Securities firms shake-up Korean wealth landscape

Many of these firms are now setting up wealth management divisions, while major banks, such as Hana, Woori, Shinhan, and Kookmin Bank, have been increasingly developing their private banking arms.

In the nascent but rapidly growing South Korean wealth management industry, there is still a general confusion about what really constitutes private banking, according to Bok-Ki Jung, CEO at Citi Private Bank in Seoul. Securities companies have recently started selling financial products and have immediately began to call themselves “private bankers” or “wealth managers”, he says.

“The history of private banking and wealth management is too short in Korea. The banks are familiar with loans and deposits, and sometimes mutual funds, while securities companies have knowledge of stocks, at times of mutual funds. None of the institutions can manage total wealth,” believes Mr Jung.

The concept of private banking also remains unknown among high net worth (HNW) investors. “Clients like managing their money by themselves but are just focused on the best stock, on the yield and do not have a portfolio view,” he adds.

Banks and securities companies segment their client base simply according to size of client assets, ignoring the individual’s total net worth. Citi, on the other hand, targets rich individuals with wealth of over $10m, for whom the bank provides highly customised personalised portfolios on an advisory basis.

As in most of Asia, one of the major issues in the South Korean wealth management market is the aggressive poaching of private bankers, because the pool of experienced advisers is very small. This has recently led top securities companies, such as Samsung, Daewoo and Woori to raise levels of guaranteed bonuses to attract new talent.

At Citi, says Mr Jung, the compensation of advisers is based on a balanced score card, which sets a number of yearly financial and non financial targets. Offering more money is not the right type of incentive structure, he says, as this leads advisers to just focus on their remuneration, paying scant regard to portfolio returns or clients’ expectations. This is not how private banking should work, he says.

Still, securities companies boast the most experienced investment advisers, despite their lack of familiarity with banking products. “We are trying to recruit new people from securities companies, but it is not easy because there they are paid more,” admits Mr Yung.

Major banks, such as Shinhan, are now stepping up their efforts in educating advisers to convert them into trusted private bankers. “Scouting of private bankers is a very sensitive issue in Korea,” admits Seung Bong Lee, general manager, private banking department at Shinhan Bank. “We are very focused on education and that’s why other firms try to poach our people. We send our advisers to universities, to the Hong Kong campus, where they are comprehensively trained.”

Whether securities firms have better private bankers than the banks is questionable, says Mr Lee, as is shown by Samsung Securities’ massive poaching of senior advisers from Hana bank, for example.

People jumping from one job to another, lured by better money, may be an accepted practice in the West but not in Korea. “In the East, this is a not the right way of doing business, a company has to be responsible towards the society and have a good attitude to business. Business is not just about money. Values such as the relationship with the customers and ethics are very important in the Korean market,” explains Mr Lee.

At Shinhan Private Banking, junior private bankers are selected internally based on their loyalty, integrity and diligence. Only the successful ones are then trained to become fully fledged private bankers, explains Mr Lee. However, it is undeniable that the war for talent is impacting incentive policy at Shinhan. “We are introducing a new salary system this year to raise incentives,” he says, explaining that so far, the best advisers were mainly compensated through promotion.

Investment trends

Banks and securities companies dominate the Korean mutual fund distribution landscape. Together they account for the distribution of 92 per cent of the total $300bn in mutual fund assets, according to Kofia, the Korea Financial Investment Association. Both types of institutions are key targets of domestic and foreign fund management companies, which have been increasingly attracted by the fast-growing market. Today, most major global fund management companies have a presence in Korea.

Although banks’ branch networks are much larger and have widespread coverage, investors perceive securities companies as having a higher level of investment knowledge and expertise. This is confirmed by statistics. In 2007, the 60 securities companies accounted for distribution of 52 per cent of mutual fund assets, while the banking sector – dominated by five major institutions – accounted for 43 per cent. By the end of 2010, the percentage had grown to a 60 per cent share for securities companies versus 31 per cent for banks. Insurance companies, merchant banks and futures houses account for the remainder.

