Wealth Management is in a Quandary
Recently, we’ve seen Lloyds (UK) being fined £117 million in 2015 for failing to treat customers fairly and Wells Fargo (US) fined US$3 billion in 2018 for charging clients unanticipated fees.
There is a wind of change sweeping the wealth management industry – specifically regulations. Born out of the Great Financial Crisis in 2008, the emphasis on Caveat Emptor on sales of financial products has shifted to one of Treating Customers Fairly to Conduct Risk for the entire organization.
So where does that leave the rest of the financial industry?
Regulations in the Asia Pacific Region
The APAC region is definitely not immune to the impact. Just like the rest of the world, the region has been experiencing waves of new regulations demanding more transparency from financial institutions.
The market is highly fragmented with many different economies, so here are some examples of regulations that have been implemented by a few of the players.
Singapore and Hong Kong
These two markets have released guidelines to managers in regards to their fees for selling funds as well as providing clients with full transparency, and suitable products. It all comes down to the overarching idea of protecting investors and providing them with the peace of mind.
However, due to these regulations, both international and local wealth management firms operating in either of the two cities must invest significantly more in additional resources such as technology to monitor transactions, additional staff in the legal department, and compliance and risk management teams. As a result, approximately 15 banks have decided to close down and move out of these cities.
Japanese regulators have also released guidelines for financial institution to follow with these seven overarching principles:
- Establishment and Announcement of the Policy Concerning Fiduciary Duties
- Pursuing the Best Interest of the Clients
- Appropriate Management of Conflicts of Interest
- Clarification on Fees
- Provision of Important Information that is Easily Understandable to the Client
- Provision of Services Suitable for Each Client
- Establishing the Framework for Appropriately Motivating its Personnel to Comply with Fiduciary Duties
There has been an increase in compliance, regulation, and technology costs- further narrowing the already tight profit margins.
Undoubtedly, this has put a lot of pressure on financial institutions across the regions. Even so, APAC’s prospect is still shining brighter than other regions of the world.
A Window of Opportunities for APAC
Like the old saying goes “when one door closes, another one opens”, and that door has opened for the APAC region.
Despite the ongoing pressure from regulators and investors, the APAC region is set for greater growth in the coming years. The market is dynamic and full of opportunities from developed markets like Australia, Japan, Hong Kong, and Singapore, to burgeoning markets like India and China. We’ll explore three major opportunities that wealth managers need to capture to drive Asia to the next level.
The area of passporting is one that is expected to grow significantly over the coming years.
Currently, there are three schemes:
- ASEAN Collective Investment Scheme (ASEAN CIS) – consisting of Singapore, Malaysia, and Thailand
- Mutual Recognition of Funds (MRF) – cross-border mobility of assets between Hong Kong and Mainland China
- Asia Region Funds Passport (ARFP) – a multilateral fund passporting framework that covers Australia, New Zealand, Singapore, Thailand, South Korea, and Japan
Following the implementation of all three schemes, the total AUM of regional passport schemes is estimated to reach USD 11 trillion in 2025 from USD 6.7 trillion in 2017. The growth is most prominent in the MRF scheme as China starts opening its market to external investments (refer to Figure 1).
Figure 1: Asian fund AuM projection by countries in passport scheme for 2025
(Source: PricewaterhouseCoopers, 2019)
2. Retirement Plans and Pension Funds
Japan, China, Singapore, Hong Kong, and Thailand are amongst the economies with the fastest growing aging population. However, according to OECD, only 26% of Asia’s working population and 35% of the labor force are enrolled in pension funds (refer to Figure 2). Now if we compare it to the 34 OECD countries, the averages are 65% and 86% respectively. Asia’s coverage is drastically low and that is mainly due to the large rural populations who do not have access to such services.
Figure 2: % of working population and labour force enrolled in pension funds
(Source: Eastspring investments, 2019)
For major economies such as China and India, a slight shift in their growth will produce huge revenue for wealth managers. And that shift has already begun. In 2018, China launched the Third Pillar Pension Tax Initiative which encourages clients to invest in pension insurance products.
But then you may ask, what about those who do not have the assets to invest? Well, individuals will receive a deduction on their income tax so that they can invest in fixed-return, guaranteed-return, and floating-return products. And even better, at the maturity date, 25% of the benefit is tax-free and the other 75% is taxed at a very low rate.
