How Does a Wealth Management Service Succeed in Asia?
This well-researched report looks into China, Taiwan, Japan, Hong Kong, Singapore and the market for wealth management software in other growing Asian economies. Many wealth management software-as-a-service providers want, but are hesitant to, get involved with the Asian marketplace. Here is a source of better understanding of what to expect.
The rapid growth of many markets within the Asian continent, particularly in the east and southeast regions, is evident in recent market analysis. Although less noted but just as remarkable is the rates of High Net Worth Individuals (HNWIs) that have emerged due to high growth rates. This trend is particularly remarkable in Singapore and Hong Kong, where HNWI population is rapidly reaching that of Australia (200,000+). Although, China and Japan especially reflect a profound development in wealth markets with a 750, 000+ Chinese and 2, 500, 000+ Japanese HNWIs. Looking at the numbers, it seems obvious that wealth managers, and their automated systems, that are in Australia are already in Japan, China, and these growing Asian markets. Although, it proves not to be that simple. The imaginary divide in the South Pacific can be attributed to culture, investor behaviour, and savings practices. The numbers quickly answer the question of why to expand but the cultural and financial differences force wealth management tool providers to hesitate on the question of how to expand. Because of the diversity of the region, wealth management software may have to follows several and not just one ‘Asian-model’. Therefore, a higher-level investigation of important factors has to be laid out.
Therefore, the first section of this brief report gives the easy case for why a solution provider should expand to take advantage of growing wealth markets. The second section presents intricacies that must be addressed in order to speak in a way that displays financial literacy in Asian markets, understand certain barriers, and gain a better understanding of whether large always means profitable. The third section will provide case studies that illustrate market intricacies and give insight into whether they are compatible or less compatible financial landscapes for wealth management software.
The Biggest Asian Wealth Markets: Why Western Europe and not Asia?
Asia is a fragmented and diverse financial region. Whereas Western Europe has fairly integrated EU markets and standardized regulatory requirements, Asia’s rapidly growing wealth markets lack many of the characteristics that a western wealth manager (and their system) are used to. However, when a systems provider — traditionally purchased by North American, Western European, and even Australian wealth managers — is considering the Asian market, some initial parallels can be drawn to put the challenge in context.
Starting with what is already familiar, the following table displays market characteristics of countries where investment practices seem familiar to wealth managers and therefore to portfolio accounting and automated trading tool providers:
A parallel will be drawn between the desires and interests of an expanding wealth manager with those of a solutions provider because typically, the provider will follow the prospective client. Therefore, insights into wealth management behaviour is reliably an insight into what providers should expect to do as well.
Hong Kong Because wealth managers reliably want to be where the wealth is, it is sensible to find these numbers attractive. The four Western European markets and the one Australian market both reflect familiar regions to deliver portfolio accounting and trading solutions. The Asian markets can be compared quite closely to these markets. If a wealth manager operates in the Netherlands only for the market size and opportunity of HNWIs, then Hong Kong should be just as attractive. Despite the Netherlands having over two-times the people of Hong Kong, the wealth numbers are similar; almost 185, 000 HNWIs with around 1 trillion USD growing at 3.2% annually — a richer body of HNWIs.
Singapore The same comparison can be made for the Australian market. Australia is more than four-times larger than Singapore, yet with 106, 000 HNWIs carrying 543 billion USD at 3.9% growth, Singapore should be just as attractive in terms of client opportunity in the wealth management category.
China and Japan The larger familiar HNW wealth markets of the UK, France and Germany standing at around 2 trillion, 2.2 trillion, and 4 trillion USD respectively are comparable to the Chinese wealth market of 757, 000 with 3.8 trillion. Offering a better comparison than Western European wealth markets is the United States when putting Japanese opportunity in context. This is because Japan is only second to the United States when it comes to HNWI population of 2.5 million carrying 5.9 trillion USD — with China third and Germany fourth.
