The amount of high net worth wealth in Greater China is rising in at between 15-30% a year, but commentators tell Anthony Climpson-Stewart client dissatisfaction is also on the rise. Banks are failing to grab a larger share of wallet as clients in the region become increasingly frustrated by staff inexperience and turnover.
Asia is maintaining its rise as the regional wealth market to watch, with forecasts putting it at somewhere between Europe and North America by 2015. At the centre of this growth is Greater China, encompassing Mainland China, Taiwan and Hong Kong. The combined market of high net worth individual (HNWI) wealth, for those with more than $1m in investible assets comes in at a staggering $5.62trn, according to figures from global wealth consultancy WealthInsight.
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China’s share of this pie, based on figures from consultancy Bain & Co and WealthInsight puts the market at somewhere between $3.6trn and $4.3trn, and is on track to take over Japan and Germany by 2020, as the second largest wealth market globally. While WealthInsight estimates Hong Kong and Taiwan account for roughly $845bn and $470bn respectively.
Within the region there is a degree of similarity among markets and client, but also distinct differences. Hong Kong still remains the offshore wealth centre of the region, while also fostering an impressive onshore market, with around 3% of its total population considered HNWIs. Meanwhile China is no longer a financial uneducated, emerging market, with a sophisticated and rapidly changing client base. Preservation and generational wealth is becoming increasingly important, but with plenty of the market still looking to make strong returns off structured products. Debate continues on whether these are fundamental changes or a passing trend.
In Taiwan clients are heavily offshore focused, 50-60% of assets being channelled this way, but with plenty of onshore needs, requiring dynamic and globally orientated private banking.
Under performing market share
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By GlobalDataKenny Lam, a Hong Kong based partner at management consultants McKinsey & Company, is clear that despite the wealth within Greater China, private banks are failing to capture all of the market.
"The market is growing at 15-17% per year in terms of wealth, the competition is fierce and highly fragmented," says Lam.
"The top ten players are getting somewhere between 5-10% of market share. If you look at each bank the natural wallet share is around 15%."
For banks this means offering extraordinary products and services if they hope to be beating a ‘fair share wallet share’ of 15%. In areas such as China and Taiwan where product diversity from retail and affluent banks – those banks servicing clients with between $100,000 and $1m in assets – is low, it can be hard to distinguish banks from their competitors.
Within the market, clients also see individual banks as servicing different roles. Loyalty to just one provider is limited. Lam refers to a recent meeting with a HNWI who was using 13 banks to service his banking needs and spread his risks.
"He sees each bank playing a different role. He said ‘there are certain banks great in proprietary products, so I would use that bank as a way to provide me with really highly leveraged, highly structured products’."
"These are anecdotes and in some cases extreme, but they help to illustrate a few core points," says Lam.
HNWI in the region use banks to service different needs, some for business and lending purposes, and others for offshore or networking purposes. It creates a complicated web, and lowers the share of assets and wealth any one bank can hope to hold.
Switch from generation to preservation
There are now opportunities for banks to catch a bigger percentage of the market; especially in China where European style wealth preservation and service orientated private banking is opening up, according to other commentators. Jennifer Zeng one of the authors of a Bain & Co report China’s Private Wealth Report 2013, explains since 2009 when they first published the China report, they have seen a major change.
"Wealth preservation has over taken wealth creation, to become the number one priority or wealth goal for HNWIs in China," says Zeng.
"As such they have shown interest in wealth preservation, or wealth inheritance type of products, including family offices. In particular they have interest in family trusts."
Hong Kong is a well established private banking market and has been for sometime, however banks have been unable to capture a dominant share of the wealth market. Assets held by private banks only account for 40%, well below the typical 60-70% held by European and US markets. Private banks need to emphasise products and services related to family offices and generational wealth transfer, if they hope distinguish themselves over affluent banks and the wealth management industry it seems.
Client dissatisfaction at staff churn
Commentators note general client unhappiness with private banks throughout the Greater China region. The majority of this discontent is based around relationship managers and the lack of understanding they often have for clients needs.
