Global players eye Korean growth

The fifth largest economy in the Asia Pacific region, the Republic of Korea, or South Korea, also accounts for the fifth largest share of the region’s wealth. According to the latest Merrill Lynch Capgemini Asia-Pacific Wealth Report, Korea experienced one of the fastest growth rates, at around 19 per cent, in the number of high net worth individuals (HNW) between 2006 and 2007.

Korea’s wealth industry was among the least impacted in the region by the financial crisis. Its HNW population shrank by 11 per cent between 2007 and 2008 as against the region’s average decrease of 14.2 per cent.

South Korea’s HNW wealth market, worth $272bn in 2008, has thus far been dominated by domestic banks such as Hana Bank, Woori Bank and Kookim Bank and securities firms such as Samsung Securities and Mirae Asset Securities. Among foreign banks, Citi is a key player and Standard Chartered is showing a keen interest in the field.

Joong Jae Yoon, head of Private Banking at Standard Chartered First Bank, the Korean unit of Standard Chartered, said they currently account for only 3.9 per cent of the wealth management market share. He is confident that business would grow aided by the bank’s global network, timely research and advanced financial products. “The drivers behind Korea’s wealth management growth are the popularity of stock-type accumulated investment funds in 2004, market implementation of retirement pension funds in 2005 and the strong popularity of equities insurance in 2006.”

With the indirect investment culture blossoming and investment portfolios being diversified in areas other than deposits and real estate, Mr Yoon said he expected the wealth management market will continue growing strongly.

The Merrill Lynch Capgemini report showed that in 2008 HNWs in South Korea allocated 23 per cent of their investment portfolio to cash and deposits, 20 per cent to equities, 13 per cent to bonds and 38 per cent to real estate. Lee Jong Pil, head of the marketing division at Mirae Asset Securities, acknowledged that real estate has traditionally been the main investment avenue for Korean private investors looking to grow their assets.

However, he said that there has been a growing interest in investment funds fuelled in part by regulatory measures such as tax benefits provided to onshore funds investing in overseas countries. Mirae Asset Global Investments, a sister concern of Mirae Asset Securities, is the largest player in Korean asset management, offering sector equity funds and regional equity funds focused on Asia Pacific.

Bok-Ki Jung, head of Citi Private Bank Korea said that Korean investors prefer onshore funds and equity investment solutions and the main products offering by Citi to their high net-worth clients are onshore and offshore funds, simple structured products, brokerage services, and deposits.

The recent financial crisis has impacted investor sentiments, said Mr Jung, since a number of investors witnessed huge losses as a result of improper investment strategies suggested by inexperienced financial advisers. “Disappointed customers have withdrawn invested assets as the market picked up and the losses were recovered. However, the whole processes and consequences of the financial crisis gave a valuable lesson to Korean investors that they need professional wealth management services to make the right investment decisions and efficiently manage risks.”

Early last year sweeping financial reforms were initiated in Korea under the Capital Markets Consolidation Act that allows a single firm to conduct a variety of financial services such as investment banking, asset management, dealing and brokerage. The aim is for the Korean financial industry to eventually consist of three categories of firms: commercial banks, insurance firms and non-banking firms such as investment banks.

The new law has heated up competition in the wealth management space, said Mr Yoon of SC First Bank, as commercial banks and securities companies partner with firms that can complement their existing service offerings. Finding the right partner and appropriate value proposition to differentiate the financial institution in the crowded marketplace is a key challenge going ahead, he stated.

Another challenge in the Korean wealth management market, he noted, is diversifying the source of revenue in investment consulting services. “Although Koreans are used to paying for legal consulting or tax consulting services, they tend to think that investment consulting fees are included in their charge when people purchase or sell their investment products. Once investors develop greater recognition on wealth management consulting services, wealth management companies will be able to offer more diverse and high-quality services in investment, tax and real estate and diversify the source of profit,” he said.

Joong Jae Yoon, Standard Chartered First Bank