Taiwan, South Korea, Thailand, Malaysia, and Indonesia The other, smaller wealth markets are not usually which states come to mind when managers are looking to expand. Taiwan, South Korea, Thailand, Malaysia, and Indonesia can be characterized as having smaller HNWI populations ranging from 40, 000 (Indonesia) to 112, 000 (Taiwan) and HNWI wealth values from US$133 billion (Indonesia) and US$522 billion (South Korea) — lower than the Australian wealth market yet comparable to South Korea and Malaysia at US$419 billion. Together it seems like these smaller Asian wealth markets can be a good opportunity for wealth management expansion and software usage. Although unlike integrated Europe, each market is quite idiosyncratic and unique with a vast diversity in investor protection, trust in financial institutions, and cultures of asset management and product availability.
Even considering that a Forbes contributor claimed earlier in June of this year that Asia is to surpass North America as the wealthiest region in 2016, the variety of less integrated markets with a variety of legal, financial, and cultural barriers requires an examination of the profitability of sheer size.
Challenges to Expanding into the Asian Wealth Markets
As a wealth management solutions provider, SS&C follows wealth managers. Therefore, the sizes of wealth markets are not necessarily the only factor that goes into the decision to provide a solution in a certain Asian market — it is essential that the movement and geographic trends of wealth managers are understood. In addition, Asia is a fragmented economic arrangement with varying legal protections and investor behaviors. Thus wisely, not all wealth managers expand to Asia at large but select markets that are strategically identified as beneficial. How do we understand where wealth managers go and why?
A number of indicators of the attraction, modernization, and ease of access into certain markets can be used to help an unfamiliar firm distinguish Malaysia from Singapore and China from Taiwan.
According to Data Monitor, and overall rank of markets by attractiveness to wealth managers is as followed (1 being the most attractive; excluding Japan):
1. Hong Kong
2. Taiwan
3. Singapore
4. South Korea
5. Malaysia
6. Philippines
7. Thailand
8. Indonesia
9. China
10. India
This ranking may make sense in some areas while it may remain puzzling in others. For instance, in Europe, the largest markets are often the top choices. In Asia, the Chinese US$3.8 trillion (third largest world-wide) is ranked lower on the list for other reasons. Also, many states that are rarely considered because of size (GDP and population) like Taiwan, Singapore, and Hong Kong are seen to be the most attractive. In this way, other factors other than size must be considered.
Market and Political Stability (including lower inflation and currency stability and frequency of crises)
Economic, market, and political instability can be very large barriers to an expanding wealth management system because it is a large barrier to the expansion of its clients — managers. Wealth managers tend to be drawn to markets that reflect the same market and political stability as those in their more familiar Western European and North American countries. Preferences can be quantified and compared using several indicators that reflect inflation and currency stability, historical ability to absorb crises, historical frequency of crisis in general.
According to Data Monitor, Hong King and Taiwan use the most sophisticated regulatory frameworks and thus experience less financial turbulence. Taiwan is also found to be one of the most politically stable along with Singapore while Hong Kong has experienced small amounts of shake-ups to democratic integrity. Of course, the political stability variable is a contributing factor for the low ratings of Philippines, Thailand, and China as it is often seen that faster growing means more instability due to political mechanisms of authoritarian modernization — nevertheless effecting investor and wealth managers confidence in the reliability of working in these countries. Taiwan remains on top directly in from of Malaysia and Singapore when it comes to low inflation, a factor many managers feel is important for lowering the risk to the values of their client’s wealth. Where Hong Kong and Singapore have the lowest frequency of turbulence and high ratings of currency stability, Taiwan can also be justified as an attractive market for these factors.
The following table displays the most sophisticated regulatory schemes in Asia:
Affluent Population (China and Japan)
Asia’s diversity and pervasive inequality — both national and international — produces many richer and many poorer countries. Understanding which are which can address many concerns facing challenged expanding firms. Many of those who study the movement and decisions of wealth managers in their expansion to Asia have noticed that despite barriers, large enough markets and the affluence of population can be enough to convince firms to make those decisions. China is an example of this draw to affluence despite cultural, legal and political barriers. Judging by the overall rankings of markets like China and India, many would suspect that sheer size is not the first priority for many expanding wealth managers. However, the pull is enough to note and worth noting that those same managers who choose China for its size would not be drawn to Malaysia, Indonesia, or Thailand or even South Korea and Taiwan.