In the wake of this high turn over and lack of knowledge or understanding of client objectives is a ‘product push’ culture, with private bankers selling products to clients without consideration for long term goals.
This complaint has been mirrored throughout China, Hong Kong and Taiwan, and highlights concerns many clients have regarding the maturity and age of bankers advising them.
The result of this lack of maturity and talent, in Greater China has meant good private bankers come with a high price tag; this has been a factor for keeping bank margins so low. Banks are now thinking creatively on how to recover from this position, and source talent and expertise back into the industry. One option has been to look to the corporate banks for faculty; corporate bankers have typically dealt with companies with owners who are typically HNWIs themselves.
Losing appetite for risk?
Zeng says risk appetite within China has levelled right off recently, as people look towards wealth preservation rather than creation.
"As the wealth goals shift from wealth creation to wealth preservation, their (clients) risk return level has become low to mid-level," says Zeng. "They are looking for products that have lower risk but moderate returns."
With the tempered risk appetite, Zeng also has seen an interest in fixed income type products, to further diversify away from real estate and equities.
Lam has seen a similar shift into fixed income in 2012, but puts it down to an underperforming equity market. He sees this swing as representative of the clients in this private banking market in general, not as a fundamental shift.
"It’s not whether its debt or equity, it’s much more around trends of the market," says Lam.
He also sees appetite for risk as a shift rather than a fundamental change. "There is still a strong appetite for growth in assets, across all markets (China, Taiwan and Hong Kong). What they don’t want is complex products. But there is still a need for high growth. There still clients that are seeking calculated substantiated risk."
Clients are demanding structured products and services that they can understand, where potential risks are clearly explained and not hidden, but this does not mean HNWIs are not willing to take these risks.
CHINA
Growing Heavy lifter
China is very much the heavy lifter within Greater China, but also the Asian market. Figures released by Bain & Co put HNWIs’ total investable assets at $3.6trn (RMB 22 trn) at the end of 2012. The amount of HNW growth expected for China varies but McKinsey & Company estimates the onshore market will reach $5.4tn by 2015, while WealthInsight estimates an overall figure of $7.3tn by 2015.
China has grown rapidly in recent years into a sophisticated market encompassing two distinctly different onshore and offshore markets. Within the domestic market local banks are the predominant players, servicing the majority of clients needs. When it comes to the offshore assets they are lacking the same impact, with HNWIs opting for international services instead.
"Over time the share of assets allocated overseas has increased, and the percentage of HNWIs having asset allocations overseas has increased," says Zeng.
"In that offshore market they are looking for private banks that can offer different product options and locations, as well as professionalism, so typically foreign banks will still be preferred providers for the HNWIs."
Asset diversification in China is also a dominant feature of the market and can be broken down into geographical and asset class diversification. With clients opting for a spread between multiple offshore sites including Hong Kong, Singapore, US and Australia, and moving out of primarily real estate focused assets and into commodities and structured products.
HONG KONG
Over regulated offshore hub
Hong Kong is the dominant wealth centre for Greater China and is competing with Singapore for the Asian title. Hong Kong offers the deepest capital market within Asia and has a large variety of products on offer, attracting a lot of offshore investment. For Lam the big question Hong Kong needs to address is how to effectively serve its two distinct markets: the large onshore market or those using it as an offshore hub. "Which flows do banks need to serve properly?," Lam queries.
It appears that there needs to be a strong focus on addressing not just the traditional flow from China and Taiwan, but also new wealth coming from places like the Middle East and Indonesia.
TAIWAN
Sleeping Giant
For the Taiwanese wealth market, offshore allocation like China, is a major factor, however much of this is based around peripheral risk associated with Taiwan and the region generally. There is a considerable amount allocated offshore to Hong Kong, but as the risk of political intervention from China becomes greater, Taiwan HNWIs are looking for more politically stable areas for banking.
McKinsey’s Lam sees Taiwan as the sleeping giant in the region, noting not only the asset size of many HNWIs, but also the dynamic nature of these clients and the openness to try new products and strategies. Their use of the private banking system is dynamic in nature using multiple banks to diversify risk, but also meets their needs.
