My posts are like buses. You wait for ages and then several come along at once!
On September 15th I jetted off to Hong Kong to share the findings from our latest vintage from the wealth report program, the 2015 edition of the Asia-Pacific Wealth Report.
The launch was more special than usual, given that it represented the 10th anniversary of the report (following on from the 19th annual edition of its Big Brother, the Capgemini RBC Wealth Management World Wealth Report 2015 which I covered here).
Beyond my team’s analysis of the size of the market (defined as high net worth individual, or HNWI, population and financial wealth) and investment behaviors, our feature point-of-view looks at the complexity of Asia-Pacific HNWI needs and the resulting strategic shifts that firms need to take to position themselves for success. Allow me to take you on a brief journey to understand this fundamental challenge.
We begin by understanding that the needs of Asia-Pacific HNWIs are especially distinct from their peers in the rest of the world. Our research shows Asia-Pacific HNWIs have a higher proportion of their wealth coming from business ownership compared to the rest of the world, and they stand out further through their strong preference for credit availability, professional advice, and digital interactions.
More specifically given the heterogeneous nature of the markets comprising the region, HNWIs in the emerging markets have a higher level of concern about wealth-related factors such as assets lasting through their lifetime and the impact of the economy on their ability to meet their financial goals. They also indicate higher importance for all their wealth needs compared to HNWIs in mature markets and the rest of the world.
Perhaps with such acute needs, it is not surprising that the demand for professional advice is so high in Asia-Pacific.What is worrying however, is that the level of misunderstanding between HNWIs and wealth managers regarding HNWI wealth needs is higher in Asia-Pacific (excl. Japan) than anywhere else in the world, and the disconnect could widen further still given expected future growth in Asia-Pacific emerging-market HNWI wealth and an expected wealth transfer to the next generation.
The region’s wealth managers do not appear to be fully attuned to the needs of their HNW clients. To illustrate, wealth managers largely overestimated their accurate perception of HNWI wealth needs, with 88% of advisors saying they have a good understanding, compared to 73% of HNWIs who agree (see our figure below if you do not believe me). The resulting 14 percentage point gap is significantly larger than the 9 point gap for the rest of the world, and the gap is larger still in Singapore (24 points), Japan (20 points), and Australia (16 points).
Looking forward, there is a risk that this client-advisor alignment gap widens further still given that much of the HNWI wealth increase through the end of 2017 is expected to occur in the emerging markets, as our helpful figure below shows.Why is this an issue? It is in emerging markets where HNWI wealth concerns and demands are greatest, and yet where the sophistication of advice (and related advisory and platform infrastructure) is currently lowest.
The passing of wealth from one generation to the next is another factor that risks further exacerbating the misalignment, as well as due to these younger HNWIs creating new wealth of their own in the region.
How so you might reasonably ask? Well, younger HNWIs told us that they have higher levels of concern about the factors affecting their wealth (as you can see below). With significant wealth likely to be transferred over the next few years to the next generation, firms may need to transition their value propositions from transaction-focused to wealth-planning models, even for younger HNWIs.
Such a shift in approach will not be easy however, given the potential family conflicts during succession planning (to take just one crude example, managing the conflict when dealing with the Chinese supermarket baron whose Harvard-educated daughter has no interest in continuing the family business… but also the nature of how a wealth manager needs to structure trust agreements among siblings), and a general cultural aversion to discussing the details of wealth transfers in some markets, notably around a patriarch or matriarch’s desire to retain control of financial affairs. Additionally, concerns about the ability of the next generation to manage wealth will likely lead to further challenges.
So the logical question after painting such a scary picture… What should firms in Asia-Pacific do about all this? Our view is that they must take action in three specific areas—wealth manager enablement, digital capabilities, and lending solutions—to position themselves for success by addressing Asia-Pacific HNWI needs.
