Hong Kong set to abandon its old investment model

Hong Kong has long been one of the world’s premier trading hubs, with a well-deserved reputation for savvy consumers who enjoy the art of the deal.

This reputation has carried over into the investment sphere, with a transaction-based model dominating wealth management approaches. While the wealth management industry has transitioned away from a brokerage model in North American and European markets, there has been a stubborn resistance from both clients and brokers to change what has worked for decades in Hong Kong.

However, the challenges posed by the financial crisis, coupled with the continued creation of wealth coming from the mainland, is forcing a re-evaluation of the best way to serve this growing segment.

The “one country, two systems” model operating in the political arena in China can easily be applied to investor attitudes in the country.

Current trends identified in the Future Priority Report 2012, released by Standard Chartered Priority and International Banking together with Scorpio Partnership, show clear differences in the types of investment products preferred by affluent investors in Hong Kong and mainland China. The Future Priority report surveyed more than 2,700 affluent individuals across Asia to track their attitudes and expectations when it comes to wealth.

When asked which types of investments they would make in the next 12 months, Hong Kong investors indicated a strong preference for direct equities, commodities and derivatives, significantly above the overall Asian sample response.

When the same question was asked of mainland Chinese, they were significantly more likely to invest in high-rate savings products, direct fixed income, exchange traded funds and index products than their compatriots in Hong Kong. In fact they are almost 15 per cent less likely to invest in direct equities.

This difference in attitude may stem from the way wealth has been created. Hong Kong Chinese have grown up in a trading environment, which may have increased their comfort with a more speculative, short-term approach. In contrast, wealth created on the mainland is often derived from a manufacturing and industrial base, leading to a greater appreciation of longer-term investments and steady growth trends.

From recent conversations with wealth management firms active in the region, it is clear that many are aware of this growing preference for more conservative investment products, and have been taking steps to adjust their investment proposition. These instruments can fit well in a fee-based advisory approach, rather than the historic transaction approach.

While this transition has been in the works for some time, as it is generally more profitable for the institution, it is only now picking up steam in response to an emerging investor population that will value these services. Since the crisis of 2008, there is a growing aversion to ‘product push’ and greater emphasis on planning for life goals.

A key part of the transition will be retraining relationship managers to effectively explain an asset allocation process, and deliver advice based on model portfolios. For some experienced bankers this may prove too difficult, and we would not be surprised if banks resort to training new talent, rather than trying to break long-entrenched habits of the old guard.

The model products developed, and the way they are marketed will also be different than those approaches found in the US and Europe. It is expected that they will be more modular in nature, providing the bank with more opportunities to interact with the client.

This will give clients the feeling of a bespoke service, but still use a cost-effective product-centred method of delivery. The advisory model can be delivered in bite-sized chunks to Asian clients, allowing these clients to remain engaged with their bank and relationship management team throughout the process.

As demographic shifts continue in the years to come, those institutions that adapt to the holistic needs of wealth planning and generational transfer will have a distinct advantage over those who cannot bring themselves or their clients to look beyond the next trading opportunity.

Bill Yelverton is executive director at wealth management think-tank Scorpio Partnership