However, amount of affluence in a population is not always a reliable number for a wealth manager because it assumes conditions of North American markets. Important to consider is the amount of banking, or the proportion of the population that is ‘banked’. China, although large and affluent, is quite unequal and under- or lightly-banked. Generally, the only participants in the formal market are those that are of HNWIs. This may explain why a comparative HNWI value of US$4 trillion of Germany and China can accompany 1.2 million HNWIs in Germany but only 750, 000 in China. The market may react in an unstable and invalid way if managers choose to expand to China’s two stock exchanges, not entirely open to foreign investors.
Efficiency of Client Management (diversification, urbanization, efficiency of banking systems, willingness to use financial advice)
Another challenge to an expanding firm may be characterized as a lower-than-expected level of operational efficiency for managers. Wealth management firms that are used to working with European and North American markets are often highly concerned about their workflow and efficiency of their asset management. Therefore, assessing markets with this in mind requires consideration of various alternative indicators such as investor preferences (willingness to diversify and willingness to rely on financial advice). In this category, Thailand has emerged as the most responsive countries when it comes to diversification. Typically, such as in cases like Malaysia, a large bias exists that pulls investors from choosing international assets and investing at home. Singapore’s HNWIs seem to be the most responsive to financial advice, with South Korea the most skeptical and reluctant. This has drawn firms, naturally, to Singapore where they can be granted more discretion and logically more business.
Access to clients and centrality of a single office to cut down on operational costs are also large factors for managers. Urbanization levels reflect more, centralized, higher earners within one area. Hong Kong and Singapore, in this way, allow for full country service form one office since both are high density, city-states.
Lastly, wealth managers used to North American or European banking and investment prefer to continue the efficiency they are accustomed to working with. As a result, many managers who prioritize this have rule out Indonesia and Philippines for their lack of modernization, restrictions, and efficiency in the banking sector. This characteristic may contribute quite heavily to the lower ranking of these two states.
Ease of Access (barriers, competition, corruption, tax regime, liberalization and openness)
Maybe the most important challenges to expanding firms are the varieties of accessibilities that exist across markets including several that are not easy to access and others that are. The ease of access into new Asian markets and the length it takes to establish an operational wealth management branch is an important yet difficult attribute to know for sure. Because all Asian states are quite distinct, a number of indicators of barriers and liberalization can help to bring out which managers view with preference. Hong Kong and Singapore appear to be on top with the least entrance barriers. They are also favoured in the field of competition. Wealth managers prefer markets where a greater breadth of products can be offered. Greater competition leads to the incentives to provide a greater range of products and services and thus achieves the diversity managers are used to seeing in more familiar western markets. Hong Kong and Singapore as well have the least corruption, the best tax regime for new firms and offer openness and liberalization of new business restrictions and barriers. Malaysia has also been working in recent years to liberalize and relieve barriers to foreign expansion that has pushed their ranking up a few more places than most would expect.
Breadth of Services
The breadth of services of the standard products are displayed in the following table:
The popularity of products by asset class are displayed in the following table:
It is interesting to consider popularities of certain asset types in the Asia region compared to North American, Australian, and more familiar markets. Above is a table that illustrates popular average asset allocations per country. Measuring a typical allocation of Real Estate, Cash and Equivalents, Equity, Fixed Income, and Alternative Investments (5 — where equal would be 20% of each; indicating lower-than-normal and higher-than-normal allocations). Here, Japan stands out as having exceedingly high real estate allocations compared to the rest of Asian countries at low-20%s allocation. Cash seems to be the most popular asset type among Hong Kong, Singapore, Indonesia, and Malaysia while maintaining a ‘second-highest’ asset of real estate. Still, with the exception of Japan, Asia seems from Australian markets different in this respect. Take China as an example of a more in-depth look at changes in the popularity of products in recent years:
It is interesting to see that fixed income products are and will remain, a popular option (bonds). In addition, the increase in wealth preservation as a priority, inheritance planning, and risk aversion characteristics are all illustrated by the growth of instruments like trusts, lower risk wealth management products, and insurance. These trends will be discussed in a later section.
