Banking. “The onshore China clientele is much younger. The economic development really started in the late 1970s. So it is still fairly young compared to Hong Kong. “In our industry it is very typical that no two clients are the same. But in general, Chinese clientele tends to be younger, more entrepreneurial, and they have different wealth management needs,” he adds. “In China there tends to be less need for trust management among entrepreneurs; because of their relative youth, succession planning and all that goes with it, is secondary. They may have a lot more cash flow requirements because their business is still developing,” explains Mr Fung. HSBC differentiates in how it services the high net worth versus the ultra high net worth clients. The latter is usually served by a senior relationship manager who will focus on a smaller number of clients with similar asset levels and investment requirements. The high net worth people can be placed among a book of more than 20 relationships. “Both groups can be the same in the sense that when it comes to trading they can very well invest in the same products,” says HSBC’s Ms Wong. “A trade is a trade. Of course even from there, there are also differences, in size as well as pricing. Likewise when it comes to credit, loans and leverage, with ultra high net worth requiring more sophisticated structuring and finer pricing.” However another layer of the market that requires an altogether different approach is in family wealth or a family run company’s trust and succession management. This is a highly lucrative sector as China and many of Asia’s companies have been dominated by families for generations. There are many highly sensitive issues surrounding succession planning but the private banks are focusing heavily on these potential clients. Succession planning and trust management is almost as much of a legal and taxation operation as it is wealth and asset management. “There is a popular saying as to how wealth eventually diminishes over multiple generations,” explains Ms Wong. “Shirtsleeves to shirtsleeves is the American saying and in Asia the Chinese saying ‘Fu but buo sam doi’ means that wealth does not survive past three generations. As family businesses are the backbone and engine of growth in most Asian economies, the ability to break this cycle is an important element of focus for us and how we serve ultra high net worth families.” Frequently, the bigger the business and assets, the more complications arise, particularly when a family is large and diverse. To help manage this, HSBC created a Family Wealth Advisory team to focus on these issues and many other private banks are putting together similar platforms. Changing appetites The risk profiles of these groups is diverse and has changed dramatically as a result of the financial crisis. According to Ms Ong at UBS, Asia’s wealthy have traditionally had a higher tolerance for risk and leverage, but lessons from 2008 were taken to heart and recently there has been more demand for simpler products. She says: “At the same time as investors have shunned relatively complex structured products in favour of simpler structures with shorter tenors and transparent payoffs, others have gone further to ground seeking principal protection, or in the case of the most risk averse, being sheltered in cash. “There has been a marked revival of interest in vanilla options, equity-linked notes and dual-currency and interest rate instruments,” explains Ms Ong. “Ironically, these are the first generation structured product instruments that were the mainstay for the industry more than five years ago,” she adds. As such there will be great deal of emphasis placed on products and education, but these products will be across the investment universe. Some individuals and families will still be more aggressive with their investments and will want more exotic structured products. However many, particularly the younger ones, tend to be very new to investing outside of basic fixed income and equity instruments and therefore will want more straightforward options. Société Générale claims they are not pushing particular products and as proof say their managers are not paid based on the product they manage to sell. They are more interested in an investor understanding where their assets are, which is where the education aspect to the business comes in. Some banks are actively engaging clients on the aspects of more complicated investments, while UBS has gone as far as opening an education centre in Singapore that trains employees and clients in nearly every aspect of wealth management. A lack of experience Consequently one of the main issues confronting this expansion is an overall lack of experience among Asian wealth managers. It is not something they like to admit, but the fact is that wealth management in Asia is a comparatively newer industry and there are simply not that many domestic managers. According to Simeon Fowler, chief executive officer and executive search firm Fox Partnership, there is not enough talent in Asia to meet the growing demand of the region’s wealth management industry. As such, many private banks are recruiting European and American managers to come to places like Hong Kong and Singapore. He says: “While the local banks say they are well committed to wealth management, some of the staff they have just don’t match up to their European and American counterparts. A lot of the banks in Asia haven’t mastered private banking yet. They all want to get into the ultra space, but their private banking is not up to much, to be honest.” The banks bristle at the notion that the domestic talent has not reached an appropriate level. Instead they prefer to call Asian managers “talented, but less experienced”. Regardless, they all admit they are recruiting and actively adding to their private banking teams in their hubs of Singapore and Hong Kong. They say this is to meet demand, and while this is true, there have been a number of big names who have relocated to Asia in recent months. Many banks, needing to reduce staffing levels across American and Europe, are finding that sending staff to Asia is a decent solution as there is more demand and business to be won across the region.

Addressing the pursuit of talent in asia pacific At the forefront of developing organic talent in wealth management in Asia has been UBS’ multi-million dollar education centre in Singapore known as the UBS Wealth Management Campus – Asia Pacific. Opened in April 2007, the 500,000sq metre centre is located at Command House, the former residence of the country’s first president. The Singaporean government has been a huge supporter of the venture and gave UBS financial assistance to convert the building as it also recognized the growing demand for local wealth management expertise. Shortly after the opening, when UBS ran into trouble with its toxic assets and troubled balance sheets in 2008, the government reportedly gave the firm $10.6bn to keep the campus going, a claim UBS denies but adds through its press office: “The Singapore government has been supportive of the initiative as with all such educational initiatives.” The curriculum reads like an MBA brochure and offers to train, develop and certify UBS employees. It says it uses a non-traditional teaching method that relies more on individual teacher-student relationships and practical, real-life training. Specifically it trains for risk management, legal and compliance matters, technical banking and finance, advisory and sales skills. Curdin Duschletta, head of leadership and learning at UBS Asia Pacific, says: “The campus frequently seconds the firm’s senior leadership to commit their time to training at the faculty while external experts bring best-in-class knowledge of specialist topics.” Interestingly the campus is also offered to UBS clients, possibly with the aim of increasing client education and their interest in more advanced and structured products as opposed to traditional and more conservative investment strategies which have usually been preferred by Asians. The bankers say this is common sense, as they can’t, and shouldn’t, sell a product that the client does not understand. Officials at other private banks give mixed reactions to the UBS project. Amid tones of jealousy, there are assertions from UBS’ competitors that they are taking similar measures and are trying to find ways to develop local talent, though none of them are going as far as setting up an entire school and they see it as unlikely that more of these ventures will pop up around Asia. While they praise the UBS centre as a good idea and say that more education is always welcome, they do not think this centre alone is enough to solve the imbalance of talent and improve investor’s knowledge and skill. In their minds they would like to see governments across the region do more to encourage the growth of the industry as this is what will bring about real change. Many managers have praised recent efforts by the government in Hong Kong to make the system more business-friendly, but say that there are always more measures that can be taken to help wealth management in Asia.