This article first appeared in Personal Wealth, The Edge Malaysia Weekly on March 20, 2017 - March 26, 2017
As PwC points out, technology is merely an enabler of strategies. At the end of the day, it is the customer who should be at the heart of these strategies.
There are no cookie-cutter approaches to doing this, warns Manjit Singh, a partner at PwC Malaysia. He reminds banks that the readiness or comfort level of their customers in using on-the-go technology plays a significant role in the take-up of these innovations. “For example, some high-net-worth individuals (HNWIs) may be resistant to consolidating their data in one place, especially in the case of self-service platforms.”
For banks, a crucial part of embracing a digital mindset is to think hard about how their customers access information, what type of information is useful to them and the concerns that are holding them back from using digital platforms, he says.
“Change or evolution, in any form, hinges on trust. For instance, customers need to trust that banks are using their data in the right manner, are transparent about how they are utilising such data and have the ability to keep their data safe.
“This is a fundamental part of embracing a business strategy that is fit for the future. Technology should be an enabler of strategy, not the entirety of it. The needs of your customers should be at the heart of this strategy.”
Banks and their wealth management businesses are facing immense competition from an array of financial technology (fintech) start-ups that are meeting customers’ needs faster and cheaper online, on top of regulatory pressures, geopolitical uncertainties and erratic market behaviour.
The Global Center for Digital Business Transformation says digital disruption has the potential to overturn incumbents and reshape markets faster than perhaps any force in history. In 2015, the research entity — initiated by IMD and Cisco — ranked the financial services sector at No 4 in the list of industries with the greatest risk of digital disruption. The first three were the technology products and services, media and entertainment and retail sectors.
In its report, Digital Vortex: How Digital Disruption Is Redefining Industries, it warns that digital disruptors are particularly dangerous because they grow enormous user bases seemingly overnight and are agile enough to convert those users into business models that threaten incumbents in multiple markets. One example is Ant Financial — the digital payments affiliate of China’s e-commerce giant and New York Stock Exchange-listed Alibaba — which gained about 100 million new clients last year to take its total above 500 million which, according to The Financial Times, is almost 10 times that of the world’s largest banks.
Banks would do well to embrace digital innovation to stay ahead of the competition, says Manjit, noting that most banks are already investing in digitalisation through investments in digital applications and technology-enabled customised solutions that help their customers keep track of their portfolios and get up to speed on market developments.
This trend has had a quicker uptake in Asia, he observes, adding that HNWIs in the region have shown to be more tech-savvy and far quicker at embracing technology.
According to PwC’s 2016 report, Sink or Swim: Why Wealth Management Can’t Afford to Miss the Digital Wave, some 77% of Asia-Pacific’s HNWIs are already using online or mobile banking, compared with 69% globally. Of this number, almost half of them are already using online tools to review and manage their portfolios.
“Asian HNWIs are more at ease with technology than those in Europe or North America. We are seeing private banks respond to this shift,” says Manjit.
“For example, a local bank recently launched a wealth app for its premier customers. Fintech solutions such as robo-advisers are also being created across the customer investment journey, enhancing the experience of all customers, including ultra HNWIs.”
Regardless of the higher affinity for digitalisation, clients prefer to have an adviser in their “living room”, he says. “As mentioned by a relationship manager interviewed in the report: ‘Clients look for a much more customised service — something you cannot buy with technology’. This primarily stems from the belief that wealth management is predominantly a person-to-person business, built on trust.
“The challenge is for banks to integrate technology into existing structures, instead of completely doing away with tried and tested processes. For instance, provide self-service solutions to customers who value rapid access to market insights (if this is more efficient to them than liaising with a relationship manager), then looping in the relationship manager to follow up with the customer.”
Manjit believes that wealth management is still very much a people and relationship-oriented proposition as HNWIs are willing to pay for expert advice to help them reach their financial and non-financial goals. “[This is] a mindset that the wealth management industry is ideally positioned to leverage. However, there are opportunities for the industry to scale up through skilful use of digital technology to improve efficiency and responsiveness,” he says.
MEETING THE NEEDS OF HNWIS
Asia-Pacific is notably the highest growth region for private banks and is expected to overtake North America as the largest market for HNWIs — customers with more than US$1 million in investable assets, says EY in its Rethinking Private Banking in Asia-Pacific discussion paper last year.
