It is not an easy time to be a wealth manager in Southeast Asia. Five experts give their views on the region's hurdles, and how to overcome them.

It is not an easy time to be a wealth manager in Southeast Asia. Cost income ratios are untenably high after years of over-zealous investment, with many not yet breaking even. Clients are hard to find, difficult to sign up and tend to have many relationships, over which they spread their wealth thinly. Markets are uncertain, making finding appealing options for existing customers tricky.

But despite the doom and gloom, opportunities abound for the canny players. That was the message that came out of WealthBriefingAsia’s inaugural Singapore WealthMatters event, held recently at the prestigious Fullerton Hotel, in the city-state’s central business district.

Around one hundred senior executives from the Asian wealth management industry gathered together over breakfast and coffee on the morning of 13 September, to hear from a distinguished panel of wealth management experts.

Panellists included Colin Day, vice president of banking at Sungard, Sebastian Dovey, managing partner and co-founder of Scorpio Partnership, John Grist, founder of Asia Wealth Management Consultancy, Nick Hughes, managing director of Asia Wealth Management Search and Ranjit Khanna, head of Southeast Asia and global non-resident Indians, at Coutts.

The event was sponsored by Coutts, Sungard, Asia Wealth Management Search and Christie's Fine Art Storage Services.

Stephen Harris, managing director of Clearview Financial Media, publisher of WealthBriefingAsia, chaired the panel. He introduced the panel of five, and asked his first question in the hour and a half panel debate.

Stephen Harris: Is there a talent shortage in Southeast Asian at the moment?

Nick Hughes: There is an abundance of talent in the industry, but the difficulty is attracting this talent. High quality people are extremely reluctant to move at this stage. There is the fear of being first in, last out, the fear of more cuts within the industry. So people are very wary of making a jump without having to throw money at them. As a result, banks have to be inventive and take a long term view as to how to attract and retain that talent.

Sebastian Dovey: I don’t think there is a talent shortage, more a talent supply issue, which is quite positive. There are lots of training programmes within financial institutions and public courses, and Asia leads the way in teaching younger professionals in these concepts. Many of these programmes are focussed on the future type of wealth managers, ie more of a balanced model. So while there is a talent challenge, I am more optimistic than I have been in a long time. In fact, I suspect that in Asia that if you ask young people which part of financial services they want to join, quite often private banking comes up and that is likely to be a much higher incidence than if the same question was asked in Europe, the US or even, right now, Switzerland. On the issue of the economics, the problem is we need to understand how people are compensated. Many global banks have been stuck with historical models on share of revenue aligned to productivity on individual sales personnel. This can often mean bankers take a very restricted view on that they do because if it does not impact directly on their revenue they are not motivated. This inevitably has an influence on stimulating a selfish environment rather than a collegiate one.

Colin Day: It comes down to efficiency and to focus. Everyone here is looking to strengthen the bench, but it hinges on front line staff productivity. If you look at some of the cost income ratios that some of the private banks are saddled with in Asia, it is simply not sustainable. Banks are exiting the wealth business on a regular basis and there is certainly more consolidation to come, this can definitely be attributed in part to increased costs of doing business and regulations. In our recent survey with Scorpio Partnership, one of the key findings was that in an average week, advisors would be spending less than two days on client related activities. This shows how revenue could get shot to pieces. A lack of talent? Probably not. The real question should be: is it focused in the right areas? Probably not.   

Ranjit Khanna: I think it is important to address this from the point of view of talent for what, and which segment. You do have a growing pool of local talent that you can acquire from, and banks are also training up more individuals. But when it comes to specialized expertise, like how to manage inter-generational wealth transfer or setting up philanthropic family foundations, for example, or other specific requirements for ultra high net worth, the reality is there is not enough expertise on the ground here yet, and in such cases we do need to import talent.

SH: Is European style wealth management versus a more product-led transactional approach taking hold yet?

RK: We at Coutts believe Asia is in a very different cycle in terms of wealth creation right now, as wealth still is concentrated in the hands of first and second generation entrepreneurs and business owners. This is different to what we see in the West. Also, clients in Asia want to be a lot more participative in terms of wealth management requirements. From a pricing point of view, there can be a greater degree of sensitivity, which is a departure from what we see in Europe, where concepts like wealth preservation and succession planning are key and clients are willing to pay for the same. But in Asia, decisions on products can often be driven on price. But that is fast evolving. Given the volatility of the markets, now clients are looking at engaging banks for effective risk management and asset allocation. Clients are tired of having to manage volatility and are once again open to investing for the long term with the objective of wealth preservation.  

