Matching client expectations

“Every day the door opens and in walks someone who has never seen so much money in their life – it’s a bit like the Wild West.” So says Arjuna Mahendran, head of investment strategy for Asia, at HSBC Private Bank Singapore.

A banker almost anywhere in Asia could say the same, due to the explosion of new millionaires and billionaires in region in the past decade.

The newly wealthy elite, just like America’s early settlers, tend to be fearless enterprising types, ready to risk everything in a bid to grab an even bigger fortune.

This gung-ho style contrasts fairly starkly with the traditional agenda of the private banker, which is to steer clients towards investment strategies aimed at wealth preservation and longer term, moderate but steady growth. Neither are such trail-blazing clients particularly receptive to the concept of discretionary investment services, where the bank takes a more active role while the client takes a back seat and which are of course more profitable for the bank.

Further complicating the picture is the fact wealth management services have only been battling in this tough region for about 10 years, as opposed to the long-established operations in Europe and the US. So how well are banks in Asia managing to match client’s requirements with the right products and services?

Frontier spirit

“The large Asian community of entrepreneurs, the ‘first generation wealth’, who started from scratch and made a few concentrated investment decisions which brought in good returns, usually favour short term trading and take a hands on approach,” says Marc Van de Walle, head of product management at Bank of Singapore

The logic is easy to see. Firstly, if you’ve built a fortune making your own decisions, why change that approach? Secondly, Asia offers a mouthwatering menu of tempting IPOs and fast-growing companies. And thirdly, the vibrant market means entrepreneurs are able to mortgage shares in their own companies in order to trade in others. Plus, they often have in-depth information about these companies, since high levels of stock are concentrated in the hands of a relatively small number of families – around 200, according to HSBC’s Mr Mahendran – who tend to know each other.

With share trading remaining so attractive, Mr Van de Walle says that an average of just 10 per cent of clients in Asia are using discretionary services. Meanwhile, 50 per cent are opting for advisory services – where the bank executes the client’s investment decisions – and a further 40 per cent prefer to trade their own assets directly. “There are still people who call their banker several times a day,” he says. This presents quite a challenge for wealth managers seeking to meet clients’ requirements in the traditional way.

Changing trends

However, the situation is changing. Bank of Singapore, for example, is seeing its discretionary book of business grow. Mr Van de Walle says that in the past three years its assets under management have risen by 15 to 20 per cent but assets in discretionary portfolios have grown by 50 per cent over the period.

“Another generation of clients is emerging, which is more receptive to discretionary,” explains Allen Lo, deputy chief executive of UBS Asia Pacific Wealth Management.

This second generation could be the offspring of entrepreneurs who do not share their parents’ appetite for getting their hands dirty, although Mr Lo says that many younger investors are keen to be involved heavily in investment decisions.

The new generation favouring discretionary management also comprises investors who are based offshore and therefore do not feel they are close enough to the market to make decisions.

Then there are those who have been spooked by the global financial crisis. “Since 1997 we have been seeing a willingness to diversify – increasingly through the multi manager route,” says Mr Lo.

Clients also want more advice on how to balance their portfolios. HSBC’s Mr Mahendran, an asset allocation specialist, says he has never been so busy. “Clients are demanding much more of my time.” They are also wary of structured products, he says. “They are much more interested in asset allocation and research.”

Clients are diversifying in terms of currencies too, shifting from focusing on the US dollar to a mix of currencies closer to home, including the Singapore dollar, the Australian dollar and China’s newly internationalised RMB.

Many clients have lost the stomach for taking larger risks too. Mr Van de Walle says: “Before the 2008-2009 crisis, there was much more appetite for leveraged investments but the financial crisis has taught clients that maximum leverage is not always the best thing. So there is more moderation in leverage.” The bank addresses this by advising clients to borrow against cash-flow producing assets – typically bonds – in order to service the interest payments of the loan.

In true Wild Western style, Asia is also seeing its own, Far Eastern gold rush. Mr Mahendran says holdings of both gold and cash are higher, due to their reputations as safe havens. The average wealthy Asian investor now allocates around 30 per cent to these assets classes combined, he says, against 15 to 23 per cent before the crisis.

Match making

The slow shift to a more conservative approach is partly why wealth managers’ products and services are now doing a better job of matching the requirements of Asian clients. But wealth managers are also doing their bit.

New product launches in the past three years have aimed to meet clients’ wishes. For instance, many regional banks have launched CNH funds to allow customers to take advantage of the China’s new fully tradable offshore RMB. Bank of Singapore even offers a full suite of CNH products, covering fixed income, foreign exchange, structured products and a limited equity range.

Mr Van de Walle believes this product range is exactly what customers want. “It’s growing quite nicely as people believe the currency will become increasingly strong.”

