One third of the world’s millionaires now live in Asia – this fact alone is driving private banking opportunities in the east. Strong economic growth, high savings rates and the sustained performance of equity markets have all played a part in boosting the number and wealth of Asia-Pacific’s high-net-worth population, or those considered to have more than $1m in liquid assets. According to the 2011 Capgemini/Merrill Lynch Asia Pacific Wealth Report, the wealth of high-net-worth individuals (HNWIs) in the region grew 9.7 percent in 2010 to $10.8trn, compared with Europe’s 6.3 percent growth to $10.2trn. The region is also home to more companies worth $1bn (by market capitalisation) than the US, the world’s largest economy.
Private banks have been quick to spot the market opportunity; a survey by Private Banker International shows that 20 of the region’s largest private banks have increased their assets under management (AuM) by 89 percent since 2007 to more than $1trn. Global banks such as UBS and Citigroup are leading the charge, holding $182bn and $179bn in AuM respectively at the close of 2010. Local banks are hot on their heels, with Hong Kong’s Hang Seng Bank and Singapore’s Bank of Singapore ahead of global firms like RBS Coutts and Société Générale Private Banking in terms of AuM.
However, notwithstanding this surge of interest, only 17 percent of Asia’s HNWIs have private banking relationships, demonstrating that there is still a ‘blue ocean’ opportunity of untapped potential. According to the Capgemini/Merrill Lynch Asia-Pacific Wealth Report, “Despite the growing imperative for enterprise value in Asia–Pacific, few firms yet have a winning strategy.”
The good news is that the private banking industry is, by nature, fundamentally nimble and built for change, driven by evolving socio-demographic factors, entrepreneurship and the increasing concentration of wealth. For its continued success in what will become the Asian century, its players will need to commit to the emerging markets of Asia-Pacific as a business imperative. And commitment means more than a regional presence; it means customising the western private banking model to the Asian palate.
Know your client
At the firm level, this commitment may be realised by the development of a clear, integrated and organisation-wide Asian strategy centred on a deeper understanding of Asian clients and their evolving behaviours. Client insight is paramount and even a brief whistle-stop tour of Asia-Pacific’s key markets heralds important similarities as well as a surprising smattering of regional differences to be taken into account. Across the region, entrepreneurs and Ultra-HNWIs (typically defined as having investable assets over $30m) account for an exceptionally high share of HNW wealth. In 2010, mid-tier and Ultra-HNWIs made up 50 percent of regional wealth despite comprising less than 10 percent of the total HNWI population.
The region’s wealthy are typically self-made and are business owners or entrepreneurs who are still actively engaged in their business activities. Unlike their HNW counterparts in the US or Europe, they are typically the pioneers of first-generation money. In the past, on account of political instability and underdeveloped local financial markets in some of the region’s economies, newly-minted individuals would park their wealth in offshore markets to reduce risk. According to Boston Consulting Group’s 2010 Global Wealth Report, “those who keep their money offshore [now] park it in Singapore and Hong Kong, eschewing the traditional Swiss havens.”
The perceived safety of the Asian markets has led to the emergence of another client for global private banks to be aware of: the non-Asia investor, who is also interested in the Asian opportunity. Whether this involves buying up local currencies and diversifying away from the dollar or euro, or opening a standard savings account to take advantage of better interest rates, this client should be taken into consideration when building out an Asian strategy.
And despite the move to keep money closer to home, the increasing mobility of Asia’s wealthy means that offshore banking services will continue to maintain importance. The 2007 Capgemini/Merrill Lynch Asia-Pacific Wealth Report finds that globally 37 percent of HNWIs have offshore financial accounts; 28 percent have residences in multiple countries; and nine percent have children living abroad; statistics which reinforce the value of a global strategy. In particular, Asian HNWIs are ramping up emigration to western nations and as a result are creating an opportunity for global banks to capture an Asian expatriate market and the associated ‘investment immigration’ inflows into popular destinations such as the US, Canada and Australia.
A 2011 survey by China Merchants Bank and consultants Bain & Company found that 60 percent of mainland China’s residents with $15m or more have either left the country or are planning to – the reasons are varied but include lifestyle, business and wealth preservation factors. Other key similarities in the investment behaviour of Asia’s wealthy exist. Across all of its markets, Asia’s first-generation rich generally prefer to take charge of their own portfolios and have a tendency to use banks mainly as brokers; in essence, product selection is valued more highly than the role and guidance of the trusted wealth adviser.
