The difficult macroeconomic environment highlights the need to accelerate the development of Hong Kong’s private banking and wealth management industry to overcome challenges with regulation, technology and talent, said respondents to the latest joint survey by the Private Wealth Management Association (PWMA) of Hong Kong and KPMG.
Deteriorating geopolitical and economic trends as well as volatile markets have engendered a pessimistic outlook among most industry practitioners surveyed. On average they forecast 5% to 10% annualised assets under management (AUM) growth over the next five years, down from 10% to 20% in last year’s survey.
Meanwhile, the number of high-net-worth individuals (people with more than $1m in investable assets) in Hong Kong dropped 10% from the previous year and the number of billionaires fell 6%.
On the positive side, industry practitioners cited the development of the Greater Bay Area as a major opportunity for Hong Kong, becoming an offshore wealth centre to improve access to wealth created in mainland China, while several respondents said that attracting more family offices to Hong Kong is the principal opportunity for growth.
Moreover, although private wealth assets under management (AUM) fell by 2% to HKD 7.6trn ($970bn) in 2018 as a result of weaker asset performance, net fund inflows were strong at HKD 379bn, according to the SFC’s Asset and Wealth Management Activities Survey 2018.
“The report sheds light on the broader macro challenges facing private wealth managers in Hong Kong while emphasising future possibilities, particularly in connection with mainland China and family offices,” said Amy Lo, chairman, executive committee of PWMA in a statement.
The fourth annual PWMA-KPMG report is largely based on an online survey of 33 member organisations of the PWMA, as well as 29 interviews with industry executives. This year, an additional client survey was introduced, gathering views from about 230 clients of member institutions. Both surveys were conducted from June until mid-July, so the period included the first few weeks of the Hong Kong protests.
Reasons to be miserable
Despite their faith in the potential to tap Mainland China wealth and attract family offices, the dominant mood of the territory’s wealth managers seems gloomy, plaintive and critical.
The survey found that an increasing number of industry respondents believe their technology platforms do not meet client needs. They complained that regulatory changes are diverting limited technology resources away from creating systems and processes that could improve their client services to efforts that ensure compliance with regulations, according to the report.
“Our members see where their digital offerings lag behind client expectations, as they struggle to divide limited resources between business-oriented enhancements and regulatory requirements,” said Peter Stein, PWMA’s managing director, in a statement.
“This gap is growing at a time when clients’ expectations around digital offerings are increasing. Surveyed clients highlighted that ‘portfolio statement view and interaction’ and ‘communication through third party apps’ are key technology expectations,” said the report.
Clients’ preferred method of delivery across the advisory process
In fact, having to implement measures to meet regulatory requirements is the biggest concern of the survey’s respondents. Complaints include the profusion of (sometimes inconsistent) circulars, and conflicting approaches between more flexible “principles-based” regulatory guidelines and more prescriptive on-the-ground examinations.
But, the biggest “pain points” are being forced to provide evidence of the sources of their clients’ wealth and satisfy trade-by-trade disclosure and suitability requirements.
“The findings show that the challenging regulatory environment is the most significant constraint on Hong Kong’s attractiveness as a private wealth management hub, with source of wealth, investment suitability and disclosure requirements topping the list of regulatory pain points for clients,” said the report.
Percentage of respondents who cited the following regulatory areas as a top 5 expense
There is also a shortage of relationship managers (RMs), according to survey respondents.
“A lack of RMs remains a critical and key talent gap, with a drop in reported numbers in 2018. Technology enablement is expected to help attract and retain talent by driving administrative efficiency, allowing RMs to focus more on higher value activities. However, this can only go part of the way, and the industry needs to urgently address talent supply issues,” argued the report’s authors.
Investment in technology that would drive administrative efficiency would be helpful, allowing RMs to focus more on higher value activities, as well as customer relationship management platforms which would better equip RMs with more resources.
While aware of the problems facing the industry, the report’s authors nevertheless conclude on a sanguine note – as Hong Kong enters the fifth month of escalating street protests, and amid rumours of investment assets leaving the territory for Singapore:
“Firms should leverage on the city’s unique status and focus on creating and executing comprehensive strategies to further penetrate the mainland Chinese market for long-term success,” said Paul McSheaffrey, head of banking and capital markets, Hong Kong, KPMG China, in a statement.