A combination of rising wealth, greater transparency and better regulation has given Singapore a chance to overtake Switzerland in the race to be the number one offshore wealth management centre. Mike Cobb looks at how the city state’s banks are preparing themselves to take pole position by 2015.
Asia’s financial powerhouse, Singapore has continued to build upon its strong reputation as a place to do business. What’s more, an increase in transparency, better regulation and a rise in business opportunities have only made it an ever more attractive place for private banks to do business.
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The cream on this cake for private banks and wealth managers has been that these advantages have recently combined with a rise in personal wealth in Singapore making the country look better than almost anywhere else in the world for a private banking at the moment.
According to consultancy WealthInsight there were 183,000 high net worth individuals (HNWI) living or working in Singapore in 2012.This was a 99.8% increase in the numbers of HNWI since 2008. In comparison, globally the number of HNWI dropped by 0.3%over the same period.
At the higher end of the market in the ultra high net worth (UHNWI) segment, the story was even better. The number of UHNWI who call Singapore their home more than doubled from 1,891 to 3,867 in the four years from 2008.
With these numbers, it is no surprise to see the total wealth of the HNWI community in Singapore estimated to be as high as $857 billion in 2012.
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By GlobalDataThese figures are impressive and no mere blip. The assets held by Singaporeans onshore combined with offshore assets brought into Singapore gives the banking industry $1.29 trillion in assets under management (AUM). Local regulator, the Monetary Authority of Singapore, expects those assets to keep growing by 22% every year until at least 2017.
This expected growth in assets managed in Singapore is strong enough for accounting firm PWC to estimate that Singapore will take over from Switzerland as the leading manager of wealth by 2015, although WealthInsight estimates it to be closer to 2020.
Entering a crowded market
It is hardly surprising then that some of the big names in global private banking are making the city state an Asian base. Banks like UBS, Credit Suisse and Barclays have expanded their private banking presence in Singapore over recent years and others are pouring more resources into growing their operations in Singapore.
When it comes to winning business in Singapore and Asia however, a tradition of offering banking in the region appears to be more of an advantage than a big name. As Rajesh Malkani, head of North and South East Asia at Standard Chartered Private Bank, Singapore’s largest private bank by AUM puts it: "It’s really a function of who we are, we’ve been in these markets for over 150 years. So as an institution we are an extremely well known brand. You can go to even a kid in Malaysia and they know who Standard Chartered is."
Tan Su Shan, group head of consumer banking and wealth management at local institution DBS Bank broadly agrees: "Our strong corporate and commercial banking franchise in Asia allows us to provide our Asian-based customers with regional connectivity and understanding of all our major Asian markets. These are invaluable to our clients, whose main business activities are centred in Asia."
But the banks are seeing more than local money driving the business at the moment. As Amit Gupta, CEO, Southeast Asia at HSBC Private Bank puts it: "Anecdotally, our estimate of assets under management in Singapore is anywhere between $500 and $700 billion, of which its reported that just over $100 billion is managed on behalf of onshore Singapore resident clients."
"From our perspective there are two things that are happening out here. One is the growing wealth in Singapore itself amongst Singapore residents. The other is ASEAN (Association of Southeast Asian Nations) and Asian wealth which is I guess coming to Singapore to be managed out of here on the back of it as a wealth hub, and a jurisdiction which has an infrastructure for managing wealth. Lastly, we are seeing a limited amount of international wealth coming into Singapore as a possible leverage of growth or investment into Asia as well."
Hand in hand with this has come an increased interest in overseas investment by Asian clients, which in turn has led to a sea change in the way that clients are managing their money.
Malkani sees this most in a shift from advisory to discretionary management:
"We’ve certainly seen a good shift, more than a couple of percentage points in assets under management moving to discretionary portfolio management."
In contrast to Europe and the US, Asian HNWI’s have traditionally tended towards managing their own money with only 5% of managed assets in the region being held in discretionary accounts. In Europe the figure is more typically 25%
And Malkani’s impression that this is changing is backed up by other players in the Singapore market.