“The South Korean asset management industry is set to grow at a high rate,” says Kofia director Jwong-gil Lee. Currently assets under management amount to just 28.5 per cent of GDP, versus 473 per cent in Singapore and 118 per cent in Australia. Although total household assets mostly lie in cash and bank deposits, the percentage of financial investments has grown from 22 per cent in 2009 to 29 per cent today; saving accounts have decreased from being 54 per cent of total household assets in 2002 to 47 per cent in 2010.

In the current environment, with low interest rates and higher inflation, more and more capital and household assets will be invested in funds, believes Mr Lee. The rapid ageing of the population is leading more and more Koreans to plan for retirement, which will drive the growth of the asset management industry.

Mutual funds are still largely seen as trading instruments, but statistics show that the attitude of investors is slightly improving. “Around 20 per cent of investors are investing in instalment-type funds and we have seen that percentage triple in five years,” he says.

However, after the boom years of 2006-2007, where overseas mutual funds had a huge success – and also because of tax advantage incentives being removed at the end of 2010 – the South Korean mutual fund industry saw huge redemptions during the crisis.

Today, fund companies face competition from wrap accounts, successfully promoted by securities companies as better performing and more transparent instruments. Wrap accounts, preferred to funds by investors who had their fingers burnt during the crisis, supposedly provide a more dynamic and customised asset allocation, but are generally made up of a concentrated number of domestic stocks. The selection is carried out by external advisers, generally smaller asset management boutiques, often set up by senior professionals in the industry, employed by the securites firms.

Wrap accounts are competing with the funds for a huge potential market, but one winning solution would be to combine the two, says Mr Lee. In order for this to happen the regulation that imposes penalties for funds that are sold within 90 days from their purchase must be repealed. “The purpose of the elimination of the redemption fee would not be to promote short term investments, but would allow the free composition of the wrap portfolio.”

Private banks such as Shinhan are also increasingly using external advisory firms to construct customised funds for their high net worth individuals.

“Wrap accounts got very trendy in the past couple of years and nowadays funds are experiencing a hard time,” says Eun Jung Lim, head of HNW strategy planning department at Woori Investment & Securities. “Many excellent people moved from fund management companies to advisory companies to do wrap accounts, it is like a boom.”

Advisory firms, some with eye-catching names such Brain, Cosmo or Albatross, are enjoying great success. The return rate generated by some wrap accounts has been very high compared to other products. Wrap specialists can be very picky about the stocks they want to invest in and can tailor the selection to customer needs, says Ms Lim.

Moreover, wrap accounts are particularly profitable instruments for securities companies, as they can charge a commission on total assets, in addition to each transaction fee for trading underlying securities. This means having a holistic approach to client portfolios can be difficult, acknowledges Ms Lim, as commissions paid to advisers lead to product churning. Charging advisory fees is not currently permitted by regulations. However, clients are offered tailored portfolios and a number of services, including investment consulting, risk monitoring, tax advisory and real estate services.

Until 2000, rich clients mainly invested in real estate but today they are trading in a variety of financial instruments. “Financial products are getting more complicated, such as structured products or equity linked products, which are very popular and clients need to rely on specialists. This is a very good opportunity for wealth managers,” says Ms Lim.

The dynamic Korean market is dominated by fast-moving trends and it is important to react quickly. “It is very important to catch up with trends, to understand which area is working or find out which of the channels is starting to raise money,” says Kenneth Kyosuk Lee, head of business development & global marketing at Samsung Asset Management. “Once a trend emerges, everybody goes in the same direction and very fast.”

It is also vital to follow the latest regulatory moves. The latest one that enabled securities companies to provide asset management services has produced effects such as that of wrap accounts, which have gathered more than $7bn in less than a year.

But wrap accounts’ performance is already deteriorating, notes Thae Surn Khwarg, managing director at SEI. Smaller advisory firms benefited from the huge redemptions faced by major fund houses. These were forced to sell their stocks in existing funds, affecting share prices. The boutiques, taking advantage of their smaller size, were able to pick the “more sexy” stocks and avoid those under price pressure. But the fact that these companies are growing in size is not necessarily beneficial to performance. “In Korea, retail investors are not interested in investment philosophy and processes, they just want to see good results,” he says.

