Wealth Management: Changing state of play (Part 1)

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 2 - 8, 2016.

 

Wealth management has changed in the past decade and new trends have emerged. The 2008/09 global financial crisis (GFC) led to the tightening of regulations in the financial services industry, particularly in the wealth management segment. Since then, new guidelines have been introduced to protect the customer and prevent issues such as the misselling of products.

The recent volatility of markets has contributed to a growing demand for investments that hedge against turbulence, such as foreign currency-denominated instruments. Although the ringgit has stabilised, the number of people investing in other currencies is rising.

As the new-generation investors, namely the Gen Y, are more informed given their access to the internet, online banking has become prevalent. In this segment, experts observe a demand for robo-advisory services in wealth management.

Also, an increase in the “emerging affluent” and high net worth individuals (HNWI) has catalysed demand for bespoke wealth management services. Thus, one can expect commission-based advisory to evolve into fee-based advisory in the near future.

Some industry professionals Personal Wealth spoke to share their thoughts on the changes in the wealth management sector.

 

Demand for foreign currency-denominated instruments

The growing popularity of foreign currency-denominated instruments in Malaysia is due largely to the volatile markets and the depreciation of the ringgit. Evelyn Yeo, head of wealth management at OCBC Bank (M) Bhd, observes that since the upheaval in the ringgit began in 2015, investors have been actively diversifying their investments into foreign currency-denominated instruments.

“We continue to see demand this year because investors want to hedge their investments, in case of future market volatility,” she says.

Billy Hii, chief operating officer of Bill & Morrisons Ltd, an offshore brokerage firm, concurs. “Foreign currency investments have gained in popularity as a new option for investors in the local market. In the global arena, foreign exchange is already the biggest financial market in the world with some US$5 trillion traded every day just in 2014 alone.

“While foreign currency investments are still not as popular as other asset classes in Malaysia, like equities or properties, we have seen much momentum since the de-pegging of the ringgit post the 1998/99 Asian financial crisis. Lately, a growing awareness of global diversification as well as the ringgit’s volatility have driven Malaysians to look at ways to hedge their ringgit assets against other currencies,” Hii says.

In terms of strategy, he explains that it is important and useful to add foreign currencies (especially multi-currency asset classes) to investment portfolios because investors may need them for their children’s education, international business trades, retirement in foreign countries and even overseas vacations.

“By investing in a basket of multi-currency assets, one can diversify his investment portfolio, mitigating potential risks by offsetting losses from investments in one currency with gains from another.”

Yap Ming Hui, an author and managing director of Whitman Independent Advisors Sdn Bhd, also agrees that investments in foreign currencies help investors diversify their risks.

“My most common recommendation in terms of portfolio diversification is to allocate 30% to 50% of their investments out of Malaysia. This, of course, would depend on the needs of the particular client. If he plans to send his children abroad for studies, he will need to allocate more [percentage]. The rest of the percentage will be invested in Malaysia in properties, equities, unit trusts, cash and bonds.”

 

Heavier regulation of industry

Post-GFC, regulatory bodies around the world tightened regulations for both the providers and distributors of financial products.

Bryan Zeng, general manager of independent financial advisory firm FA Advisory Sdn Bhd, says global regulators have come down hard on product providers and advisers across the board, thus increasing the cost of compliance and widening the need for quality talent and human resources.

“On the home front, the Securities Commission Malaysia and Bank Negara Malaysia are both pushing new initiatives to tighten regulations. The Bank Negara Life Insurance and Family Takaful framework published in November 2015, which is also known as the ‘Balance Score Card’ (BSC) framework, essentially tweaks the way we remunerate the intermediaries, especially insurance agents.” 

The framework aims to promote innovation and a more competitive market supported by higher levels of professionalism and transparency in the provision of insurance and takaful products and services — achieved through strengthening market conduct to enhance consumer protection, among others.

Zeng adds: “The BSC framework is just one of the many efforts to stem misselling [in the financial industry]. It tracks non-sales key performance indicators, (KPIs) not the number of transactions. In other words, this ‘score card’ looks at the quality and the suitability of the advice and recommendations based on a client’s financial needs and circumstances. 

“Agents who score high above the minimum KPI requirement of the BSC framework will be rewarded more than what they are currently earning, and the reverse is true for low scorers. Singapore implemented the BSC under the Monetary Authority of Singapore on Jan 1 and Malaysia is expected to conduct a trial run from July 1. The implementation will be in 2018.”

The BSC framework in Singapore tracks four non-sales KPIs: understanding client’s needs, suitability of recommendations, adequacy of information disclosure and standard of professionalism and ethical conduct. 

Felix Neoh, an ex-banker who recently joined Whitman Independent Advisors, agrees. “Yes [the regulatory burden] is increasing and is definitely here to stay. We have already seen it in the rise of client protection and advocacy, new guidelines to encompass client protection against misselling and data protection in Malaysia.

“Global banks have higher compliance requirements because they operate on an international level. While local banks are only controlled by domestic regulations, global banks need to look at a couple of jurisdictions and see whose regulation is best and adopt it.

“How much of a role banks have played in monitoring that is coming into play. And don’t forget, with the recent 1MDB case and the fine levied on Ambank by Bank Negara show that Malaysia is taking regulation and compliance more seriously.”

OCBC’s Yeo expects regulations to tighten further in the banking industry.

“Since GFC, the regulatory and compliance requirements in the wealth management industry have only increased globally. With the rise in product complexity, increasing client [and regulator] education and change in the delivery of wealth management products, we expect more measures to be introduced in the coming years in an effort to promote better banking practices. “While the changes will force the industry to re-evaluate existing products and operating modules, they can also be viewed as an opportunity for us to innovate and be even more relevant to our customers.”

 

The advent of technology

The wealth management industry has evolved, incorporating the rapid growth in technological capabilities and usage of smart phones into its products. Two major areas are online banking (basic transactions via smart phone applications) and the use of big data.

In big data mining, Yeo says “by using clients’ demographic data, purchase patterns and geo-location data, banks now have the capability to assess the propensity for an existing or potential customer to purchase a particular product. This allows banks to personalise the offer of products and services (contextualised relationship management) and be more efficient in their marketing efforts. Simply put, the more we know about you, the better we can make recommendations for solutions that best suit you”.

According to her, when it comes to transactions, “banks will continue to significantly expand their online capabilities, even as the Mobile Wallet capability of non-banking entrants continues to grow. Additionally, under the Malaysia Sector Blueprint 2011-2020, Bank Negara targets to significantly increase the number of e-payment transactions by 2020, providing even more reason to migrate banking capabilities to the online platform”.

Wealth Management: Changing state of play (Part 2)