John Grist: I don’t see European-style investment management taking hold in Asia. Investors want more participation in their portfolio and investment decisions. Discretionary management (in the English sense, whereby a client is advised of individual purchases and sales only after the transaction has been executed) is many years away. Where we are seeing an evolution, is towards asset allocation. Private bankers and relationship managers are providing valuable advice there, which is increasingly being listened to.

NH: Asian banking should have its own identity and shouldn’t be based on the European way. We see huge numbers of Europeans looking to relocate to Asia to work in private banking, although demand for expatriates has decreased. The challenge is, how can Asian banking take the best of parts of old traditional Swiss private banking, like confidentiality and a long-term view. The smaller banks should be looking at making profit over 20 years time rather than two.

CD: Both Europeans and Asians can each learn from each other. Asian private banking is more like private brokerage, than private banking as we know it, transactional but trying to move into an advisory or active advisory model. Meanwhile European private banking is characterised by a discretionary model which is also trying to re-invent into a more active advisory model. One thing is for sure, you cannot differentiate from peers if you are just acting on the client’s instructions. This is where the Asian private banking industry can learn lessons from their European counterparts.

SD: The economics of the Asian model are in no way better than European model. There are players here which have catastrophic cost income ratios, as high as they are in Europe and in some case worse.But what are the customers looking for? We do see, based on insight feedback from several thousand Asia-based millionaires, an increasing demand among HNWs for discretionary, or what we judge could become termed as 'active discretionary' portfolio management. Another significant trend in the region is a is clear demand from wealthy clients of all generations, for a primary strategic advisor – they recognise that there is a value for that and are willing to pay for that. They do not just want to hunt out the next best broker. In Asia portfolio management is around 90 per cent advisory and 10 per cent discretionary, which is the other way around in Europe. Asians are over-banked in one specific discipline (the advisory services, which are often the easiest discussion to have, as you either want to trade or you don't), but we are seeing particularly as you go higher up the wealth chain, clients are trying to consolidate, they don’t want all of those relationships, as it is inefficient.

SH: Studies have shown NRI global growth rate of 7 per cent, is demand matching this and if so what is the number one concern of NRI community

RK: NRI wealth so far has been outpacing industry growth. This is a very entrepreneurial segment and can often have a higher risk taking appetite. The biggest challenge is that at times the segment can be very transactional and price-sensitive. It is also a unique segment, as a typical NRI client will often have a three-wallet investment strategy. They will always have an investment wallet focused towards the country of their domicile, including for example their mortgage, business, and school fees. Given their affinity for Indian investments, they will almost always have an India-centric investment wallet, partly down to the Indian regulator promoting NRI investments into India, and partly down to strong familial ties. The third wallet is the global wallet, which is where they will chase yield, as long as the risk versus reward makes sense to them . Given our franchise in India and with a presence in all the regions and countries where there are high concentrations of NRIs, Coutts is in a enviable position to efficiently cater to the needs of this segment.

NH: We still get a high demand from clients for NRI bankers even though many banks are already heavily-banked in this space, which is a signal that the market will continue to grow. But we usually hire Indians for these roles, there are very few non-Indian bankers who cover the Indian market, so again it comes down to a shortage of talent.

CD: My point would be, why NRI specifically, segmentation at the NRI level is too high-level? Why are they any different to any offshore or onshore investor in Asia? Most Asian HNWs call global anywhere outside the Asian region.

JG: Ten years ago I would have agreed with Colin, but having covered both on and offshore India, I think the NRI market can be separately identified. This is predominantly because of its affinity to mother country. India may be akin to the Middle East, with traits of aggression and risk tolerance, so yes, I believe it is a genuine profitable segment, but it is price-sensitive and multi-banked hence the need for trust.

SH: Is the family office model gaining traction in Singapore and is it a threat to the traditional private banking model?

SD: Seb: The Monetary Authority of Singapore has sent a clear global signal that it wants business from family offices. But these family offices won’t be a threat to the large global banks as such – family offices by their nature will always constitute just a small part of the wealth management industry. But they do signal something, a change to strategic advice, a move to a self-directed discretionary route. Then there is the other side of the picture, of those that are thinking of entering this space. Many multi family offices are finding it very hard to survive in light of new regulations. Asian clients are still quite used to the big franchises and the key client groups. Multi family offices won’t take away from the mainstream, for instance there are only 50 or 60 family offices in Singapore currently – many of which would not be immediately recognisable as a family office in the more classic European definition. Family offices will always be an important part of the industry but at the margin.