According to the firm, private wealth in Asia-Pacific (including Japan) rose 18% to US$14.2 trillion in 2013, driven by a high saving rate and strong growth in China and India. It says the gap between Asia-Pacific and North America is closing fast, with the difference in population calculated at fewer than 10,000 individuals — North America’s 4.33 million to Asia-Pacific’s 4.32 million.
Asia-Pacific’s HNWI wealth trails North America’s by just US$700 billion, it adds. “Between 2007 and 2012, Asian HNWIs expanded their wealth at a compound annual growth rate (CAGR) of 4.9%, surpassing the 1.6% of North America and 0.5% of Europe.”
EY points out that at the wealth market’s current rate of growth — an estimated CAGR of 5.4% — wealth in Asia-Pacific is expected to grow at a CAGR of 8.1%. By 2018, the region is expected to make up more than one-third of global wealth, with private wealth projected to reach US$76.9 trillion.
Jan Bellens, global emerging markets and Asia leader for banking and capital markets at EY, says banks are keenly aware of the high expectations of HNWIs and banks are responding to this by ensuring they have the right business models in place to effectively serve their clients. “As a large proportion of HNWIs are entrepreneurs whose wealth is closely connected to their businesses, progressive private banks have developed integrated solutions to meet both their corporate and personal wealth needs.
“These HNWIs require not only personal investment advice but also corporate finance, investment banking and asset management services. Banks that can offer such holistic services have a better chance of retaining clients.”
Citibank Bhd, for one, has been leveraging this trend. Its country head for retail banking, mortgages and wealth management Rakesh Kaul says the bank saw a 10% increase in the assets it manages across Asia last year as a result of customising products and services as well as adapting to the rapid digitalisation. “To grow about 10% is not a small feat,” he points out.
While the core needs of its clients in Asia are not very different from those of their global counterparts, the higher inflation rates in this part of the world have seen the populace get higher returns, says Kaul. “Every market is different, but the core needs of our high-net-worth customers are the same.
“Clients are becoming global. They are travelling more, buying assets overseas, sending their children for further education abroad or expanding their businesses internationally.
“The globalisation trend that we are seeing affects HNWIs in the US, Europe and Asia. For example, the results of the Brexit referendum and US presidential election have had a financial impact on HNWIs across the globe.
“So, I think the core need is client-centric wealth management. It focuses on the ability of the banker to tailor-make financial solutions for the different needs of clients in various markets while addressing global challenges.”
He says understanding its customers and curating its offerings for them is what sets Citibank apart. Nevertheless, the needs of its customers are very much dictated by their risk appetite.
“Some clients may show great interest in products with, say, 12% to 15% returns. It is important for the teams to disclose the associated risks and that the returns may come with a lot more volatility and entail a lot more risk. Ultimately, clients will need to decide if they are willing to take those kinds of risks,” says Kaul.
“I think what differentiates the Asian HNWI population from the rest of the world is that they are willing to take a bit more risk. Asia has seen higher inflation levels than the rest of the world in the past decade. Property investments in Asia have done very well over the last two to three decades. So, their expectation is that financial products should also be able to deliver higher real returns. Clients expectations on returns are usually high because if the inflation level is going to be 4% or 5%, then clients expecting anything less than that is not going to make any sense.”
As the expansion of the Asia-Pacific wealth market has to do with the fact that there is a high proportion of self-made and first-time HNWIs, the bank’s clients in the region are more open to structured offerings, says Kaul. “We are seeing a trend where clients in Asia-Pacific are increasingly receptive to structured product solutions. Once we are able to give them the full perspective of how the products work and if they are suitable to their risk appetite, we will see a good take-up rate. The acceptance of structured solutions is very strong in Asia.”
RELATIONSHIP MANAGERS’ ROLE TAKES ON A NEW FORM
The higher uptake of digital offerings and the comfort level of those using digital platforms have significantly altered the role of relationship managers (RMs), say the experts.
Bellens says more banks are investing in talent development so that their RMs can upgrade their skills and knowledge and be able to support their clients seamlessly. Prior to this, RMs only spent 10% to 20% of their time dealing with clients and the rest on administrative activities.
“Now, RMs not only have to instil a deep sense of trust in clients but also possess the ability to coordinate across divisions and specialist groups to deliver impactful insights and present the full value proposition of the bank to clients. The HNWI segment’s demands are such that the ideal RMs now need to wear multiple hats — requiring the skills and knowledge of an analyst, wealth manager and trusted adviser,” he says.