Portfolio segmentation and weighting is also similar across the region. The Capgemini/Merrill Lynch Asia-Pacific Wealth report finds that Asia’s wealthy are typically overweight in cash and real estate and underweight in income securities – highlighting potential penetration points for global banks going forward. The report also shows that Asian HNWIs maintain a predisposition toward investing in jewellery, gems and watches, moreso than their global counterparts; while HNWIs globally allocated 22 percent of their spending activities to this category, Asia-Pacific’s HNWIs allocated 24 percent.
Marked behavioural differences
Global firms should seek growth within the Asia-Pacific markets to cater for Asian and non-Asian clients investing wealth locally
Despite some similarities, a deeper dive into the investment behaviour of Asian HNWIs at the market level reveals stark differences in risk appetite and product uptake. These preferences have generally been shaped by each nation’s monetary and fiscal experience and will continue to be shaped by differing local market environments into the future.
Japan remains the largest HNW segment in the region, accounting for 52.5 percent of the region’s HNWIs, followed by China at 16.1 percent. Yet despite being the largest segment, investment behaviour is eschewed to more conservative, wealth preservation activities on account of the country’s ageing population.
The investment behaviour of Japan’s rich is also a hangover from a strong history of foreign direct investment; accordingly, Japan has the most geographically distinct savings habits of its peers. Consider that 41 percent of Japan’s HNWI holdings are invested locally in Asia-Pacific; 31 percent in North America; 11 percent in Europe and 14 percent in Latin America. Also, as consequence of its monetary policy – and most likely promulgated by a long period of low interest rates – Japanese investors maintain high demand for foreign currency opportunities.
In stark contrast, Chinese HNWIs are risk takers: they have distinct product preferences and favour stock trading and property investments, as reported in a recent and in-depth Booz&Company market analysis. Also, unlike their Japanese counterparts, the profile of the typical Chinese HNWI is relatively young and around 40 years of age. Prior to the global credit crunch, Chinese investors bought up on structured products and exotic derivatives, desired for their high-risk but high-reward potential. Product uptake is, however, still extremely low in China – only nine percent of Chinese HNWIs currently use private banks or wealth managers. Approximately one in 30 residents in Singapore are classed as HNWIs; in fact, Singapore has the world’s highest density of wealthy people and also the highest concentration of millionaire households. Approximately 15.5 percent of all households have at least $1m in AuM. Investment behaviour is tilted toward a preference for real estate holdings and alternative investments, and the country is one of Asia-Pacific’s more politically stable environments, often used as a safe haven to hold funds. Increasingly, Singapore is being recognised as the new hub of offshore finance. The small nation also has the weight of the Association of Southeast Asian Nation (ASEAN) economic bloc behind it; according to a recent report, in the past year $79.9bn of foreign direct investment flowed into ASEAN states, more than that of China ($105.7bn) and India ($24.6bn).
Leveraging client insights
Client insights paint a picture of the opportunities for global banks and may be used as the starting point to help shape a company’s Asian strategy. A keen understanding of the client also provides sight of a few key business imperatives that should be taken into account for Asian opportunities to be fully harnessed.
Pursue local and global growth opportunities
Global firms should seek growth within the Asia-Pacific markets to cater for Asian and non-Asian clients investing wealth locally. Simultaneously, firms should focus on building out local services in order to capture the Asian expatriate population and the related ‘investment immigration’ inflows in the markets of North America, Canada and Australia.
Private banks that are part of a larger commercial bank should also consider how branches in non-Asian markets are dealing with recently emigrated Asian clients. For branches in predominantly Asian communities, is there a referral system between a local bank manager and a private banker to ensure recently immigrated, high-net worth clients are being serviced? A successful approach to a global company’s Asian strategy needs to consider both offshore and onshore elements.
Focus on ultra-HNWIs and entrepreneurs
This is new territory for private banks which typically focus on developing wealth solutions for the mass affluent and HNWI segment rather than for Ultra-HNWIs. Developing the products, services and tools required for this highly sophisticated target market and ensuring the right level of service is no mean feat, but is an important consideration. The Capgemini/Merrill Lynch Asia-Pacific Wealth Report of 2007 showed that Ultra-HNWIs “required an institutional-like focus and a range of products from multiple wealth management providers to enable diversification both for risk mitigation and return on investment.” Furthermore, consideration should be given to the different levels of funding and support required throughout the entrepreneurial lifecycle (concept, start-up, expansion and ongoing).
Recognise the family unit
The transfer of wealth from the first generation of rich to the next is beginning to happen as wealth pioneers reach retirement. According to the Capgemini/Merrill Lynch Asia-Pacific Wealth Report 2007, “54 percent of the region’s HNWIs are over 56 years of age and, in the coming years, intend to distribute 92 percent of their private wealth to family members or future generations.” The importance of having trusts and strong succession planning expertise will be of key importance to global wealth providers servicing this market.