Below are the comparative allocations by region, compared across North America, Europe and the Asia-Pacific (excluding Japan). Alternative Investments are a point of comparison. Characterized normally as a hedge funds, managed futures, commodities, and derivatives, alternatives are the lowest type in all regions. However, they seem to be marginally more popular in the Asia-Pacific. This may be attributed to the rapidity of HNWI growth and the higher risk tolerance of many wealthy investors. In China, and many of the surrounding and more regulated markets, these types of products are not as popular due to their high amounts of regulation.
Real estate seems to be much more characteristic of European investors than the North American. Although, this may not be as simple as it appears. What seems to be occurring in China — a very large real estate market — is having downward pressure on the Real estate allocation in the graph above. Higher Real estate regulation, higher qualifications for purchase, higher mortgage interest rates on first and second properties, and real estate tax pilots are forcing many to evacuate the real estate market and invest in overseas real estate (35%), and many that are undecided and waiting may choose the same (60%). Similarly, European Cash and Fixed income, and equity allocations seem to follow the same comparison. All together, the product support a wealth management service provides their clients in Europe is comparative to those in the Asian region.
How does a wealth management software adapt to fit the Asian Markets?
Taking what we have discussed so far, we can consider some market environment conditions that tell us something deeper about a country than simply looking at national environments — saving culture and saving needs, expectations from managers, and histories of financial advisors. Certain environments that combine some aspects of these can give insights into how wealth solutions can fit into these types of markets with those types of investors. After this section, several case studies will illustrate good or bad news scenarios for wealth management software-as-a-service (SaaS) providers.
Understand why clients invest and what they are saving for by client segment (young vs old entrepreneurs, entrepreneurs constitute the majority of HNWIs, retirement savings plans)
A lot of attention is given today in North America and Western Europe to the approaching inter-generational wealth transfer — the largest to ever take place. Therefore, inheritance planning is becoming a significant driver for many HNWIs to preserve wealth and use wealth management services and software. In this respect — what about Asia? Because it is impossible to generalize about the region, I will give some ‘what if’ solutions in this section and drill down into case studies in the next, allowing the applications of some of these solutions.
If the same type of wealth transfer is occurring in an Asian country then a wealth management culture will arise. The self-directed trading culture that goes without a wealth management professional will meet resistance by those who feel more averse to risk and more geared to more conservative methods of preservation rather than growth. This is good news for a system provider that can support several asset classes, product types, and taxation methods — because it is likely that strong, less open markets like China will take advantage of sociological trends (mass inheritance) with an enhanced taxation regime and regulatory framework.
Because a vast majority of HNWIs are business-starters and entrepreneurs and many Asian governments provide retirement savings plans to their public employees only, more conservative demand for savings will result in a turn to wealth management products and more mature options. In these countries, solutions may be a better fit due to the expected need for private banking expertise. Also, solutions providers may benefit from positioning its service in countries with similar sociologies to North America and Europe — that are soon to experience the upcoming intergenerational wealth transfer — while preparing for the effects of differences in political reaction (strict regulation and tax regimes).
Understand Retirement Planning
A wealth management system, servicing asset managers, must adapt to using terminology that makes sense with the manager’s workflow. Because Asian countries tend to different so much from one another, basic knowledge of particular saving patterns should be distinguished. One large reason many HNWIs invest is to ready them for a retirement that does not compromise their lifestyle. Asia has a culture of saving. Where personal saving as a percent of income in North America and the west stand at 10%, China’s 30% and Japan’s 20% are common examples. Below are the terminologies and degrees to which investors save for retirement, including retirement plans or lack thereof. Here’s a hard pill to swallow in terms of graphics:
* China: The first pillar (social pooling) rewards benefits includes a monthly pension as a percentage of the city average salary (CAS) based on the average and the employee’s indexed contribution salary. The second pillar (individual pooling) account balance is converted into a monthly life annuity pension using a government-determined annuity factor. Retirees with service years will get a transitional benefit provided by the social pool.