Bellens notes that banks are setting aside investments to develop multichannel digital platforms to offer real-time information with faster and easier access to data, enabling clients to make judicious decisions. “This group’s higher tolerance for risk and high expectations of returns calls for private bankers to manage their demands by offering customised investment solutions and employing data analytics to provide them with appropriate research, investment strategies and proactive risk management strategies,” he says.
He adds that banks that thrive are the ones that have successfully transitioned from the traditional RM-centric model to leverage technology to meet customer expectations, improve efficiency and drive down costs.
“A digitally driven model based on an automated back office and self-service digital channels for routine transactions frees up RMs to deliver value-added services, speed up approval times and reduce operational and credit administration costs, offering significant expense savings and growth opportunities. Technology, by way of data analytics, will enable banks to gain a single customer view, support cross-selling and help complete Know Your Client (KYC) documentation efficiently,” says Bellens.
Taking advantage of technologies such as robo-advisers could allow RMs to provide automated advice for customers and portfolio review services, he says. “With the opportunity to expand the client mix for private banks, robo-advisers are creating waves in the marketplace with new service offerings and lower fees. Several traditional firms launched their own robo-advisory platforms last year.”
REGULATIONS NOT A HINDRANCE TO INNOVATION
Commenting on the increasingly stringent regulations aimed at improving banks’ capital requirements and rules demanding better transparency, Citibank’s Kaul says the regulatory restrictions that have come in the last decade have brought out the best of innovation.
“If you look at the changes in the banking industry for the past 10 years, the cost of compliance has gone up significantly. So, to stay relevant, profitable and meaningful, banks have been able to bring the transaction and service costs down.
“Constant effort in digitalisation, rapid improvement in straight-through processing and removal of unnecessary paperwork — all of these have been done. In my view, the quantum of innovation we have seen is huge.”
Compliance, he adds, is not the enemy. If anything, it is a financial institution’s “best friend” because without the guiding changes, the sector would be doomed to lose much more.
“We have seen the fall of 100 or 200-year-old organisations because they did not do a good job on holistic compliance. I think compliance with policies and best practices will ultimately be the biggest differentiator among institutions,” says Kaul.
“Look at Singapore, where a few boutique private banks were told to exit overnight. Why? Because they were not in compliance with regulations. Would you rather put your business at such risk or would you rather be known for exhibiting the gold standard of compliance in the industry?”
Manjit stresses that regulators are more open to new product offerings than ever before. “For instance, the Lodge and Launch Framework introduced by the Securities Commission Malaysia (SC) makes it easier for fund managers to launch wholesale products catered for institutional investors and ultra HNWIs.”
The SC’s framework is far ahead of those in more established financial centres, he adds, citing the Regulated Authorised Investment Fund, which was recently announced by Luxembourg’s financial regulator, Commission de Surveillance du Secteur Financier.
Liew Nam Soon, EY’s managing partner for Asean financial services, points out that regulators in Hong Kong, Singapore and Malaysia have launched a fintech regulatory sandbox in the past year to help foster innovation. Across several Asia-Pacific markets, regulatory authorities in collaboration with banking associations are running a series of fintech and digital banking events and conferences to stimulate discussions about and the development of the industry.
“This feedback on regulatory stringency would be from the incumbent banks that say the new entrants are receiving more support from regulators. Although the regulators would argue that they are working to safeguard the interests of consumers and need to hold banks to more stringent risk models, given their greater systemic impact on financial markets,” he says.
“While regulators are unlikely to impede new entrants, if these result in the introduction of enhanced services and lower fees for customers, they do have to ensure that both the incumbents and new non-bank financial players are operating on a level playing field and not specifically disadvantaged by regulations.”
GEOPOLITICS: VOLATILE TIMES AHEAD
Regulations matter more today than ever before in the light of the persisting volatility in the global markets and unpredictable geopolitical climate, says Bellens. “In the current volatile and complex economic and geopolitical environment, institutions need to be more proactive at anticipating new and emerging risks and develop ways to pre-empt and mitigate them.”