In Mumbai, ASK Wealth Advisors has launched a slew of new products in the past three years to match clients’ passions. Rajesh Saluja, chief executive and managing partner, says these include a fund focused on residential, mid-income only property, a market in India where “demand is far out-stripping supply”.

There is also an infrastructure fund comprised of shares in “successful companies supporting infrastructure projects in India”, such as transport and housing projects. Then there is the ASK Indian entrepreneur portfolio, which invests in 15 to 18 of the nation’s family owned businesses and has delivered a return of no less than 28 per cent over the 2.5 years to date, something guaranteed to please clients.

Neither are the region’s wealth managers only pushing products in a bid to please wealthy customers. Singapore’s DBS Private Bank is tailoring its approach for trading-oriented clients. Su Shan Tan, group head of wealth management, says: “We are not going to start advising a commodities tycoon on gold or a property tycoon on real estate. But we can provide structures to assist them. For example, if a shipping magnate needs to buy more boats, we can help them leverage their portfolio to do it.”

Ms Tan says that DBS adjusts its service according to the industry in which a client operates too. “If a client is in the coal mining sector, the solution needs to speak to the fact that coal prices are falling and the portfolio needs to provide some hedging against that. I’m trying to get my bankers to be specialists in their clients’ businesses.”

Mismatch?

So wealth managers in Asia are taking reasonable steps towards matching their clients’ requirements. But this is not the complete picture. Ask any regional wealth manager about client relationships and before long, most will start talking about the need to “educate clients”. Reading between the lines it is clear that this means persuading clients to follow more conservative and discretionary strategies.

Of course, many banks would prefer to sell these services, as they tend to be more lucrative, but there are many compelling arguments for wealthy individuals putting their investments into the hands of professionals and focusing on preserving wealth.

An example of this approach is Bank of Singapore, which launched a hedge fund offering in July, despite the asset class’s lack of popularity in the region. The product is not even a fund of funds, viewed regionally as the most palatable form of hedge fund.

Mr Van de Walle admits this runs counter to traditional preferences but he believes the new tack is right for the present market environment. “Our approach is to select one or two single manager hedge fund per generic hedge fund strategy – long-short equities, global macro or CTA for example – and then look at which strategy should do well in the current conditions.” For instance, now the bank might opt for a commodity trading adviser fund because it takes short positions and cuts losses quickly, often doing intra-day trades, “which is suitable for markets that are not trending and more volatile”.

Time will tell whether clients can be persuaded of this argument but either way, this drive to “educate” betrays the mismatch between what clients want and what banks are selling them - however well intentioned.

For wealth managers, the mismatch is the source of some frustration. “I tell my clients ‘if you have come to me to get richer, you are knocking on the wrong door because I’m here to protect part of your wealth in case something else goes wrong’. This message often falls on deaf ears,” says Mr Saluja at ASK. “Many clients favour trading shares directly but we do not encourage this at all.”

Others agree. Mr Van de Walle at Bank of Singapore adds: “We are doing a lot of education around the benefits of the discretionary approach.”

Expertise gap

Another issue continuing to prevent matching services and clients in Asia perfectly is the lack of skilled advisers. This presents a particular problem when dealing with seasoned entrepreneurs who know their way around financial markets very well.

Mr Mahendran says: “Experienced entrepreneurs are a very significant challenge as our industry is very young, so we don’t have a big enough pool of mature investors to advise them.” Bankers can be recruited from Europe and the US but this is expensive, he says.

Mr Saluja adds that Western staff can struggle in Asia. “You could hire people who are supposedly experienced but do not understand the reality on the ground here.” For example, if an investment adviser will only invest in funds with a track record of more than ten years, they may find few opportunities and end up with a limited portfolio. “India is simply a riskier market,” says Mr Saluja.

Another tactic is to poach Asian professionals in the small pool of old hands but Ms Tan says that this is wearing thin. “Because bankers have moved so much they can no longer keep taking their clients with them –clients get tired,” she says. This leaves the option of fast-tracking the training existing employees. Though it is yet to have a significant impact, intensive training looks set to make a difference eventually, particularly in Singapore, where the government is funding a number of training initiatives.

So in this respect, the region’s banks are not matching clients’ needs yet, but they are at least moving in the right direction. Similarly, as clients move towards wanting what private banks are actually offering - partly driven by the banks’ own education initiatives - the two are beginning to match up. For their part, wealth management institutions are also going the extra mile and offering new services and products that are getting closer to matching clients’ requirements exactly.

As this convergence continues, Asia’s wealthy are likely to give up some of their adventuresome, freewheeling ways, which might make this a little bit less of an exciting market – Mr Mahendran says: “As a banker, this is a fascinating place to be right now.” But overall, it will probably be better for clients and banks alike.