As other countries start launching similar initiatives, the future of APAC’s pension fund growth is on a positive trajectory. By 2025, the total APAC pension fund AUM is estimated to reach USD 6.8 trillion, with a 3.5% compound annual growth rate (CAGR).
3. Digitalization and Millennials
Even amidst the uncertainty from geopolitical events and pressures from regulators, the APAC region has managed to keep itself relatively buoyed, but how?
The answer is technology and millennials. More than half of the global millennial population is in Asia, 58% to be exact. They are the investors of the future with the potential to bring wealth managers fortunes. As this younger generation enters the investment landscape, the need and importance of Robo-advisors will become more prominent- after all, they are known as the digital generation.
With the help of technology solutions like Robo-advisors, it has made it even easier for wealth management firms to increase scale and target new market segments. Even as services are being digitized, wealth managers must evaluate their value propositions to ensure that client’s experiences are of top priority.
Prior to digital wealth management platforms, customized investment strategies were only accessible by HNWIs or UHNWIs, but that is no longer the case. Robo-advisors have made personalized portfolios readily available to investors across the whole wealth spectrum.
The move to digitalization has already begun in the APAC region, all thanks to the favorable regulatory environment surrounding digital technology and Fintech solutions.
Specifically, in Singapore and Hong Kong, the regulations have established an environment where new innovations are highly encouraged and welcomed. Similarly, China has one of the largest digital distribution markets (delivery of products through digital means), a favorable position for wealth managers and investors to start their Robo-advisor journey.
The APAC Financial Hubs
Singapore and Hong Kong are the two leading financial hubs alongside New York and London.
The governments of the respective cities saw potentials in their markets and have continuously shown strong support for the industry. In return, the cities are attracting a plethora of multinational companies from all directions- venture capital firms, private equity firms, family offices, philanthropy service providers, and financial consultancy providers.
London, the second largest financial center after New York, had been facing a tremendous amount of pressure from Brexit. This means that massive funds were flowing out of the city, and Singapore and Hong Kong were and are in the perfect position to capture the outflows. As a result, over the last five years, the aggregated growth rate has consistently maintained in the double digits and is expected to stay that way.
With the current growth rate, Hong Kong and Singapore are poised to compete for the position of world’s largest offshore wealth management hub.
Technology and Regulation
As the financial industry expands into the digital world, the need for regulations has become even more prominent, especially in preventing financial crimes.
Regulations like Anti-money laundering (AML) and Know your customer (KYC) are not new to the financial industry. But with the introduction of Robo-advisor technology, the whole process has become far more efficient.
Integrating AML softwares into the firm’s strategy has been highly beneficial. Not only is it more efficient and precise, the solution is also able to analyze customer’s data and accurately pick out any discrepancies; suspicious activities can be immediately detected, reducing the potential for fraudulent affairs.
Meanwhile, the KYC procedures have been streamlined to just 3 simple steps:
- Select the proof of identity document type (passport, national identity card or driver’s license)
- Upload a photo of the selected document
- Upload a photo of them holding the selected proof of identity
With this, it has gotten more convenient, reliable and secure for both customers and businesses.
APAC in 5 years
Undoubtedly, the APAC region is abundant with diverse markets and potential for growth, making it the largest investment infrastructure region.
PwC predicts that APAC’s total AUM will reach USD 29.6 trillion by 2025, a CAGR of 8.7% from 2017. Now, this estimation is highly optimistic so if we take into account the possible geopolitical issues, the conservative estimation is USD 18.1 trillion by 2025. Even so, this growth is still higher than other developed regions such as Europe and North America.
With China opening up its economy to offshore investors, India pushing for economic liberalization, and the overall continued growth of pension plans across the region, it is accelerating people’s adoption of investing. The APAC wealth management market is one that wealth managers do not want to miss out on.
Take your first step into the Robo-advisory world with Bambu.
At Bambu, we specialize in developing Robo-advisory solutions for the financial services industry, from smaller RIAs and wealth advisors to some of the largest banks in the world. We help our clients work through the above key considerations to implement solutions that truly benefit their wealth management business.