Understand how managers service their clients in Asia (clients are self-directed investors and digitally-minded)
Wealthy Asian investors, depending on the sociological and political backdrop to the market, will demand several services of their managers. In addition, it should not be taken for granted that they demand services from wealth managers at all as there is a clear independent trading culture in many Asian centres including China. Again, because it is not sensible to generalize Asian investors and their interactions with wealth managers, I will use sociological and political backdrops to propose solutions — because these two factors tend to most greatly shape investor behavior.
As seen below is a chart of Chinese wealth planning in 2013 — and I suspect will only grow in the near the top of the chart (in red). What is interesting here is what conclusions can be drawn from what we know about China today and the illustrated wealth planning statistics. Because China is economically concentrated between ages 40 and 60 (and about to retire), and politically restricted, tax planning, inheritance planning, legal advisory, and investment migration seem to make sense. The good news for wealth managers and subsequently, systems providers like SS&C, it is evident in the nature of these planning methods that the need for advisement and wealth management expertise will grow. The types of financial needs are becoming long-term and cannot be properly supported by the self-directed, anti-manager approach traditionally taken.
A wealth management system, in order to support the growing demand of service from wealth managers in the financial lives of many countries facing similar sociology and politics, must understand increasing taxation methods, support international asset classes, and allow for greater mobility of a client’s data.
What is the role of managers in Asia (succession planning)
One answer does not address the question surrounding the role of the wealth manager in Asia. Political, cultural, and institutional variances between countries have created completely different sets of savings requirements, trust levels, and investor behaviour — making it very difficult to conceptualize the role of the region-wide wealth manager. In reality, the role of the wealth manager has been small and even non-existent in the China area. The Chinese culture has been, and continues largely to be, self-directed when it comes investment. This characteristic may be interpreted as the need for wealth managers to better connect with their clients through daily reporting, mobile application use, and allowing for greater involvement in the initial planning stages. However, more accurately, in China and surrounding offshore hubs, there is little concept of a wealth manager. Investors see finance as gambling, a hobby, and something they do on their own. Instead of talking wealth managers, they talk stock brokers. Because their trades are done independently, stock brokers are those who interact the most.
Despite this history, sluggish performance of the capital and real estate markets have cause wealth management products to gain in popularity due to their low-risk and stable returns. The Chinese are more concerned with wealth preservation than wealth generation than any time since the Second World War and thus may be showing a greater need for the western-style asset manager — especially for the HNWIs. And even if the traditional, self-directed trading practices still exist at large, HNWIs are becoming more sophisticated, mature and conservative with their financial behaviour because of their recent wealth preservation needs and greater interest in foreign products.
The Case for China
Mapping HNWIs is important when considering their investment motivations and their needs for savings. Below is the HNWI client segment in terms of occupation:
This chart shows what has already been mentioned above; that most HNWIs are business owners and entrepreneurs. This is quite general and so is similar to many Asian countries.
Unlike Hong Kong, Singapore, and Taiwan, the amount of HNWIs is dispersed throughout China’s immense land mass, where over 20 of China’s provinces contained 10,000 or more HNWIs — and even toward the more rural northern provinces. This dispersion does not allow for the same geographic benefit as does some of the offshore financial hubs where city-states structure and high affluent density allows one office space to service the entire population. Interestingly, a high 30% of Chinese claimed their top priority was wealth preservation, followed by quality of life, then children’s education. To do this, many HNWIs use the following preservation arrangement: Family trust (37%), Cross-border asset allocation (36%), tax planning (34%), Insurance products (33%), and legal advisory (20%). Although, sensitivity to risk has caused almost 50% of HNWIs to claim they have purchased insurance products to cut down on risk.
With over a third of HNWIs and half of ultra HNWIs considering inheritance planning, many are concerned in an impending inheritance tax. Nevertheless, these people are considering inheritance planning for the first time. Because 70% of HNWIs in China are between the ages of 40 and 60, their children reaching adulthood and the stabilization of their businesses is prompting this consideration.
This chart shows this increasing consideration and seriousness with inheritance planning as investors age. What this tells us is that Chinese wealth management will grow increasingly more similar to how North American wealth managers manage their client’s assets today.