CD: The investment companies run by families are the disruptors to the status quo, they are the new entrants. But there is a big enough pie. Banks will always be required, it is just a case of how many banking relationships does an individual need.

RK: I don’t see them as a threat, I think banks and family offices can easily co-exist and possibly leverage off each other. For example, the family office can be a source of client acquisition for private banks.

SH: Are we seeing any regulatory arbitrage from clients transferring assets from other jurisdictions, for example Switzerland, and is the MAS seen as a soft touch?

JG: The MAS as a regulator is generally business friendly while offering strong protection and oversight for investors. In an evolving marketplace, I agree that some of the rules are too vague, too open to interpretation and not always understood. In terms of arbitrage between jurisdictions, I would say there is an arbitrage of confidence, particularly when you sit here in Singapore. There is a lack of confidence in Switzerland, especially in regards how it will comply with the European Tax Directive, the Foreign Account Tax Compliance Act and further. But then you look at the Caribbean, or the Channel Islands, you wonder what role will they have in future. It isn’t about what will happen, it is about perception, and for that reason there is an arbitrage of confidence. Is Switzerland now seen as superior to Singapore? Singapore has ease of travel, there are advantages seen in banking in Singapore, strong well regulated and enforced cross border laws, seen as a natural home for Asian private banking. One threat is regulation, a big concern is the casinos. One can see the retail banks massing around the area and I wonder if they have increased Know Your Client requirements? I think this could pose a problem.

RK: This whole belief that there is a massive inflow of money is a red herring to some extent. Any bank doing regulatory arbitrage is engaging in a very short-lived and dangerous business strategy. 

Steve: Can we mention FATCA? How will Singapore deal with it?

JG: Most Singapore banks are FATCA-compliant as many here won’t deal with US citizens. JP Morgan for example have started dealing with US citizens as a US bank, but they opened all the accounts on the US platform, so effectively assets remain domestic, to avoid onerous reporting requirements. As a FATCA-compliant organisation, you have to be careful with what counterparties you deal with. You cannot deal with a brokerage house that is not FATCA-compliant. The European tax directive could also cause problems when you look at banks here seeking European clients, which falls under regulatory arbitrage.

But will Asia come up with FATCA legislation? I don’t think so. Looking at ASEAN region, so much of the economy depends on remittances sent home. Trying to pass legislation without a plethora of exemptions for low-paid and domestic workers would be almost impossible. And in most Asian countries wealth is amongst a small minority with close links to the establishment - so go figure.

CD: In order to cultivate wealth in Asia we have to figure out how to do it under new regulations. How do we structure our businesses with the various new rules coming in. Change is here to stay, we need to figure out how to manage it as it will keep on coming.

SH: What do most people look for when it comes to technology in wealth management in Asia?

CD: HNWs in Asia are more willing and able to use technology. There are a billion mobile phone users in China. That is a platform you can use as a private bank to deliver solutions into the hands of the individual. Asia’s HNW are online 5.3 hours a week managing financial affairs, and a further 3.7 hours on social media networks. That means an Asian HNW individual every 5 seconds is online looking at their financial matters and the wealthier the individual, the more time is spent online. This will only increase, not decrease, so don’t get it wrong! 

RK: I’m not sure that there are many institutions that have cracked social media. One of the fastest growing segments on Facebook is the age 55 plus, how do I engage with that, how do I equip bankers to deal more efficiently with clients. How do we give the tools to private bankers to make them more efficient.

SD: Every institution wants to expand their digital strategy. In our view, digital technology is changing the boundaries of wealth management, but I am not sure how capable banks are at addressing a digital approach yet. In our work we are seeing what we have called ‘guerilla digital’, as bankers attempt to integrate technology into their dealings with clients, without knowing exactly what they are doing yet, but this will come. Of course there are luddites that say it will kill relationship management, and those who swear by the magic moment in the room with the client where you’re having the coffee...well the research insight we now have accumulated over many years in Asi where we have been tracking the influence of digital, indicates strongly that that is not true. There are new things that are happening in the way people engage, and this is one of them.

To read about the discussion held during the other panel session at WealthMatters on intergenerational wealth transfer through philanthropy, click here.

The next WealthMatters event will be held on 9 April 2013 in Hong Kong. Please click here to register your attendance.