HSBC platform offers broader product range

It is well known that if a fund house wants to be successful in the retail distribution space in Hong Kong, it must be able to get into the good books of the wealth management heads at HSBC, Standard Chartered or Citi, as these are the three major retail fund platforms in this key financial hub in Asia. At the helm of HSBC Wealth Management, personal financial services, in Hong Kong (HK) is Bruno Lee. A local, with 20 years of international experience, Mr Lee has also worked at Fidelity Investments and Invesco, for which he was CEO in Taiwan from 2004 to 2005. This is Mr Lee’s second spell at HSBC, where he started his career after graduating from the University of Calgary in Canada in 1988. When he rejoined the organisation three years ago in his current role, he found a very different organisation to the bank he left for richer pickings in his youth. One of the main changes was that the bank was no longer just an outlet for its own products. HSBC embraced open architecture around four years ago, and third-party funds now represent 70 per cent of the firm’s total fund assets in HK, says Mr Lee. “Before that, we offered mainly in-house products.” Helped by the buoyant stock market, the firm’s distribution business took off and has grown substantially thanks to this broader product proposition, he says. A couple of years ago, under Mr Lee’s leadership, and in conjunction with the re-launch of HSBC Global Premier – the bank’s division servicing customers holding at least HK$1m ($129,000) in liquid asset accounts - a more systematic fund screening process was introduced. The results of this process are incorporated in the recommended quarterly list, which includes those funds that have “consistently performed better under various market conditions”. At least two funds, which can also be HSBC products, are recommended in each of the asset classes that form clients’ core portfolios. Currently, of the 30 recommended funds across the various asset classes, only four are in-house products. “We are indifferent whether it is an HSBC product or not, and the front line people are not compensated differently depending on whether they sell an in-house product or not,” he says. The introduction of this more rigorous system aims at making sure the firm’s sales force employs a consistent approach when offering products to investors. Although around 2000 funds are available for sale in HK, only 400-500 funds have gained a place on HSBC’s shelves. “A lot of the fund houses may have funds authorised here but they do not provide sales and marketing support. But in our business, as a retail bank, we require a lot of ongoing updates on the products, on the markets and a great deal of training from the product providers,” says Mr Lee. Also, asset managers must offer a reasonable product suite as this enables investors to “switch around at a lower cost and have a wider range of choices and expertise,” he says. “Very seldom we will select a particular performing asset class, if the fund provider only offers that one.” Finding the right profile The discussion on which funds will populate a client portfolio is the concluding act of the portfolio building service, which the bank offers to its premier customers. Investors choose a portfolio that suits their risk profile and their preferred market exposure. The four profiles available - stable, balanced, growth and aggressive growth - are offered in two different global portfolios, only one of which includes HK and China equities. Depending on the profile, the other main asset classes included are: global bonds, global high yield bonds, emerging market bonds, US equities, Europe equities and emerging market equities. “Our customers tend to be leaning more towards the balanced and growth portfolios, including HK and China equity exposure,” says Mr Lee. Currently only 20 per cent of HSBC premier customers invest in mutual funds. But there is room for growth. The launch in Hong Kong, at the end of 2000, of the Mandatory Provident Fund (MPF) system, a mandatory, privately managed defined contribution scheme, strongly contributed to boost the use of mutual funds, he says. “Hong Kong people have started to see funds as long-term investments or pension saving instruments. The usage of mutual funds has grown quite dramatically in recent years,” he says. “Forty per cent of qualifying customers in HK invest in their long term pension fund, so you would think that 40 per cent of our target customers would feel comfortable using mutual funds for their discretionary savings. There is big potential for us to grow our mutual fund penetration.” While investors still take a relatively conservative approach when managing their pension fund money, they tend to be “trend followers with a lag time” on the discretionary investment side, he says. “From a distributor stand-point, we would like to keep educating customers about asset allocation and diversification. I think there is still a long way to go in terms of customer education and development in the wealth management business in Asia.” Structured products are classified in the same category of mutual funds. “Structured products can be quite complicated but to really reduce the complexity of the equity linked investments, we tend to introduce investors to a single underlying with an ETF, which generally mirrors the Hang Seng index. This way the proposition becomes much simpler,” says Mr Lee. Currently only 10 per cent of HSBC premier customers use structured products, compared to 20 per cent who use funds and 40 per cent who trade (mainly HK) stocks. This means that the customers who use structured products are still the most sophisticated ones, he explains. “The fact that HK people use a lot of derivative warrants does not necessarily make them sophisticated investors,” says Mr Lee. Insurance products are also an important instrument in wealth management, he says. “A lot of the HK people, particularly those over 40, are quite concerned about not being sufficiently prepared for retirement.” The fixed annuity products are becoming very popular in HK. “We are now in the process of looking at the next phase of annuity product,” he says, revealing his plan to develop variable annuities, which are typically invested in mutual funds and are very popular in North America. But funds and structured products represent only 7-10 per cent of total assets supervised by Mr Lee, while insurance products account for a few percentage points. “Given the current market condition, it is highly unlikely that the weighting of the investment products on the total assets will increase substantially,” he says. In fact, around two thirds of the investable liquid assets that premier customers invest with the bank are in cash, and 20 per cent are in direct stock investments. Something that differentiates HK from other markets is the huge investment in foreign currency. “Of the total money that our customers invest in cash, fifty per cent is invested in foreign currency in high yielding currencies,” he says. “Their people have to go round all the time, as we have 100 branches and a 1200 front line licensed sales force in HK.” “This is consistent with the level of sophistication and experience of the HK investors.”

Rolling guided architecture out across asia The portfolio building service and the recommended fund list of the guided architecture approach is gradually being exported to other markets in Asia from Hong Kong. “Premier banking is a global proposition and the holistic financial planning model is very consistent across our Asia-Pacific region of 18 markets,” says Bonnie Tse, head of premier, wealth management and mid-market segment Asia-Pacific in the personal financial services division at HSBC. “We offer a consistently high level of service standard to our premier customers across the region, but the types of solutions available vary, because of regulatory constraints across the countries, and they are also tailored to the investor’s investment experience,” she says, emphasising the importance of learning and sharing experience with the more mature wealth management operation in Hong-Kong. In terms of product selection, there is a team of local specialists in each country, who is responsible for the local product portfolio. However, for more sophisticated and innovative products, these need to be reviewed and/or approved on a regional level by Ms Tse’s team.“With this kind of committee approach, our confidence level in selecting the third-party provider is very high,” she says. The number of funds recommended in each Asian country also varies greatly depending on the development stage of each domestic fund management industry. Not surprisingly, the longest list of recommended funds is in HK. It is very important to keep abreast of the types of solutions available, believes Ms Tse, who welcomes the opportunity to be approached by third-party managers to share with them their best ideas. “When we like that idea, we take the fund manager to meet the local wealth management team so that they can have a direct discussion,” she says.

Bruno Lee, HSBC Wealth Management