Bank of Singapore, the private banking arm of local bank OCBC, said in September it was seeking to expand its discretionary business and increase the assets managed this way to $80 billion by 2016. The main reason for this drive towards discretionary management Malkani believes is client’s taking a greater interest in unfamiliar markets and more sophisticated products.
Growth through client understanding
This greater client sophistication in Singapore has led to a need for the banks to offer a broader range of products to clients.
And those banks with a broad product offering are emphasising this as a part of their growth strategy.
"Our principal strategy at the private bank to grow our business, is around internally collaborating with our corporate bank or commercial bank and our franchise of the HSBC more widely, and that’s the strategy that’s being done for growth," says Gupta.
In addition the growth is seen as coming from not just offering corporate or investment products to the newly wealthy of Singapore, but also capturing the internal market of customers in Singapore who may already bank with the corporate arm of the business.
"With this as a strategy the challenges really are about unlocking the full potential of the client base within the HSBC group," continues Gupta.
"It’s been focused around working closely with our colleagues. Making sure that we’re working with them in terms of both explaining our proposition, our competitive advantages. Using them as extensions of our sales force in a lot of ways," he adds.
And the advantages of this approach could pay dividends in the numbers of untapped clients, thinks Standard Chartered’s Malkani: "If you carve that out in terms of what is considered high net worth wealth I think the private banks probably have about a 20% market share. So if clients sitting in our retail bank have liquid assets under management in excess of $1m, then we have less than 20% of that money in private banking as an industry and that’s the opportunity."
But where does this leave the smaller, local businesses when tempting new business from the big international players? Su Shan thinks that one of the key areas for DBS Bank is the offshore market.
"During recent years, there is also a general appetite from non-Asian investors for the Asian product offerings that are linked to the region’s growth in which we are specialised. We are also focused on being known as a bank that offers ‘smart’ and innovative solutions, to provide international clients with exposure to Asia’s growth."
The fact that the majority of new and old clients are from offshore is not restricted to local banks like DBS. Standard Chartered estimates that about 65% of its Singapore private banking clients are from offshore and in particular, Asia.
HSBC’s Gupta thinks that this flow of money out of Asia and Europe and into Singapore is due not only to a desire to invest in the region but also because of the expertise and regulatory environment that Singapore offers to its clients. Singapore has positioned itself as a place that offers wealthy clients a unique opportunity to invest in a developing hub that invests in its potential to become a world player in private banking on a par with Switzerland.
But post financial crisis geography alone has not been enough to retain custom and grow AUM, the banks themselves have had to increase the level of trust with clients.
One route to that goal is through client education: "I think we owe it to clients to educate them and give them all the information they need to make an informed decision," says Malkani. "It’s not that they’re not aware that it can go sour in a bad market, but it’s when they were not made fully aware of the all risks involved that they feel that there’s a breakdown in trust"
Increased trust, greater regulation
To this end the change in regulations affecting private banks in Singapore is only seen as a good thing, not only adding to that level of trust but in other ways too.
One of the regulatory changes was the anti-money laundering and tax compliance laws that were introduced in July 2013.
These laws enhanced Singapore’s agreements with the Organisation for Economic Co-operation and Development and other bodies over tax information, and more importantly signed the country up to the Foreign Account Tax Compliance Act (FATCA).
The FATCA agreement means that US citizens with money in Singapore will now have their details passed to the USA’s Inland Revenue Service.
At first the laws were seen as possibly causing damage to Singapore’s reputation as a place to hold wealth. The reality of the situation seems to have worked out differently however.
Malkani for one welcomes it as a chance for banks to now operate on a ‘level playing field’ which he feels is not just good for the banks competing with one another but also for clients. Though he admits having that initial conversation with new clients about how tax compliant their money is can be ‘very very difficult’.
