On the regulatory front, client investment suitability is a key issue in wealth management.
“The focus is on a financial advisor selling the right product to the right client at the right time. It’s a huge topic of interest with regulators in Hong Kong and Singapore,” Seow told Fund Selector Asia.
In July, the Monetary Authority of Singapore (MAS) released a consultation paper on regulatory safeguards for investors, which Seow called “earth shattering”.
“It had radical recommendations put forward in terms of how banks and insurance companies should risk rate products, how to service the client and how to treat accredited investors.”
Generally, regulators have been more protective of retail investors than professional ones. The paper aims to offer increased protection for the more wealthy clients.
“The MAS has taken the first move to recommend a different way of risk rating products and also suggesting that products should be rated on complexity.”
“A lot of Hong Kong industry players are watching this and trying to anticipate if Hong Kong and Singapore will follow each other.”
Mercer hosted a recent roundtable In Asia with 16 private banks to debate the MAS consultation paper and provide industry feedback.
“Most of these banks put forward some concerns in regards to how this would impact the way they do business. Some already have a risk rating model in place and were concerned that the new regulations may require them to throw away the existing models.
“The banks were also asking how the proposed framework would impact on other aspects such as the sales process and client suitability assessment.”
The MAS will assess the industry feedback and is expected to issue another paper in response in 2015.
Competitive pressures
In Asia, the cost of doing business is rising along with an increasing regulatory burden — as competition grows. Banks are hiring people for compliance teams and upgrading the IT infrastructure in part to take care of operational risk management.
“The global banks have economies of scale. It’s the mid-tier banks that are challenged by costs. Some banks are suffering from a high cost-to-income ratio of 80%-90%. Banks need to find a smarter way of complying with these regulations to achieve sustainable profitability.”
In addition, margin compression is occurring.
“Profit margins are coming down as clients become more sophisticated. You can no longer charge 300 basis points like many years ago.”
Competition is also growing. Malaysia’s RHB, Maybank, CIMB and Hong Leong Bank, for example, either have plans to set up private banking units or have already done so.
Seow said despite the new entrants, an industry repsonse to the challenges has been M&A, which will likely continue. The latest moves have been DBS’ acquisition of Societe Generale’s private banking business in Singapore and Hong Kong, concluded this month, and an announcement of a merger agreement that includes CIMB and RHB.
Technology and the RM
Competitive pressures are combining with Asia’s changing demographics to drive new technology requirements at private banks, Seow said.
“Banks are looking at technology to replace some face time with the client and at the same time not have a negative impact on the client experience.
“If you have one banker serving 50 clients and they don’t bring in enough revenue, you question whether this high touch model is sustainable.”
He pointed to the consumer banking world, where the technology infrastructure enables one relationship manager to serve 200-500 clients who do not bring in enough revenue to justify face time.
“In private banking today the ratio is roughly one relationship manager to 20-100 clients. So technology is becoming important in addressing interaction with the client.”
Seow said a wave of demographic change in Asia will significantly alter the way private banks service clients.
“Some private banks are spending on technology because they are marketing to the new generation,” Seow said, citing UBS and Citibank as examples.
Other private banks primarily market to older generation wealth, which is generally high touch and face-to-face in terms of client servicing.
As money moves from grandfather to grandchildren, things will change, he said. The younger generation in Asia embraces new technolgies and communication through social media. Forward-looking banks will already have social media strategies in place.
“The new wealth generation will start telling the banker, `I’m not my grandfather and I don’t need to meet you every two weeks over coffee to go through a printed statement. What I need is an iPhone app to login and trade or see how my portfolio is doing.'”
Asia’s client difference
The region’s high net worth individuals also shape the way fund selection is done in Asia, which differs from Western countries, Seow said. Demand from a very different client base influences a private bank’s product buying decisions.
As an example, he pointed out that earlier this year, high yield bond funds were very popular among private banks.
“That doesn’t make the best sense because some ratings on high yield bond funds have not been that great. But clients were asking for the product and even leveraging up to amplify the return.
“If the client has, for example, $1m, they put it with the bank in assets and collateralize that $1m and take a loan for a much larger investment amount. They put that leveraged amount in high yield bonds to amplify the return. I’m not sure you would see this in Europe. That’s one clear example of the difference in client demand.”
“Nobody could say it’s wrong, it’s just the way market works and what client wants and these are sophisticated clients.”
Client demand is linked to the demographics.
In Europe, wealth management is deeper, Seow explained. Some of the wealth has been passed on for generations, so clients take a more measured approach when looking at risk/return.
“In Asia, assets are still predominantly held in the creators’ hands, meaning the people who make the money. They could be in their 80s and still making executive decisions. So the psychology is different.
“This type of client made their money as an entrepreneur and therefore the appetite for risk tends to be significantly higher than counterparts in Europe.”
“How clients made their money or got it in the first place defines their attitude toward investment.”