Seek an organisation-wide approach
This is of particular value for independent, self-directed clients who value a holistic and diverse wealth offering. Companies should focus on leveraging knowledge, expertise and product sales across business units and seek collaborative partnerships between private bankers, financial planners, risk specialists, investment bankers, corporate advisory and subject matter experts. In this environment, the value of referrals between the bank’s various wealth partners is key to ensuring that there are no gaps in the client’s product offering.
Differentiate products offering by market
Vast differences in the risk appetite and product preference of HNWIs across Asia-Pacific clearly indicates that a one-size-fits-all approach will not work. Companies should apply a two-pronged approach to their Asian strategy, tailoring product development vertically as specific to each country and overlaying it with what services can be leveraged at a regional level.
Offer corporate and personal banking solutions
The fact that the majority of HNWIs in Asia-Pacific are business owners and entrepreneurs means they will require both personal and corporate banking services for a holistic private banking experience.
Increase the role of the trusted wealth adviser
While data reveals that Asian HNWIs generally prefer to be self-directed, it’s worth noting that this perception may be based on experience with local wealth advisers who aren’t as experienced as their global counterparts. Consider that the average financial advisor in Asia has just nine years of experience and has been with the company for under six years.
In comparison, the average advisor in North America has 24 years of experience and 20 years of tenure, according to Merrill Lynch and Cap Gemini.
A lower level of exposure to experienced wealth advisers provides companies with an opportunity to market the value proposition of the trusted wealth adviser to this new market. A key element of a firm’s Asian strategy should involve marketing the role of relationship management – and for banks, this type of business is also more scalable than a transaction-based broking relationship and also encourages long-term business relationships.
To this end, banks with a regional presence should focus on training up local advisers and ensuring they also have a strong understanding of the client’s industry. It’s not enough to have an ‘Asian desk’ – these teams should be segmented by industry knowledge to provide a true private banking experience for the client.
Challenges of the nouveau riche
While Asia-Pacific provides a myriad of opportunities, there are a number of challenges to be overcome, largely consistent across the region as the majority of its markets are still considered ‘emerging economies’. As a result of such rapid growth in these economies in such a short span of time, many of Asia’s HNWIs are first generation rich, which makes the topic of wealth transfer particularly emotional.
According to the 2011 Asia-Pacific Wealth Report, the chief concern of the region’s HNWIs relates to the capability of the next generation in managing their wealth, with “88 percent of HNW clients in Asia-Pacific excluding Japan, and 75 percent in Japan, believing the next generation will not be able to adequately manage inherited wealth.” Those banks carving out their Asian strategy will need to be particularly mindful of the emotional considerations behind succession planning activities – this may require additional and culturally appropriate training of staff to ensure Asia’s HNWIs – and their families – are supported appropriately.
Broader cultural factors will also create challenges for the western private banking model. In many Asian cultures, privacy is an important value, reinforcing the importance of clients having a single touch-point. However, demand for a holistic wealth offering will require firms to work across business units and share referrals. This will need to be balanced in a way that the firm can maintain a single high-touch point with the client while also sourcing the best product options from across the organisation.
The trend of Asia’s wealthy bringing their funds closer to home also presents a unique challenge for global private banks by pushing up transaction costs. Currently, there is a relatively high margin for banks to make holding offshore assets but these margins will start to diminish as local holdings of assets ramp up. A recent report by Boston Consulting Group highlighted that even as assets held at private banks by Asia’s rich have grown, the pre-tax margins of global private banks have halved to 19 percent from 2007. Global firms will therefore need to adjust their business model to this reality and look at how the onshore opportunity can be leveraged in a cost-effective manner.
A key factor that will influence the success of any company’s Asian strategy is how the company manages the weaker external demand conditions globally. A firm’s strategy should be developed in light of how to seek out new-to-business clients in what’s still a challenging environment: the global financial crisis and Europe’s ongoing credit crunch have made the current operating environment one of the most difficult for banks to navigate through in financial history. Asset-price declines, weaker trade demand and the increasing cost of offshore financing have all made for a tough playing ground and have seen private bank revenue levels at 25 to 30 percent below where they were before the financial crisis. In what has become a challenging market, private banks will need to focus on defining what their value proposition and ‘point of difference’ is as they expand into Asia. This calls for private banks to very carefully choose which clients and markets they cover while simultaneously looking at new ways to reduce costs.
To capitalise on this ‘tectonic shift in global wealth distribution to the east’ private banks must not only look to the east, but actively commit to it. How industry players can adapt their business models and find a new centre of balance in the Asian century is ultimately what will bring them success or, if they fail to do so, failure.