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 of 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 not immune to the impact. 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 a few of the players have implemented.
Singapore and Hong Kong
These two markets have released guidelines to managers regarding their fees for selling funds and providing clients with complete transparency and suitable products. It all comes down to the overarching idea of protecting investors and providing them with 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 the 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 prospects are still shining brighter than other regions of the world.
A Window of Opportunities for APAC
As 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 more significant 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 options that wealth managers need to capture to drive Asia to the next level.
The area of passporting 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
After implementing 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 have the fastest growing ageing population. However, according to OECD, only 26% of Asia’s working people 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, mainly due to the large rural populations who do not have access to such services.
Figure 2: % of the working population and labour force enrolled in pension funds.
(Source: Eastspring investments, 2019)
For major economies such as China and India, a slight growth will produce huge revenue for wealth managers. And that shift has already begun. In 2018, China launched the Third Pillar Pension Tax Initiative, encouraging 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 meager 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 will reach USD 6.8 trillion, with a 3.5% compound annual growth rate (CAGR).
Figure 3: APAC pension fund AuM growth
(Source: PricewaterhouseCoopers, 2019)
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 digitized, wealth managers must evaluate their value propositions to ensure that clients’ 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 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 centre after New York, faced a tremendous amount of pressure from Brexit. This means that massive funds were flowing out of the city, and Singapore and Hong Kong were in the perfect position to capture the outflows. As a result, the aggregated growth rate has consistently maintained in the double digits over the last five years and is expected to stay that way.
With the current growth rate, Hong Kong and Singapore are poised to compete for the 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 software 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 growth potential, making it the most significant 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 consider the possible geopolitical issues, the conservative estimate 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 continued overall growth of pension plans across the region, 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 vital considerations to implement solutions that genuinely benefit their wealth management business.