Some of the newer regulatory changes in Asia-Pacific include the new Basel III and IV equivalent rules; Fundamental Review of the Trading Book on clear boundaries between the banking and trading book; model developments (risk-weighted assets and liquidity modelling); International Financial Reporting Standards changes; KYC and Anti-Money Laundering policies and processes; and general data protection regulations.
“Banks need to focus on how these regulatory changes will impact their balance sheets and capital optimisation, perform stress tests, ring-fence operations, review legal entity structures and have effective engagement with regulators to trade ideas and help shape risk regulations via proactive discussions and feedback,” says Bellens.
This is particularly timely in the light of the populist revolt against “globalism” as 2016 was the year that startled the global markets. A number of events that were particularly unexpected were the UK’s vote to leave the European Union, the elections of US President Donald Trump and Italy Prime Minister Matteo Renzi and the Philippines President Rodrigo Duterte’s announcement that the country would a break with the US.
This year, investors are expected to confront even more political risks in the developed world that will further rock asset values. Some of the potential market-changing events on the cards are general elections in France, Germany and the Netherlands, where support for populist candidates is growing.
“The rise in the voice of the people — Vox Populi — is the trend that we notice. This year, we expect a lot more geopolitical shifts with elections in Europe and not forgetting the impending general election in Malaysia, which is due next year,” says Kaul.
“All of this discontent stems from the fact that growth is not happening. If you look at China, for it to be able to look after such a large population, it needs to grow at 10% to 12% per annum. Unfortunately, growth has slowed. The official number is between 6% and 6.5%.
“This rising inequality, coupled with no growth in the economy, is leading to a lot of dissent, to a lot of people coming out to say that we need a change. We expect this trend to continue in Europe, where we have elections in a number of countries such as Germany and France.”
Despite the gravity of these geopolitical events and their potential impact on capital markets, it is more important to tailor one’s portfolio so that it can weather any market gyrations than to bet on who will take power, says Kaul.
“What is important is to be able to tell our clients that if the unexpected happens in Germany, how it is relevant to their portfolio and what we can do to help them avoid those risks. For example, after the Brexit vote, the pound sterling lost about 15% to 16% in a matter of a week. But if you look at the UK equity market, it was up 11% to 12% as investors expected the weak currency to underpin earnings and dividend payouts for internationally exposed UK companies.”
Similarly, if you look at the US election results, the dollar has strengthened and equity markets are at their all-time highs, he points out, adding that the rest of the year is expected to be a stressful one for the banking and wealth management industries.
Dr Michael Hasenstab, Franklin Templeton Investments executive vice-president, portfolio manager and chief investment officer for Templeton Global Macro, says such unprecedented events have emphasised the relevance of active strategies. “We think they are crucial to navigating the current markets. Last year, we saw US treasuries sharply sold off during the fourth quarter — passive strategies that were constrained to bond indices experienced severe losses in a very short period of time.”
He adds that investors were warned about the vulnerabilities of US Treasury valuations and the asymmetric risks in longer duration exposures last year. “When rates rose, passive and index-constrained strategies bore significant market losses from rising yields while our unconstrained strategies actively gained. We were actively positioned not only to defend against rising rates but also to benefit from them.
“Thus, it is critical to remain active in these markets. But even more importantly, we see tremendous advantages to being unconstrained to the indices. Our strategies are not tethered to a specific duration level or to specific sets of bonds in the indices that may be overvalued or unattractive on a risk-adjusted basis. Instead, we have been able to build portfolios that can actively navigate rising rate environments and do well as rates rise. This is crucial not only for current conditions — unconstrained investing is important to all the varying macro environments that investors may face over time and for each phase of the investment cycle.”
Hasenstab says some of the best valuations the fund house is seeing is in the emerging market local-currency bond markets. Emerging market debt issuance had risen from about US$600 billion in 1995 to around US$17 trillion last year, he adds, noting that the vast majority of that expansion came in local currencies.
The volume of local-currency sovereign bonds is now about eight times that of hard-currency sovereign bonds, he says. “So, it is tremendously important that your investment strategies can evolve to keep up with the changes to those markets. Fortunately, the global scope of our company empowers us to trade effectively in several local markets because we have a physical, on-the-ground presence in many of these places.
“You also need to have the right research-driven, longer-term philosophy in place in your strategies as well as the resources, people and disciplined processes to carry them out. Have each of these components empower you to design strategies that can respond to the new opportunities and developments in the markets.”
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