Rewrite the rules of the game
Fundamental changes in client behavior are rewriting the rules of the game for wealth managers. In many markets the crisis has been so severe that some changes could become part of the “new normal” for asset managers. Their success will therefore depend on the ability to adapt to the new behaviors exhibited by investors. Especially in Asian Pacific markets including Korea, client behavior has changed a lot.
First of all, before the crisis, complex structured products were a key driver of growth for wealth managers in the Asia-Pacific (AP) region. Many investors, alarmed by the scale of the financial crisis, have since shifted assets into simple, low-margin products, undercutting the ROAs of many wealth managers. To spur growth and improve gross margins, wealth managers need to explore opportunities to create new and innovative products.
Sophisticated products have suffered some of the biggest losses during the crisis. Structured products were undone by counterparty failure and the resulting loss of confidence in these vehicles. Products that had seemingly low risk, like absolute return funds or certificates written by reputable counterparties such as Lehman Brothers, were bought by investors who did not fully understand them.
In some cases, financial advisors failed to adequately explain the terms and conditions of these and other products, in part because of their own lack of knowledge but also because their banks had rewarded them for pushing higher-margin products.
Clients want to revert to simple solutions for two reasons. First, they want to understand their investments. Dazzling complexity is no longer seen as a desirable attribute (if it ever really was). Advisors must be able to explain investment products in detail and give a clear picture of embedded risks. Second, clients feel ― understandably ― that the returns on sophisticated products did not justify their price.
In addition, clients in the region have a hands-on, product-driven approach to managing their wealth. They value access to investment ideas and like to retain control of their portfolios ― less than 10 percent of the region’s AuM (assets under management) is held in discretionary mandates.
In Europe, by comparison, that proportion generally ranges from about 15 percent to almost 25 percent. Recently, however, client behavior has been changing in ways that lend a sense of urgency to the development of new products.
Then, what could be the next-generation products for AP region clients?
First, wealth managers need to extend the offering of renminbi-denominated products. In 2010, offshore renminbi deposits in Hong Kong increased sharply to RMB 315 billion, up from RMB 64 billion in 2009.
Despite this surge, there is a dearth of renminbi-denominated investment products ― offshore renminbi bonds amounted to only about RMB 80 billion in Hong Kong. Given the strong fundamental demand, Hong Kong’s stock exchange is actively promoting the launch of renminbi-denominated equities and other investment products, while major banks in Hong Kong, such as HSBC, are preparing to launch renminbi-linked structured products.
Second, wealth managers should create real-estate related products. Wealthy individuals typically have 20 to 30 percent of their wealth in real estate. As important as this asset class is, it is largely ignored by international wealth managers. There is a shortage of real estate-related research and investment products.
Third, second- and third-generation clients tend to be more open to the idea of discretionary mandates than are first-generation clients. Wealth managers should anticipate and help drive the growth of these mandates.
Lastly, asset managers can gain a competitive edge by serving Asian investors. Many wealthy Asian investors are entrepreneurs. Their companies, for the most part, are not very large and thus are not targeted or adequately served by global investment banks. Their needs, however, can be complex, in part because an entrepreneur’s personal wealth is often entwined with the company’s assets. Wealth managers can find opportunities for growth by serving both entrepreneurs and their companies.
Also, many Asian investors are first-generation entrepreneurs. They have no blueprint for passing their wealth or their companies on to the next generation, as evidenced by a rash of high-profile family disputes. Wealth managers have a clear opportunity to help clients navigate the complicated inheritance-planning process.
Wealth managers must not allow the ongoing recovery to lead to a sense of complacency. Many of the changes that are reshaping the industry present fundamental, lasting challenges to growth and profitability. In short, they must recognize this period for what it is: an opportunity to shape a new tomorrow in the post-crisis world.
Park Sang-soon is a partner at The Boston Consulting Group.