At DBS Bank Su Shan shares the sentiment: "Rules surrounding tax reporting and anti money laundering have been tightened significantly and this may cause some short term pain for the industry in terms of increased costs of compliance and surveillance, but it is better for all industry players in the long term as standards are lifted across the board."
As Su Shan points out, all banks in Singapore are feeling the pain of increased compliance costs.
PWC reports that wealth managers in Singapore are expecting the cost of complying with regulations to rise from 7% of annual revenue to 10% by 2015.
Some of this cost is coming in the form of investment in technology, particularly in the back office and reporting functions, but overall the most significant costs have come from increasing wage costs associated with finding qualified compliance staff and relationship managers in a tight employment market.
"There’s no technology that replaces human judgement and especially when it comes to knowing your client there’s a lot of judgement involved. It’s not all black and white, it’s not all binary," says Malkani.
But increased demand for wealth managers that truly understand their clients and also for compliance officers has opened an old wound for banks operating in Singapore. Its limited talent pool.
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Singapore’s population of five million people, a high demand for staff from other sectors and the unique character of relationship management within private banking has all led to a shortage of new talent coming into Singapore’s private banks.
"There is an inability to get the right sort of talent to meet our objectives," says HSBC’s Gupta, although he remains optimistic, "[Singapore] does have tight labour markets and there is wage inflation. These are specific Asia issues in some respects. But we do find we are able to one, develop our people and two, attract the right kind of people."
But Malkani feels it is more of an issue: "I think people are a big challenge. I said that five years ago and I’ll probably say it five years from today as well. Getting qualified talent, across the value chain, is a challenge and I would love to see the industry work together in bringing more people into this part of banking. So we need to invest in more training and attracting people to this business otherwise we’re going to hit a wall and it’s not going to be skilled."
Measures have already been taken to train those entering the business more thoroughly with Credit Suisse seeing its first graduates from its Singapore compliance academy in the summer of 2013. UBS also operates a business university in Singapore. Standard Chartered meanwhile actively encourages employees to attend Singapore’s Wealth Management Institute where Malkani also lectures.
But in relationship management the training is only half the solution, a mind set for the business is also key. For Gupta ‘long termism’ and the ability to see the long game are essential.
Malkani thinks that in addition having the right sort of personality is key and believes it ‘s a personal ity that not everyone has.
"If you’re not an outgoing, sociable extroverted kind of person I don’t think that you can be in this industry, because this industry is all about building relationships."
The challenges of talent and regulatory cost aside, the future looks bright for private banks in Singapore.
A bigger slice of the pie
Gupta is enthusiastic about the future. "This business will continue to grow over the next five or ten years given the facts that I described earlier," he says. "We are very positive about the growth of this pie and we have a meaningful share at the moment, both as a global international private bank and a very popular local player. We therefore are in a very good position to grow our share in this growing wealth."
Su Shan adds to these thoughts and said: "Notwithstanding short term regulatory constraints, the long term basic premise is that Asia remains a good place to invest and grow your wealth and a long term partnership with an Asian bank gives you just that kind of access to grow and preserve your wealth."
Malkani doesn’t see it as an easy ride however: "I think we have some work to do [as] private banks in creating trust, creating credibility, creating awareness and go after that money because it is a significant sum that could become assets under management for private banks."
This will be aided by advances in the way that business is conducted. For example in execution and information delivery. "That’s going to be completely done online, but you will still need Private bankers, investment advisors to give you advice. That’s our value add," said Malkani.
Malkani concludes that the true future of private banking lies not in increased technology, but in the advice the banks give.
The future then for private banking in Singapore looks bright, the combination of rising wealth, increased regulation and being seen as business friendly has made it one of the most attractive places to put your money in 2013. This steady base to work from is added to by private banking’s ability to adapt to the new regulations and add value to their clients through a broad product offering. For this reason Singapore continues to grow into the image of the ‘Switzerland of the East.’
