Cover Story: A tough transition


  • Not being aware of the importance of financial planning is the greatest problem facing millennials who are not from a finance background. To reach this group, we need to harness the social influence of peers. > Veturi

  • Banks must go from trying to educate the customer to engaging the customer. This is particularly important when dealing with millennials. > Yeo

  • The role of a relationship manager is not so much about having a person help you with transactional services but to help you keep abreast of the views of the fund houses, for example. Citibank’s views are based on internal research. > Leong

  • Millennials are also more likely to compare services online and look at various online resources before making key financial decisions. We see them as more mobile and willing to explore new opportunities. > Lim

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 9 - 15, 2017.

 

The wealth management landscape is about to change with millennials taking their place as the largest living generation. What are the players doing to prepare themselves for this shift?

 

The global banking industry is facing its most daunting challenge yet — the wave of intergenerational wealth transfers as baby boomers and Generation X start to pass on their financial and non-financial assets to the millennial generation. According to consulting firm Accenture in a 2014 report, some US$30 trillion will be transferred in the next 30 to 40 years in North America alone.

Who are these millennials? How do they plan to manage the assets they inherit? And how can the wealth management industry leverage their demand for these services? 

Millennials tend to be high earners. In fact, Fortune magazine has used the term HENRY, or “high earners, not rich yet”, to describe them. Also, their financial behaviours are subtler and more complex than those of previous generations.

Global banking trends indicate that millennials are less likely to visit a bank or use an automated teller machine to withdraw cash than the older generations. Instead, they prefer to use mobile phones and applications for such services. They are also less likely to use financial advisory services to help them manage their future wealth. 

An HSBC report, released in September last year, says the number of digital natives — defined as those who spent their entire secondary education in a country with an internet adoption rate of more than 50% — is expected to rise from about 430 million to 2.3 billion by 2030.

Malaysia achieved an internet penetration rate of 51.6% in 2006, according Internet Live Stats, which tracks internet usage and social media statistics. Millennials currently make up about a third of the labour market, based on the figures provided by the Department of Statistics.

Lim Eng Seong, HSBC Malaysia’s head of retail banking and wealth management, says banks need to be cognisant of the fact that millennials are exposed to a very different socio-economic environment from baby boomers. “Having grown up at a time of rapid IT development, millennials are more likely to adopt new technologies and the information available in the digital world,” he says. 

“They are also more likely to compare services online and look at various online resources before making key financial decisions. We see them as more mobile and willing to explore new opportunities.”

With millennials having surpassed baby boomers as the largest living generation, they are being primed for wealth management. Merrill Lynch Private Banking and Investment Group’s Millennials and Money report rightly points out that more than 70% of Generation Y are self-directed as they want to maintain control over their money. They are not passive clients with blind confidence in their advisers when it comes to managing their portfolios for targeted returns. 

According to the report, with the tumultuous financial climate of the last two decades and information-saturated environment they have grown up in, millennials harbour a deep-seated scepticism of financial markets and question the need to pay for financial advice, 

Despite the differences between the generations, a vast majority of financial advisory service providers still group millennials with other clients whose investment and advisory needs may be significantly different from theirs, according to the Boston Consulting Group (BCG) in its Global Wealth 2016: Navigating the New Client Landscape report. It warns of future customer attrition if firms do not effectively and comprehensively engage this age group. 

BCG points out that the millennial segment holds an estimated 10% of global private wealth. As these young professionals, entrepreneurs and inheritors significantly increase their wealth — at an estimated annual growth rate of 16% — they will account for 16% of global private wealth by 2020. Therefore, it is imperative for wealth managers to understand and address their needs as well as position themselves as their ideal partners.

“Fully 50% of the wealth managers we surveyed did not possess a clear view of how to address millennials in terms of service models, products and overall approach. Not surprisingly, roughly 75% of millennial survey respondents who had switched banks say dissatisfaction with customer service was the main reason,” says the report. 

“Millennials express specific needs that are not addressed by a segmentation approach based purely on wealth levels. Of key significance are competitive and transparent pricing schemes, the bank’s financial track record and the sophistication of the digital offering.”

If anything, this finding is a call to action as banks not only serve retail customers but also have rather entrenched private banking services. 

OCBC Bank (M) Bhd head of wealth management Evelyn Yeo says banks are already allocating greater resources to better understand the financial behaviours and needs of the emerging affluent, of which many millennials are a subset.

