It is fair to say that I was greatly looking forward to my first trip to Tokyo and Japan. The experience did not disappoint: Even by the time I had arrived at my hotel from the airport I had recorded the following observations (made all the more impressive since I was coming from the modern infrastructure of Singapore, making it difficult to really impress me):
“Thankfully very easy and positive airline experience [JAL]”
“Great first impression! People waving to greet the arriving planes”
“Helpful greeters at airport”
“Clean – no/little graffiti”
“Immediate feeling of welcome – no sense of being lost in a new city”
“Ingenious bike storage”
There are many other idiosyncrasies that make this country so unique, from the hierarchy of taxis (black taxis are for drivers who have consistently demonstrated excellent service), the haphazard construction and loose zoning laws in a society otherwise highly focused on attention to detail (look out for the gaps between buildings), and the ever-present vending machines on every street corner. However since this is not a travelogue, I will stop here and leave it to the reader to experience this magical place for herself (I did not mention anything about the excellent food – simply has to be tasted).
The purpose of my trip was to meet with the leadership teams of wealth management firms in Japan, which I did with three of the big domestic firms as well as the leading international private bank in Japan.
Now Japan, mirroring the society as a whole, is wholly unique when it comes to wealth management….
- For one thing, it is the second-largest wealth market in the world by number of millionaires (second only to the United States)
- Japanese high-net worth individuals consistently demonstrate “world-leading” low satisfaction and trust levels with the industry (from individual wealth managers through to firms and markets in general)
- Cash levels within portfolios are exceptionally high and while they have come down somewhat over the past five years as equity markets have recovered on the back of Abenomics, they still hover between 40-50% of the entire portfolio. Such a dynamic is a somewhat understandable in a country coming out of two decades worth of deflation, and where the investment offering is relatively immature.
As I discussed the market with the knowledgeable bankers, I learnt a fair amount of further nuance about the industry:
- MARKET STRUCTURE: There are the three Japanese mega banks (MUFG, SMBC, and Mizuho) that dominate retail and corporate banking. After this, there are then hundreds more regional banks strewn across the country, but with far less mature business models.
- WEALTH BUSINESS MODEL: There is generally not much in the way of pure goals-based wealth management in the sense of a Singapore or Hong Kong. Rather, the domestic mega banks’ wealth management offering to individuals is generally split into the separate business lines of “Brokerage”, “Securities”, and “Trust”. These are again separate to the “Retail Bank” and “Corporate Bank”.
- REGULATIONS: The regulator (the FSA) enforces strict Chinese walls between these departments, making an integrated wealth management proposition challenging. At the same, the FSA is trying to increasingly educate clients about the need to invest.
- TALENT: With large and powerful corporations in Japan offset again a relatively low level of entrepreneurship, and a wealth management industry that is less developed than in other markets, the corporate bank is the crown jewel of banks in Japan. As such, the best talent is attracted here, and not always to the wealth management sides of the business.
- CLIENT SOPHISTICATION: Given the context of the Asian Financial Crisis and Japan’s two decades of deflation, HNW client demand for sophisticated wealth planning and complex investments never really took off. Additionally, many of the execs I spoke with felt that investor sophistication is correspondingly low. As a result of this and the segregated business lines mentioned above, the proposition offered to clients tends to be very transactional and not part of a holistic wealth offering (especially for the domestic players not specialized in wealth management… there is more traction in areas such as Discretionary Portfolio Management among the International pure private bank players).
- DIGITAL DISRUPTION: Due to a mix of client preferences, language, business inertia, and culture, the waves of digital disruption sweeping the global wealth management industry have yet to full take hold in Japan. This is not to say that digital initiatives are not taking place – this is after all the world leader in robotics and with a highly skilled workforce in technology, as well as powerful tech firms such as Line (effectively the Japanese version of WeChat). Rather, a confluence of factors have left wealth management lagging behind, though it is expected to change over the coming years.
- CULTURE: A lot of the execs I spoke with appreciated that culture and change management were the biggest challenge when transforming business models in Japan, given a traditional mindset and a desire not to make waves, even among competitors).
- GENERATIONS: There is also a lot of generational nuance. For example, people in Japan are well-known to have among the longest life expectancy in the world. As a result, even when wealth transfer occurs to the next-generation it is still passing to someone who is in their 60s or 70s! This cushions some of the urgency behind digital transformation, given the digital natives will not yet control significant amounts of wealth.
Ultimately it seems that the Japanese wealth management industry operates in a very different manner to the rest of the world. At the same time, I cannot help but feel that it is still a question of when, not if, the usual forces descend on Japan – in particular the need to transform what has traditionally been a highly intermediated industry in the face of digital disruption (especially true in Japan where investment products are currently very simple and ripe for digital disruption to the benefit of the end-client).
Happily, I go back to Tokyo in October to continue the dialogue with firms’ management teams. I am looking forward to playing a role in the transformation of the Japanese wealth management landscape.
I leave you with a picture I took of Mt Fuji at sunset on my departure. Rather than a sunset, here’s to a new dawn for Japanese wealth management.