Asia: A Maturing Market Place

Asian economies were the first to rebound from the global financial crisis and, helmed by China, led the world’s economic recovery. Consequently, wealth has grown by double digits and by any relevant metric, be it the rate of expansion of the high net worth population or the speed of wealth creation and assets under management, the region has eclipsed the rest of the world.

At the time of writing, the last official count of high net worth individuals (HNWI) in Asia was second only to North America by a mere 10,000 individuals[1]. With wealth growth among HNWIs surpassing the rest of the world and showing no sign of slowing down, Asia Pacific is forecast to very soon dislodge North America from its top spot.

Between 2009-2014, assets under management in Hong Kong and Singapore grew at accelerated rates that have left their more mature rivals in the dust. These two Asian cities were in fact the only two global financial centres to attract new net assets[2]. Although Switzerland continues to be the top centre for managing wealth, its assets under management only rose by 14 per cent between 2009-2014, compared to a galloping 142 per cent to US$640 billion for Hong Kong and 25 per cent to US$500 billion for Singapore.

With a clear focus and confidence in generating wealth, the demands of the Asia-Pacific rich and ultra-rich are compelling the wealth management industry to realign business models, increase the digital footprint and offer innovative solutions while balancing increased compliance requirements with profitability. Investors are pursuing customised multi-asset solutions, demanding relevant on-the-go real time information and analytics and are looking to both increase and preserve capital as succession planning gains importance.

Going forward, what can we expect? What trends have emerged or entrenched themselves that will reshape the nature of wealth management in Asia?

Investors are requiring customised solutions tailored to their specific needs. Clients do not just want in-house views and standardised solutions, which are replicated from one client to another. They expect bespoke managed solutions and discretionary offerings and they want more input on how their products are to be assembled. This requires that wealth managers tap into the voice of the client, a task made more complex by the diversity of client’s needs. The wealthy in Indonesia have different goals from the high net worth in China[3]. What may work in more mature financial centres does not necessarily work in Asia. The Asian high net worth individual is typically 20-30 years younger than his European or North American counterpart and while they may not have in the past sought out wealth structuring advice, Asian clients have become more sophisticated in their expectations of service.

This is partly because of the impact of the next generation of the ultra-rich. The Asian high net worth client is not just one person but a multigenerational family. Over the next few years, the next generation will be the beneficiaries of the biggest transfer of wealth in Asia and their likes and dislikes will have to be taken into account. They are better educated and more literate, and many have been educated abroad, likely graduating from the world’s top business schools. Such exposure influences their more global attitudes towards investing. The next generation is definitely open to paying for customised services, are interested in increasing personal wealth to earn their stripes and are willing to expand the scope of alternative investments to asset classes such as art.

Putting all these factors into the mix, we foresee that Asian clients will demand portfolio choices across the investment universe, tapping into the expertise of various portfolio managers within a single, wealth firm, rather than relying on a single touch-point in the firm or working with multiple firms. They will be increasingly willing to pay for customised services focused on increasing family wealth.

While the level of trust of the Asian wealthy in their financial managers has returned to pre-crisis levels, investors have not forgotten how badly beaten their portfolios were in the immediate wake of the crisis. There is a discernible rise of interest and demand for portfolio protection. Investors are seeking low-volatility assets uncorrelated to portfolio risk and markets at large that also offer liquidity and equalisation in succession planning.

Protection-focused insurance, such as life insurance, is rising at a faster rate than the wealth management market as a whole. Life insurance policies with an average death benefit of US$10 million is a segment that has enjoyed double digit growth rates as high as 20-25 per cent per annum. It is also worth pointing out mega-sized policies with a face value of as much as US$100 million are not uncommon these days in the region. This creates a new need; investors require solutions that offer high predictability in risk and returns and/or an assured stream dividend income to pay the sizeable premiums for these customized life insurance policies.

We see changing tastes in asset choices and the high net worth client now requires multi-asset portfolio allocations with an enhanced global interest. Real estate has been the preferred asset class of the wealthy here. This could be a cultural bias, as Asians traditionally have been attracted to physical assets as opposed to less tangible stores of value such as stocks. Nonetheless, they are increasingly willing to invest in certain alternative investments. As many have created their wealth through business interests spread across the region and in some instances, globally, they are comfortable with investing in foreign currencies to grow their assets.