This has contributed to the exponential growth in the development of mobile banking capabilities and applications, which in a nutshell is the new norm for Gen Y, she adds. “Instant money transfers, quick balance checks, online bill payments, account opening, insurance purchases and investing are just some of the banking capabilities millennials seek with their mobile phones these days.”

To cater for their needs, the bank introduced OCBC OneTouch in May last year. The app leverages the fingerprint sensor technology found in most smartphones today. Yeo says its customers now have quicker access to their balance statements, cards and investments.

“The fingerprint recognition system makes basic banking simpler and more accessible by eliminating the need to remember and repeatedly enter authentication details for the most common transaction — checking account balances. This is very much in line with what millennials are looking for,” she points out. 

OCBC is also changing the way it communicates with its younger clientele. This includes using less financial jargon, transitioning from letters to email and developing quicker banking processes. 

Citibank Bhd head of wealth management products JA Leong says banking services have changed tremendously in the last 15 years to cater for demands brought on by globalisation and technological breakthroughs. These include the launch of innovative products that meet the specific needs of clients, such as allowing them to maintain dual currency accounts, which cater mainly for parents who want to send their children overseas for tertiary education. 

“Those days, when I was about to travel to the US to further my studies and needed US dollars, my parents went straight to the bank and bought the currency regardless of what the exchange rate was. They prepared the money in a ringgit sense and when it was time for me to travel overseas, they made the conversion and bought a bank draft,” says Leong.

“Now, my generation — I am hopeful that my son will go overseas one of these days to further his studies — is preparing for this future in a foreign currency because it now has access to this kind of products.” 

The difference with millennials, he says, is that they want to perform these tasks more quickly, cheaply and efficiently through the internet. And they literally have more information at their fingertips.

“At my age, I am still going to the bank’s relationship manager to ask for the bank’s views on investments since Citibank comes out with a lot of research. While this is still something favoured by clients — as it gives an indication of the future market outlook and how investment decisions can be altered accordingly — younger people are pretty much already aligned with what is going on in the markets,” says Leong.

They know what they need to do and just require the transactional capabilities to act on the information directly, he says. “For example, they go online and start buying currencies because they have read, researched and accumulated information that suits their needs and they proceed with the transactions on their own.”

Nevertheless, this does not negate the role of a relationship manager as professional services are still pertinent in advising those in the affluent category and above, says Leong. “The role of a relationship manager is not so much about having a person help you with transactional services but to help you keep abreast of the views of the fund houses, for example. Citibank’s views are based on internal research. 

“Relationship managers have to make this connection to help their clients make informed decisions. Ultimately, whether the clients take our view or do another round of research is up to them.”

 

Start with unit trusts 

Banks are also facing competition from robo-advisory services and other new approaches such as fractional investing. Firms that offer such services allow people to invest with as little as US$500 and build a portfolio of stocks and bonds. Often, the service is free for accounts up to US$10,000.

Such novel investment products have not dominated the local landscape. That is why Standard Chartered Bank Malaysia’s managing director and head of wealth management Pramod Veturi reckons millennials should start with unit trust investments. 

“These are widely available to suit different risk tolerance levels of individuals and can be modified over time via portfolio rebalancing at little to no cost, as their needs and risk tolerance change over time. With as little as RM1,000 and RM100 for every subsequent top up, millennials can indirectly own a part of global companies, such as Google or Facebook,” he says. 

Veturi says Standard Chartered has made available pre-selected packages of high quality investment products for its millennial clients. “We even allow them to trade or invest over the telephone or via our video banking channel.”

OCBC’s Yeo also says unit trusts are the simplest means of investing without much upfront capital. But the challenge is in engaging potential investors and making investing a habit. 

“Recognising that millennials and young working adults need to begin the habit of saving and protecting whatever little money they might have at this stage of their lives, we developed the OCBC 360 deposit account last year. It has gone down very well with young working adults,” she says.

“This product features ‘bonus interest’ — potentially comparable to the bank’s fixed deposit rate — on a monthly basis for performing one or more of three common types of transactions through the account. For millennials, some of these are second nature to them.

“Customers receive a special ‘bonus interest’ of 1.2% per annum per transaction type when they (1) deposit at least RM500; (2) spend at least RM500 using their OCBC credit card; or (3) pay at least three bills online using the newly launched OCBC 360 account in a month. They receive the maximum reward of 4.1% per annum — inclusive of the 0.5% per annum base interest rate applicable to the entire OCBC 360 account balance — when they perform all three transactions in a month.” 