The above chart shows the popularity of bonds/fixed income products when the Chinese choose to invest overseas.
It is also an important question to consider where HNWIs are keeping their money for wealth management services. This will tell SS&C who the best clients are; larger banking institutions or smaller wealth management firms. The chart below displays the Chinese preference in 2013 of who to choose to manage wealth and achieve changing wealth goals.
It appears that, in China at least, the bigger banks (Bank of China, Industrial and Commercial Bank of China, and China Construction Bank) are the primary sources for platform-based wealth management.
The Case for Singapore
The UBS Singapore webpage introducing strategic wealth management services contains insight into the wealth management market that can be helpful to understanding how a wealth SaaS product can fit in:
Our wealth planning team has over 600 staff located in major financial centers across the globe. Our planners are specialists in fiduciary and insurance solutions. Their knowledge and experience in local and cross-border wealth management issues, such as succession and inheritance planning complement the expertise of our investment specialists. This contributes significantly towards planning your financial future.
In Asia, each of our wealth planners specializes in a particular geographical location, enabling us to have in-depth discussions on your personal financial needs.
What does this tell us? A few important characteristics about what the high concentration of HNWIs in Singapore is looking for and therefore what a product needs to adapt to in order to support the managers role in wealth management. First, there are several emphases on the cross-border, global, and geographic dimensions to wealth management. This signifies that UBS, a significant wealth management player in Singapore, is dealing with clients with similar needs to China — internationally diversifying investors, and a recognition that new interests overseas involves the specialist advisorship from a wealth manager over using the self-directed approach. Second, particular mention of insurance, succession planning, and inheritance planning tells us that Singapore faces similar sociological trends that China faces — an aging, wealthy population gearing up for wealth transfer in the next 10–20 years. These are both goods signs for North American-providing wealth solutions companies because it means that North American trends are echoed in Singapore and that little concern needs to be given into the state of wealth management as an industry. As HNWIs grow, the use of wealth management will as well. And third, the mention of insurance products in the most general introduction to the UBS wealth management service signals that Singapore’s HNWIs are, similar to China, becoming more risk averse — good news for wealth management firms that provide safer, more conservative products.
Also worth considering, and perhaps more in contrast to the Chinese situation, is the fact that Singapore is much more politically and economically open. This is another good sign for wealth solutions providers because the sociological trends of China are in favour of greater wealth management use but the political restrictions would lead to greater taxation regimes, more specialized products, and more strict regulations that could ultimately impede the ease of access of new, competing wealth management firms. This will not be the case in Singapore as was shown in the first section, Singapore displays one of the more open, liberal, and developed capital markets in Asia with little entrance barriers and internationalized practices.
Considering Singapore’s Central Provident Fund (CPF) retirement savings plan for private sector workers is a peculiar case. If wealth managers are dealing with HNWIs and an early retirement age of 55 years, and the high fees demanded by the fund, HNWIs will still need to save additional money for retirement and thus provides good news to wealth managers and their software. In order for products to support clients in Singapore, a wide range of asset type support is needed to allow firms to best compete in one of Asia’s most competitive markets and also support the accounting principles necessary to bill working clients the fees associated with the CPF. In short, inferred from these market dynamics is a strong wealth management client base of medium to high HNWIs (multi-millionaires), because many (88%) of the less affluent private workers will likely be less likely to need wealth management. However, the many and growing number of HNWIs will need to use wealth management to maintain their lifestyle for their abnormally long retirement.
The Case for Hong Kong
Deloitte’s Wealth Management Centre Ranking of 2015 assessed the world’s leading wealth management centres and regarded Hong Kong as the most winningest centre in the world. A market share increase from 2–7% between 2008 and 2014 and an international market value increase of US$370 billion occurred over the same period — less of an increase in both areas than the US. But growth aside, distinguishing Hong Kong as an expansion project requires a look into how healthy they allow wealth managers to be.