Let us first begin by looking at the “opportunity”. To a greater degree than in the rest of the world, Asia-Pacific HNWIs tend to have multiple wealth management relationships. We can see that they are likely to work with multiple firms at a rate of 37%, compared to 22% of HNWIs elsewhere. We also found a correlation in that HNWIs working with a single firm are more satisfied with their primary wealth manager, giving satisfaction ratings of 74% versus 68% for those working with five or more firms.
So what? By providing services that span the diversity of unmet HNWI needs, wealth management firms have the opportunity to increase satisfaction and as a result, consolidate multiple relationships and increase the assets at the firm.To better satisfy clients and bring in more assets, firms can differentiate from their peers by taking action on three fronts.
Wealth Manager Enablement and Training: Training and tools in support of goals-based wealth management will help overcome the scarcity of wealth managers throughout the region, as well as address the complexities of broad business ownership.
- The fact that clients work with multiple firms points to shortcomings in the ability of wealth managers and firms to adequately identify and address HNWI needs. Firms need to provide their wealth managers not only with more enablement on holistic financial planning, but also develop their strategies for deploying both automated advice and human interaction, and ensure wealth managers are fully up to speed on how to identify the appropriate level of service for different clients. Additionally, the region’s wealth managers must attune themselves to the specific concerns and behaviors of younger HNWIs in order to prepare for this group being the clients of the future.
- Asia-Pacific HNWIs are also more likely to need support on cross-border assets and transactions, given the high rate of business ownership and the nature of region. Therefore wealth managers with knowledge of cross-border products, and the ability to address implications from legal, regulatory, and tax perspectives (including via networks of third-party experts such as attorneys and other experts) will be well positioned.
Digital Investment: Investments in digital technology will enable firms to empower their clients and wealth managers, and create enhanced sales opportunities.
- Digital tools are especially in-demand in Asia-Pacific (excl. Japan), with 27% of the regions’ HNWIs likely to outright prefer digital contact, compared to only 17% in the rest of the world).
- Related to this, the propensity among Asia-Pacific HNWIs (excl. Japan) to use automated advisory services (or robo-advisors to use a widely-used expression) is very high, reaching 76%, compared to only 42% for the rest of the world, with the likelihood even higher for HNWIs under 45 years of age. However, wealth managers are not at all aligned, with only 19% of advisors believing their HNW clients would be interested in using automated advisory services.
- Firms willing to follow the lead of their tech-savvy clientele and invest in digital capabilities should accrue a number of benefits in better serving their clients, and can also empower their wealth managers through digital capabilities. Digital capabilities also lay the groundwork for the use of advanced predictive analytics, which are crucial to being able to mine data for insights into the market and client behavior. Indeed the conferences I have attended since we launched the report show that many of the region’s wealth managers are aware of this, with execution of this goal being the challenge they are now focused on.
Credit Provisioning: Strategies for providing credit, while mitigating risks, will help feed the regional appetite for lending solutions to satisfy investment and business goals and act as a competitive differentiator for firms with the risk appetite.
- HNWIs in the region place very high importance on a firm’s ability to provide credit when choosing to initiate a wealth management relationship. Asia-Pacific (excl. Japan) HNWIs give significantly higher importance (59%) to credit provisioning as a factor in choosing a wealth management firm when compared to those in the rest of the world (35%). Clearly therefore this is a key pillar of a strategy for success in the region.
- While there is an opportunity to do more in providing credit to the regions’ HNWIs, especially for non-domestic firms with balance sheets governed from headquarters outside the region, firms that move ahead with extending credit will need to do so with care. To accommodate HNWIs’ high demand for loans and still meet internal lending guidelines, firms will have to develop a detailed credit analysis framework to mitigate potential credit risks, while also ensuring client profitability.
So all in all a very exciting time to be in the region, with plenty of opportunity. However the region is exceptionally challenging to succeed in, so my hope is that the above thoughts can help firms chart the right course. Of course this only covers a fraction of our overall analysis, so please do check out the more detailed analysis by downloading the report at our interactive website. Comments are always welcome!
I leave you with an image of our very attractive report, and my personal strategy employed to ensure I didn’t forget my lines on the day!