The base interest rate applies to the entire account balance at the prevailing rate (Board Rate) and is computed daily and credited into the OCBC 360 account at the end of the month. All rates are subject to change from time to time. The bonus interest is applicable to average daily account balances of up to RM100,000 for the calendar month. Beyond the RM100,000, only the base rate of 0.5% per annum applies.

“We believe these kinds of straightforward gains resonate well with millennials and will spur them to invest in other ways as well in the future,” says Yeo.

Despite being conservative in their worldview, especially when it comes to traditional investments, millennials have an affinity for values-based investing and impact philanthropy, according to the Merrill Lynch report. 

This may seem contradictory — a conservative approach to traditional investments, yet a willingness to accept higher risk or lower returns for positive social impact — but it makes sense when it is viewed through the lens of the millennial world view. And no generation understands this better than millennials, who are at the forefront of consumerism underpinned by a keen awareness of social justice.

Yeo says these expectations represent an opportunity to offer new solutions. Investments are already being rated using environmental, social and governance (ESG) factors to cater for this trend, where businesses are measured based on their sustainability and impact from an ESG perspective. 

“The Malaysian unit trust industry now has funds that are dedicated to ESG-rated investments,” she points out.

 

Financial literacy

Yeo says its 2015 study found that 82% of the 654 respondents were self-directed in terms of investment advice and knowledge. But the reality is that many millennials have a rather basic appreciation of financial matters, often equating financial knowledge with product knowledge, she points out.

To promote financial literacy, the bank has embarked on the “More Than Small Change by OCBC” programme. It offers customers easy-to-achieve solutions to their financial worries, such as savings, spending management and getting started on investments.

“Despite expressing interest in investing, most of these would-be investors tend to procrastinate. To challenge the status quo, banks usually encourage these people to sign up for a regular savings programme, where they set aside a small amount each month to invest in a unit trust fund,” says Yeo. 

“This disciplined monthly commitment continues until the investors instruct the bank to stop. To make it more convenient for them, we have a programme called Stabiliser, where our investors can choose to commit a fixed amount to unit trust funds for 6 or 12 months. 

“We believe it is imperative to start where the customer — in this case the millennial — is. Banks must go from trying to educate the customer to engaging the customer. This is particularly important when dealing with millennials. So, we ensure that our front-liners are properly trained to engage them. This, we believe, is a step in the right direction as it meets the millennial where he or she is.” 

Merrill Lynch’s report says very few millennials describe themselves as having a high level of knowledge on financial and investment matters. “Other initiatives can include hiring banking staff that are in the same age group to better connect with this group of clients as studies show that peers can influence this group when it comes to financial matters,” says Veturi.

He also says financial literacy plays a big part in cultivating the saving habit in Malaysia, citing The Impact of Financial Literacy on Individual Saving — An Exploratory Study in the Malaysian Context 2013. “However, for millennials, ‘you don’t know what you don’t know’ is relevant. Not being aware of the importance of financial planning is the greatest problem facing millennials who are not from a finance background. To reach this group, we need to harness the social influence of peers. Studies show that the social influence of their peer group has significant impact on the risk attitudes of Gen Y.

“For those who are aware and approach wealth managers, the main concern is the high degree of caution, with the mindset of strong association between finance and risk of losses. Hence, they abstain from making such financial decisions to avoid losses.”

Citing a 2015 joint study between Taylor’s University and Asia Pacific University, titled Factors affecting savings habits within millennials in Malaysia: Case study on students of Taylor’s University, Veturi points out that millennials with higher financial literacy possess a high level of confidence, which can determine their self-dominance in their financial planning. 

“Hence, investing in financial literacy among the millennial group is crucial to ensure that banks can help to bridge this gap. However, the non-existence of financial knowledge can have a very risky effect on financial behaviours, which later will affect their financial well-being. The study also showed the importance of peer influence in finance-related matters, suggesting that friends’ recommendations could play a large part in driving these behaviours,” he says.

Let’s say a large group of millennials invests in cash products that have been at multi-decade lows, says Veturi. “At a fixed deposit rate of 3.5% per annum, it will take about 20 years for them to double their savings. With Malaysian government bond yields at a multi-decade low, even guaranteed pension fund dividends from the Employees Provident Fund are expected to trend lower over time. This compares with 15 years ago, when 10-year Malaysian government bonds yielded more than 6% per annum. Pension fund managers have to reinvest those bonds at yields of 3.9% per annum. 