Even more, scholars writing in the Capital Markets Law Journal have concluded that “Switzerland may be losing its position as the traditionally dominant private banking and wealth management hub of the world.” The claim that “industry opinion suggests that” it is experiencing a shift toward Asia. In particular Singapore and Hong Kong, “where the rapid growth of the private banking industry and the rise of money managers looking to capitalize” on the growing amount of millionaires (Long and Tan)
The Case for Japan
The following are Japanese firms providing the bulk of the competition for HNWI clients:
· Mitsubishi UFJ Financial Group
· Mizuho Financial Group
· Sumitomo Mitsui Financial
· Shinsei Bank
· Bank of Yokohama
· Citibank
· Credit Suisse
· Nomura
The Japanese are a truly global body of HNW investors. Where in previous years Japanese allocations in North America have been large, they have been decreasing (8.1%) in favour of allocations in other parts of the world. Especially in the Asia-Pacific region has Japanese allocation grown to 46% of Japanese foreign assets. Investment in Europe is expected, as well, to increase to 44% of HNWI assets by 2018. Thus, the breadth of asset coverage worldwide is an important attribute for SaaS providers supporting wealth managers with Japanese HNWI clients — and there are a lot of them.
Global research firm specializing in IT and financial services, Celent, identifies five trends that illustrate major evolutions to the Japanese wealth market:
· Generational transition among small business users
· Revision of tax regulation
· Strong relationships with senior adults
· Rise of mobile advisor tools
· Advice of real estate
At first glance, these trends do not seem too dissimilar to those of China. Although, Japan more fundamentally seems to be much more receptive to wealth managers and new entrants into the Japanese wealth market. Japan also seems better regulated, more liberal in political control, and more attractive to wealth management firms.
Considering Japan’s retirement savings plan, the National Pension, a 401(k)-like plan leads to conclusions of similar investment desires in the HNWI client segment. From this, we can infer that the Japanese save in similar ways, and for similar reasons, to the US HNWI clients. Except one difference: Japan’s savings rate is one of the highest in the world and their consumption rate is one of the lowest. This only helps the wealth managers — SaaS clients — business because saving equals investment.
There are a couple of characteristics that provide an interesting financial dynamic in Japan presently. First, Japan tends not to have an overly trustworthy investment culture. In fact, when asked whether HNWIs have trust in wealth management firms, 50% of Japanese answer ‘yes’. Compare this to China’s 90%, Hong Kong’s 80%, and Australia’s 75–80% ‘yes’ rates. Second, the Japanese internationalization, concern for wealth preservation, and similar trends to China have led to an increasing need — reluctant of not — for wealth management services in the daily maintenance of HNWI wealth. These two characteristics lead — similar to the case of China once again — to a body of HNW investors that prefer to be heavily involved in wealth management activities. Interestingly, as Celent identifies, a trend toward mobile advisor tools where clients can use personal technology to keep updated and involved in their account activities from home is on the rise. This illuminates a reality that a system, in order to be the best answer in Japanese markets, will need to further develop mobile banking products for better and more frequent integration of clients and managers.
The Case for Taiwan
The Taiwan market is an attractive case for expanding wealth management firms and wealth management service providers. At a broad level, this can be partially attributed to Taiwan’s positive recovery following the financial crisis in previous years. At a more specific level, there are several directions we can look to find a promising avenue for product expansion with clear messages as to how to adapt.
Not unique to the Asian region, a majority of Taiwan’s 112,000 HNWIs (larger than Singapore’s 106,000 and much larger than Indonesia’s 48,000) are former entrepreneurs. ‘Former’ because most are between the ages of 51 and 65, making retirement and inheritance planning an increasing preoccupation of HNWIs. For these reasons, increased need for wealth managers is a deciding factor for many expanding firms simply because of existing demand by necessity.
In addition, increasing GDP per capita (wealth of the average citizen) and a low Gini coefficient (low inequality) are leading to a growing number of affluent individuals with similar needs to the client segment addressed above. When we set aside attention of HNWIs and focus on simply affluent investors ($100,000 — $900,000) we find 4 million on top of those 112,000 HNWIs that require wealth management services as well. In sum, Taiwan houses an influential amount of investors although the proportion of which is relatively small. Since the percent of HNWIs of population in Hong Kong is 2.6%, in Australia is 0.95%, and is 0.9% in Canada, Taiwan’s 0.5% seems quite low. Although the absolute numbers make it as attractive as Singapore and Hong Kong when several structural factors are taken into account.