Another game changer is technology. Digital is adding a new dimension to client engagement and the Asian client is more insistent on digital interaction.

Device penetration in Asia is higher than elsewhere around the world, the Asian high net worth individual is more mobile, is tech savvy, has multiple devices and would like to access information digitally first before asking their advisor. It is no surprise that

82 per cent of the wealthy in Asia (ex-Japan) expect most of their wealth relationships to be digital by 2018 and will look to digital interactions to inform, engage and facilitate transactions.

Global banks are now using Asia as a breeding ground for technology platforms; they are deploying new technology platforms in Asia before taking them back to more mature markets. For example, a large Swiss wealth manager is replacing its core banking platforms with one that enhances flexibility firstly in Asia for completion in 2016 before implementing the template in other regions.

However, technology alone is not sufficient; the new systems must deliver relevant metrics and the right tools for the right job. For example, existing core banking systems use index benchmarking, but clients, in their search for more sophisticated bespoke analytics, require peer and cohort benchmarking.

There is, however, a dark side to Asia’s relentless growth. Hot money flowed into its property and equity markets when the rest of the world struggled with recovery. But hot money is fickle. Nonetheless, the Asian countries have become addicted to high growth numbers and many now look to increased government spending to make up for the vacuum created by the outflows of hot money. Public spending has to be balanced with revenue, and even if a country is not suffering from very high levels of public debt, Asian governments are proving themselves not immune to the adoption of taxes that target the wealthy and those benefitting from property appreciation.

As a result of the dramatic rise in the numbers of high net worth individuals, I foresee that many countries in Asia will consider introducing a redistributive tax of sort on the ultra-wealthy, like the one recently signed off in Thailand.

Thailand plans to introduce an inheritance tax sometime in 2015, to take 10 per cent off any estate valued at US$1.5 million or more. Some of its ASEAN neighbours had previously toyed with the concept but subsequently dropped the idea.

The proliferation of billionaires in Asia has helped Singapore and Hong Kong attract more money than its more established rivals. In tandem, however, these centres will need to deal with increased compliance requirements and the task of minimising the risks of reputational damage.

Intensifying scrutiny of enforcement, rising cost of compliance breaches and reputation risk are all forces to be reckoned with. Since 2011, Singapore for example, tightened tax evasion measures and money-laundering rules. It has agreed to comply with a modified version of FATCA, in which it has agreed to submit information on accounts held by US citizens to Singapore’s tax authorities, rather than the Internal Revenue Service in the US. At the same time, Singapore has made it an offence for its banks to help tax-evaders in tucking away their illicit funds.

The flip side is that wealth managers are discovering that extracting and integrating required data into required reporting formats is time-consuming. Compliance has significant cost implications. Many are finding that they face uneven regulatory landscapes in the different territories in which they operate. In some cases, as in Singapore, some standards are more stringent than they are in Switzerland.

Asians are insistent on privacy. Although this is not currently a hot topic of conversation, cyber security will become an increasingly contentious issue. The high-profile breach suffered by a major US bank in which data of 76 million households is said to have been exposed, plus hacker attacks on 13 top US financial institutions in 2014 means that the management and security of data will have to be addressed in the near future.

Obviously, there remains much to be done. Changing technology, increasing compliance and client expectations of greater sophistication in solutions and delivery channels are all putting pressure on the revenue-cost ratio. Yet, for those who can transform and adjust to the trends, the opportunities are significant and it is up to us to strategically manage the speed and effectiveness of the changes we must make.

[1] Capgemini RBC World Wealth Report 2014

[2] http://www2.deloitte.com/content/dam/Deloitte/ch/Documents/financial-services/ch-en-financial-services-the-deloitte-wealth-management-centre-ranking-2015.pdf

[3] Having manufactured bespoke life insurance solutions for the ultra high-net worth clients since 1971, Global Willis Solutions has long foreseen and understood the strategy of focusing on goals-centered management.

Odd Haavik
Odd Haavik is the Chief Executive Officer, Asia & Europe for Willis Global Wealth Solutions (GWS), a division of the Willis Group. A global risk management consultancy, GWS serves individual HNWI, their families and businesses from offices in Singapore, Hong Kong, Zurich and Miami. He can be contacted at odd.haavik@willis.com. Willis Global Wealth Solutions home page is www.willis.com/gws