Malaysia's underdeveloped wealth management industry must play catch-up

A recently published study on wealth in Asia by Swiss private bank Julius Baer, in collaboration with brokerage and investment group CLSA, found there were 1.2m high net worth individuals (HNW) in Asia ex-Japan and that the number would increase 2.4 times by 2015. The study estimates total wealth in this region will grow as a 23 per cent CAGR (compound annual growth rate) from around $6,000bn in 2010 to nearly $16,000bn by 2015.

Malaysia, which has one of the smallest HNW populations among the 10 countries included in the study, is expected to see the number of HNWs in the country nearly double from 32,000 in 2010 to 68,000 in 2015, 0.36 per cent of the adult population in the country. The study further predicts that the stock of wealth in Malaysia will grow from $143bn to $329bn over the same period.

The wealth management arm of Maybank, the largest bank and financial group in Malaysia, saw its clientele grow by 11.73 per cent in the financial year ended 30 June 2010 compared to the previous year. Since 2007, its average annual AUM growth was 16.90 per cent to total more than RM40bn ($12.7bn) as at end June 2010.

“Malaysia is a developing market,” says Carolyn Leng, head of CIMB Private Banking Malaysia. “Much of the wealth has been generated from entrepreneurial activities. The first generation of entrepreneurs is still around although the second is now taking over.”

CIMB, the second largest financial services provider in Malaysia, set up its private banking arm in 2002 and expects its domestic private banking assets to touch RM10bn next year.

The investment sentiment among HNWs is cautious and they are keen to actively manage their wealth, observes Ms Leng. “Until five years ago, fixed deposits accounted for the majority of investments by HNWs. Although that has changed, even today, up to 25 per cent of assets are in the form of cash or fixed deposits. Additionally, a quarter of the portfolio is invested in real estate,” says Ms Leng. While plan vanilla products such as unit trusts remain popular, structured products such as equity linked notes have also gained traction.

There is a very strong demand for bancassurance products, says Lilian Long, general manager, Wealth Management, Standard Chartered Bank Malaysia.

“Bancassurance is one of the new trends in Malaysia. It presents a huge opportunity with lots of banks tying up with insurance companies,” agrees Lim Eng Seong, general manager, retail banking and wealth management, HSBC Bank Malaysia Berhad.

The bank, which has been offering wealth management services in Malaysia since the early part of this century, has 1.2m retail customers with focus on wealth management for its affluent customer base. Mr Lim says that eight to 10 years ago, the bank used to only distribute unit trust products, however the suite of products being offered has since grown to include structured products, insurance and bonds.

“A lot of customers are now aware of structured products such as currency-linked notes and equity-linked products,” he observes.

“Liberalisation has facilitated growth in the wealth management industry and this has enabled financial institutions to provide more sophisticated products to high net worth individuals. As a result, greater emphasis is placed on asset allocation and portfolio rebalancing for this group of customers today,” says Mr Lim.

Despite the market liberalisation, the country’s financial market is still relatively underdeveloped compared to nearby Singapore, and Malaysian HNWs regularly invest offshore to diversify their portfolio.

Regulations permit investment abroad to a maximum of RM1m for residents that hold any debt such as a car, credit card or housing loan, while for debt-free residents there is no investment limit. Well developed, mature financial centres such as Singapore and Hong Kong are the key beneficiaries of Malaysian HNW’s offshore investments.

“The level of offshore investment depends on the risk HNWs are keen to take,” says Ms Leng of CIMB. “Appetite for currency risk is also important. Singapore, due to its close proximity to Malaysia, is a key offshore investment destination where the Reit (real estate investment trusts) space is very popular. Much of the investment in Hong Kong is in the Hang Seng Index while some HNWs also invest in the Indonesian rupiah.”

While many HNWs are keen to increase onshore investment, the regulatory environment does not enable this. “There is lots of wealth onshore that does not need to flow out,” says Ms Leng. “However the constraints of the domestic financial market combined with the presence of a liquid and flexible market like Singapore makes that a key challenge.”

There is no single framework defining wealth management in Malaysia, she explains. The presence of a variety of different regulators means wealth management providers end up with three to four different licences. This, says Ms Leng, is in contrast to Singapore where there is much greater clarity on the provision of wealth management services.

“Everyone talks about asset allocation, but there is no framework to execute these ideas. Regulators need to make a conscious decision to drive the capital market to be more attractive and enhance liquidity.”

Standard Chartered’s Ms Long points out that although there is demand for more sophisticated products in the market, customer knowledge levels may not be high enough to accommodate this. A wealth management survey by Standard Chartered found clients’ main demands concern the level of quality of their relationship with the banks’ staff. “Customers are asking to be serviced by knowledgeable and experienced relationship managers. Also, they need to feel that they are receiving advice, not a sales push,” she says.

CALL FOR COMMON FRAMEWORK

With Malaysia being one of the leading players in Islamic finance, there is tremendous potential for the growth of Islamic wealth management. “Islamic wealth management is a potential growth area because of the high Muslim population in the country. However the growth in wealth management space is also dependent on the development of the Islamic financial market,” says Mr Lim.

HSBC has a network of 55 branches in Malaysia of which 42 are conventional branches and 13 Islamic branches. Standard Chartered has 39 branches, of which seven are focused on Islamic banking.

Islamic wealth management is currently still very much skewed towards retail banking products such as standard loans, term deposits and structured products, says Ms Leng of CIMB. “In order to create an effective and vibrant Islamic wealth management industry, there needs to be a common framework under which firms can develop Islamic products.”

To that effect, CIMB has started work on developing such a framework on Islamic wealth management in collaboration with institutions. “We can propose this framework to the regulator and if implemented, it will benefit all players,” says Ms Leng. “Malaysia is a leader in Islamic finance. We have the talent and vision and we need to aggressively grow the Islamic wealth management space.”

Lilian Long, Standard Chartered Bank