What do Taiwanese investors hold? HNWIs in Taiwan most often invest in real estate and cash or near cash products but will be experiencing a shift toward fixed income within the next two years due to regulatory developments tailored to develop a local bond market. Traditionally, more real estate investments were expected among HNWIs. This has been changing slightly. While these seem marginally in contrast to China, the age of HNWIs creates a strain of similarity between the two. Mortgages, personal loans, tax planning, and professional investment advice seem to be of growing demand signalling good news for wealth managers.
Even more, Taiwanese HNWIs have proven to have a lower understanding of risk and return principles despite having a larger risk appetite. Luckily, this makes investors increasingly receptive to personnel who can assist in their understanding of complex investment processes and discretionary management essential in the future.
There are a few challenges to a wealth management software that requires adaptation. First, Taiwanese investors tend to show a great deal of loyalty to their banks but not their wealth managers. A wealth management firm that is aware of this cultural phenomenon will require a workflow that emphasizes CRM and KYC. A SaaS wealth product must be able to provide the most automation possible in order to allow managers to stay connected with clients and upgrade the client-manager relationship. If products are able to confidently automate the emphasized CRM process, this may allow for a very powerful marketing point if this issue is really as sensitive and top-priority as it seems to be.
Second, and along the same lines as CRM and KYC, is the Taiwanese pattern to use more than one manager. Many HNWIs have been known to divvy up their portfolio into fifth and use five different managers. This requires an enhanced and integrated body of client relationship functionality. The most effective way that managers gain clients is by referral or relationship — illustrating the emphasis that Taiwan, and similar to Japan, put on the personal aspects of business and selective trust. This selective trust and skepticism of firms outside of the family relationship will ultimately place more demand on the high-performance of CRM tools. Family offices, relationships, and a high demand for weekly phone calls and frequent updates are examples of specific functionality that SaaS providers looking to support East Asian clients need to look into developing if not already complete. Despite, additional enhancements made necessary by other market and cultural quirks is difficult to predict.
The competition profile includes institutions like:
· Bank of East Asia
· Bank SinoPac
· HSBC
· Taiwan Cooperative Bank
Learn Anything? — I hope so
There is a rationality to the point ‘if Europe, North America, and Australia, then why not Asia?’ The Asian wealth markets are the fastest growing in the world. The number of HNWIs is increasing and there is a large amount of research done recently encouraging wealth managers, with reliable evidence, to follow many of their competitors to Asia. The numbers are attractive; there are large markets (Japan and China) that reflect similar opportunity to that of the big European players, mid-size financial hubs (Hong Kong, Singapore, and Taiwan) that reflect the Australias, Canadas, and smaller European markets, and several smaller markets with growing wealthy populations (Indonesia, Malaysia, and Philippines). Although, the Asian-Pacific region proves to be vastly diverse in many respects and expanding to Asia is not as simple as moving an office to Shanghai or Kuala Lumpur. In reality, there are many challenges and strengths that distinguish each market from one another. Each market contains varying levels of regional integration, internationalization, political and market stability, regulatory requirements, and tax regimes. Each country, as well, contains a different culture, investment traditions, levels of trust, asset preferences, and sociologically-defined investment needs.
In this report I have attempted to introduce the attractiveness of each market to give a general idea of how to distinguish Asian markets. I have sifted through the pervasive challenges facing an expanding wealth manager, classifying specific types of markets based on these attributes. I have also presented the cases of several more attractive Asian choices for wealth managers and given some strategies as to how software providers are best to adapt to better service these clients. I conclude that certain areas in Asia are becoming much more like the European or North American markets that many wealth managers and many SaaS products already service. Traditional intricacies of each developing market are being moved aside in favour of American-school rational finance theory and investment planning. The demands of lifestyle, large amounts of wealth, and a united global fear of recession may be responsible for this shift. Either way, it is good news for western-style asset managers and their solutions providers, leaving minor functional adaptations, a familiarization with industry terminology, and a knowledge of country-by-country regulatory frameworks and economic regimes.
