Looking to the next generation

The recent heightened M&A activity in the financial services community in Asia hints strongly at a new and clearer focus on the future landscape of wealth management related services in the region. Indeed, financial institutions across the region have pinpointed the six figure net investable client as the most likely bedrock for stronger financial product distribution capabilities over the next decade. Of particular note is the recent deal by Australian bank, ANZ, to purchase, among other aspects, the premier banking capabilities of RBS in the region. The likely jewel of the purchase is the premier financial services business formerly known as Van Gogh and developed by ABN Amro, which had benefitted from a major commitment during the past five years to reach out to the region's up and coming affluent customers. Moreover, the comprehensive nature of the Van Gogh offering combining both upgraded banking solutions with a refreshingly uncomplicated investment product range made it a stand-out option in the market which, until HSBC Premier was launched two years ago, arguably had the affluent segment all to itself. Crucially, the importance of the recent developments is that there are now some major franchises that recognise investing in the region’s wealthy middle class may yield better returns both in the long-term as well as in the medium-term. Moreover, it is possible that the likes of the Australian banks believe that they can effectively mix it with the regional powerhouses such as Standard Chartered and HSBC in capturing market share. Although this may come at a short term premium, as it was widely suggested ANZ paid above the odds to secure the deal. So why are deals such as this one significant? Firstly, one has to look at regional market growth projections. The recent annual spotlight on the wealthy world by Merrill Lynch Cap Gemini indicated that Asia was the only wealth continent that was likely to have double digit growth in asset levels. While the research focuses on $1m net investable clients and above, it is fair to assume that the $100,000 to $1m market segment will grow at least at an equivalent rate or faster. Secondly, the margins of the upcoming wealth holder market segment are traditionally much better than the mainstream private banking community. Typically, it is possible for financial institutions to experience a gross margin of 130-170 basis points for this sector compared with around 70-100 basis points for HNW business. This is consistent worldwide but the big kicker is that the cost of delivery in Asia for a mass affluent client solution is notably lower over time drawing on greater use of technology than the delivery of solutions for HNW clients, which remains a specialist, labour intensive proposition. Longer term it is likely that financial institutions can project healthy sustainable margins in the so-called ‘affluential’ segment. Thirdly, the demand from clients in the region is high, particularly in markets such as India, China, Hong Kong and Singapore. These clients want to have an enhanced financial service well above the standard retail banking solution. Crucially, client and adviser research conducted by Scorpio indicates the customer base is increasingly recognising the enhanced solutions have an implicit value that is worth paying for and they are prepared to write the cheque. Of note, while they may not agree to pay much over the odds for the banking solutions, they will tolerate this more if it incorporates an enhanced capability around the investment management solutions and this is where the banks are hoping to benefit financially. Indeed, this last point is where we expect the repainting of the wealth landscape in the Asia Pacific region to be most significant. There is a growing recognition that banks that sustainably tap into the distribution capability to premium client channels will profit substantially, as demand grows for investment management services. The pioneers such as HSBC, Standard Chartered, and ING have shown what can be achieved. But they have only scratched the surface, particularly if the projections of wealth distribution become reality. Indeed, Asia is likely to be the powerhouse of financial product consumption for several decades to come. Sebastian Dovey, managing partner and head of consulting at wealth management think-tank, Scorpio Partnership