“It won’t be too long before we see the pension fund dividends converging downward towards such levels. Hence, to retire comfortably, millennials cannot depend solely on EPF savings. They have no choice but to start planning earlier.”

 

A long way to go 

Despite some changes in the pipeline, there is still a long way to go before banks are able to reap the rewards they hope for. 

OCBC’s Yeo points out that a three-year study of industry disruption conducted by Viacom Media Networks’ creative consultancy arm Scratch, which was released in 2013, found that 71% of the soon-to-be largest banking segment would rather go to the dentist than listen to what banks were saying. The study also noted that the banking sector had the highest risk of disruption.

A corresponding study on emerging affluent Malaysians, conducted by OCBC Bank in 2015, found that there were three main points of contention — banks seemed to be more focused on selling a product rather than looking after their customers’ interests, many bankers were not well-versed enough to advise customers and banks were not providing enough consultation/advice. 

“We are mindful of these issues and have them at the back of our minds as we develop our products and services. That said, globally, banks still have a long way to go to properly engage with millennials and gain their trust,” says Yeo.

Veturi says Standard Chartered has invested heavily in technology over the past few years to cater for clients who are increasingly digitally savvy and mobile to ensure that its banking services are accessible anywhere, anytime. “This can be as simple as offering sign-up gifts that appeal to this generation and digital contact channels such as chat and video banking.”

In February last year, Standard Chartered introduced the Retail Workbench — a sales-and-service iPad tool that “brings the bank to the client”, he says. The system has effectively reduced paperwork and made banking more convenient for the bank’s clients. 

More recently, the bank tapped into the real-time online communications space by launching a video and chat banking option that allows clients to contact the bank’s customer service unit with a click of a button on its website. Priority banking customers can now speak to the bank’s investment advisers via video. 

Another challenge that banks have to contend with is the HENRY aspect of Gen Y. As those in the millennial generation are still in their early 30s, it is difficult for them to have enough savings to invest properly, says Citibank’s Leong. “People in this age group are probably saving, but they are more likely to spend money on their lifestyle, such as purchasing a new device or car, or heading to a café.”

Banks, however, need to start getting ready for this group as they are not far off from thinking about making investments. Leong says foreign currency as well as dual currency accounts would appeal to millennials as the financial and economic environment continues to be defined by currency volatility.

“We see young investors looking at investing, and in different types of currencies. Gone are the days when there were only ringgit mutual funds,” he points out. 

“Nowadays, you can buy mutual funds in US, Australian or Singapore dollars, or even the euro. People can pick and choose what they want to invest in and in the currency they prefer. 

“There are a number of online mutual fund companies right now. But at Citibank, we are able to bring funds that are global in nature, whether you are into fixed income, balanced income or equities.

“At Citibank, we are continuously looking at different channels for clients to do transactions on their own. Now, you can do overseas fund transfers online and perform dual currency account transactions over the phone. We are also looking to launch products such as dual currency accounts online and a platform to do e-mutual funds where you will be able to buy into 

mutual funds or unit trusts online.” 

Leong says it is crucial that banks consolidate all their services online and provide an easy way for millennials to access them. “This becomes a powerful tool for millennials. We have to ask ourselves: Are they going to run to different banks to look for relationship managers when they are ready to invest? I doubt it. They are going to search the internet to find out which bank provides them with straight-through services. 

“Most banks are now one-stop centres. You can purchase insurance, invest in currencies and buy into asset classes, such as retail bonds and other structured products. So, you will probably only need one bank to consolidate everything for you.” 

To better cater for the different customer segments, Citibank uses a model portfolio approach that not only looks at one’s risk appetite but also the diversification of their investments. “It tells of a person’s portfolio — whether you are well-diversified today, enough to withstand what is going to happen in the market. If I have 60% in bank deposits, 20% in fixed income and another 20% in equities (let’s assume my holdings in equities is in a specific geographical area/asset class), do I want to just keep it in that  or diversify further to other geographical areas/asset classes within the equity space in my portfolio,” says Leong.

“For a young adult who wants to invest, this is the kind of information we can give them from the onset, as opposed to those who invested many years ago, as these kinds of models are only coming to the fore now.”

Citibank implemented its plain language system five years ago, he says. “We have simple straightforward documentation to go through with the clients on the details of the product and the risks. A lot of people go into products not knowing what the risks are.

“As a bank we need to embrace this change because this is the future. Clients of today and tomorrow will want to deal with a bank at their convenience, anytime and anywhere. People will look for the best service providers. So, we have to embrace it and make sure we are a part of this particular shift.”