In the competitive asset management industry, where there are more than 60 fund houses and more than 100 advisory firms, local managers do not tend to have a consistent investment style. “The majority of managers are trying to outperform the market with some fundamental analysis and follow market movements and themes,” says Mr Khwarg. “It is getting better today, as fundamental research is paying off, but in the old days everybody was chasing momentum.”

However, on average Korean active managers are able to outperform the Korea Stock Exchange Kospi index, mainly because the market is still inefficient and also because the index does not include the dividend yield, explains Mr Khwarg.

Looking ahead

Catching up with trends is as vital as looking ahead and trying to identify the next hot development. This appears to be that of alternatives and hedge funds in particular. “Wrap products are almost finished and hedge funds are booming now,” says Hee Joo Kim, executive director, financial product development at Daewoo Securities. Over the past few months, the major securities companies, such as Daewoo, Samsung and Woori have all started offering funds of hedge funds to their high net worth investors in the search for absolute returns.

Until regulation allows domestic asset managers to manufacture and market onshore hedge funds, which is expected to happen by the end of the year, distributors can only sell offshore hedge funds in private placement, with previous regulatory approval.

Setting up a proper hedge fund selection team is a priority. “We try to be very careful about the selection and distribution but the hedge fund market is very small in Korea,” says Mr Kim. Daewoo uses five hedge fund houses in its 13 fund of hedge funds, of which 10 were launched year to date.

The minimum account size to invest in hedge funds is $100,000 versus $50,000 for wrap accounts. These products are therefore equally suitable for HNW and mass affluent people. But the segmentation of clients and products will be critical to be able to grow in the high net worth space. “In the past we did not make any classification on wealth, but today we are trying to segment clients in order to be able to develop a targeted marketing strategy,” says Mr Kim.

Daewoo has just opened a private banking centre in Seoul’s Gangnam district, one of the most affluent areas of the city with the highest concentration of private banking and wealth management businesses, and one in Busan city. “We are at the beginning of private banking consulting and investing, we are setting up services such as tax, real estate and education, but at the moment the products we offer are the same for both rich people and retail clients,” explains Mr Kim.

Educating clients on the benefits of asset allocation, portfolio construction and diversification is also one of Mr Kim’s objectives. His team has launched a number of model portfolios to meet different risk profiles, although these have not yet had huge take-up.

Daewoo prides itself on its open architecture model and its independence from in-house funds arm KDB Asset Management. Of the total sales volumes in equity funds, only 5 per cent are sourced from the in-house fund management arm. The remainder comes from 10 selected asset managers, both domestic and foreign, including Fidelity, BlackRock, JP Morgan and also Mirae Asset, Samsung, Truston, Korea IM, KTB AM and Shinhan.

Currently, around fifty funds are on Daewoo’s recommended list of funds. Brand, performance, investment philosophy, risk management and consistency of management team are highly monitored. “In Korea, fund managers change a lot, usually they are contract managers that last two-three years, so we have to be very careful.”

Bancassurance channel

Life insurance companies appeal greatly to fund houses as they provide that much sought after “stickiness” of assets, as they use mutual funds as underlying assets in their investment-linked products. The role of insurance companies as mutual fund distributors is not that big yet, but it is set to increase, as the bancassurance channel, which started in 2005, grows.

“Almost 30 per cent of our new business is coming from bancassurance, and half of the sales from the bancassurance channel are variable annuity products,” says Hyun Kang, senior manager treasury team at Kyobo Life Insurance. Variable annuity products are the most popular insurance product sales. They are more competitive than traditional annuity products as on average they generate higher returns, being linked to securities, funds or indices, although they are less aggressive than other forms of investments.

“Korea is one of the fastest aging countries in the world, and people are realising the importance of preparation for their retirement. These days, everybody thinks they need annuity products,” she says.

Most of the funds used as underlying are domestic bond funds, says Ms Kang, as they provide the minimum guarantee of accumulated benefit. With little investment in stocks they can offer some upside.

Korean asset managers generally accept funds of smaller size and a short life, but there is also a matter of home bias. Koreans strongly prefer to invest in the domestic market as they are familiar with it, she says.