Chinese wealth managers put faith in family values

Wealth managers across Greater China are at last starting to regard the region’s entrepreneurial families as their future target clients. This sea change in perception marks a sharp move away from dealing purely with the patriarchs who ruled the roost across many extended families. It also serves as a belated recognition of the fast internationalisation and increased professionalisation of many of the region’s expanding clans.

But the question passing across the lips of many of Asia’s private bankers is a pertinent one: is this new family focus just the latest trend in the region’s wealth management map or does it respond to a serious demand from family members for a more inclusive service?

“Five to 10 years ago, we never heard terms like asset allocation in China,” admits Hong Yan, a professor at the Shanghai Advanced Institute of Finance. 

“It was just all about buying wealth management products. Now banks and clients are starting to appreciate more careful planning is needed, to properly allocate investments. They have finally realised you can’t put all your money into a single product, which creates a very large risk for investors.”

To achieve respectability as wealth managers with expertise in the new concepts, many are starting to play the family card. “Everyone is now trying to use the ‘family office’ label to attract clients, rather than adhering to the real meaning of the concept,” suggests Wu Fei, also a finance professor at SAIF.

Huge opportunity

There are approximately 25,000 private funds in China likely to register as family offices under new legislation, calculates Charles Chang, deputy dean at Fanhai International School of Finance at Shanghai’s Fudan University. Two thirds of these unregulated private accounts are managed for wealthy people reluctant to invest their assets with a private or investment bank.

According to Mr Chang, this market segment presents a huge opportunity for Chinese and foreign wealth managers. “In the next 10 years, companies in this space will no longer be the administrators who just help you secure an EB-5 visa,” he says, referring to the US citizenship by investment programme hugely popular among Chinese clients. 

“They will have to be well versed in equities, bonds, alternatives, estate planning and real estate investing.”

One commentator closely linked to the Chinese government says: “Wealth management and private banking are likely to see significant changes and developments around how professional their services will become.”

But the pace of development of family offices across the region has been slow so far, says Harry Pang, founder of Fountainhead Partners in Hong Kong.

“Family offices are coming up and the whole trend is starting, but we are definitely at an early phase, compared to the US and Europe.”

Banks and brokers are still the first destination for wealthy clients in Greater China, says Mr Pang, with multi or single family offices only coming onto the radar once financial needs become a lot more complex.

What is increasing the attractiveness of the newer options is that the banks’ pitches are becoming increasingly difficult to differentiate from one another, he says. Much of this is due to regulatory requirements, forcing the institutions to de-risk, protect their assets and take a much more conservative approach to the business.

“In the old days, all the banks were quite unique, but now you look across all the large players and you can barely tell them apart,” he says. “They are all short-term profit driven. Management is pushing the RMs to be more profitable, productive and more competent in the way they sell the bank’s products.”

Rather than being part of this product-led, machine-like private banking system, Mr Pang believes the multi-family offices can offer a clear alternative.

“We believe there are many smart ‘super-brains’ out there,” says Mr Pang. “Our role is to aggregate their thoughts and ideas, so that our clients can stand on the shoulders of giants to make decisions, whereas banks just rely on their own internal strategists.”

Alongside this investment oversight role is the crucial stewardship of assets across the generational divide, which Mr Pang admits is often more challenging than the investment piece. 

“The idea that we all believe in a set of Asian family values is often nonsense,” he suggests, with the intensity of succession squabbles often much more intense and bitter than similar disputes in Europe or the US. “Creating efficient family structures to help transfer assets can be a big issue for us.”

Hong Kong hubs

UBS, the region’s leading wealth manager, is seeing more and more clients from mainland China looking to set up family office structures in neighbouring Hong Kong, which it sees as a complementary international finance centre to the mainland’s wealth creation hubs.

“Previously, families were concentrating on their businesses. Now they are starting to understand the need for proper risk management and segregation between business assets and family interests, especially since the financial crisis,” says Amy Lo, chairwoman and head of the bank’s Greater China operation.

“Now the Next Generation is coming into the picture. They are Western-educated, exposed to older families in the US and Europe and have seen how these Western counterparts run their assets. They want to replicate these governance structures in Asia and they also need more access to advisory services to help them achieve this.”

Philanthropy has also been a big part of the new trend to family-centred finances, but that does not mean that it has necessarily increased in terms of volumes. It has just become more transparent, more efficient and more formalised in terms of being channelled through foundations, argues Cynthia D’Anjou-Brown, regional head of philanthropy and family governance advisory services at HSBC Private Banking in Hong Kong.

“Twenty years ago, all the giving was to China. Everyone wanted to help their clan or their home town,” says Ms D’Anjou-Brown. “Typically, the patriarch did it all himself, through letter and verbal communication, with no formal structures. Most of the family members did not even know this was happening.”

During the last 10 years, however, she has seen a massive growth in foundations, linked to both company and family wealth. The bank also facilitates introductions of wealthy families to each other, enabling them to co-participate in both philanthropic and investment projects.

“It’s a great place to teach them both governance and the practicalities of working together as a family,” she adds.

This transfer of both assets and responsibilities is forming the main challenge for today’s private bankers across Asia, believes Bernard Fung, head of wealth planning services private banking Asia Pacific at Credit Suisse.

Clients in Asia, unlike many parts of the world, are still keen on directing the lion’s share of their investment decisions but the generational handover is causing major upheavals. 

“The patriarch would make all the decisions. The ‘old man’ would literally tell us to ‘buy this’ or ‘sell that’. Now he is handing over decision-making to the Next Generation,” says Mr Fung. 

“But they don’t work in the same way as him. Most of them are not that interested in managing money per se, but they are interested in creating their own industrial wealth. Investments are only a small percentage of each family’s assets and managing these directly is not the best use of their time, so we see the concept of discretionary portfolio management now very much on the rise.”  

When East meets West

For many Western private banks, Asia has acted as something of an investment laboratory, where ideas are tried, tested, refined and rolled out across other markets. The idea is to take some trading ideas from the East and then adapt them to those more mature markets which enjoy a portfolio-based approach, where discretionary mandates feature higher in the priorities of client bases.

Among this vanguard of innovators has been Swiss bank Lombard Odier, which according to CIO Jean-Louis Nakamura, has tried to position itself at the convergence between private banking and asset management models.

The bank has seen assets managed out of its Hong Kong office double to $8bn over the last five years. “We target large wealthy families, who have invested the majority of their portfolio in illiquid, real assets such as business operations, real estate and private equity,” says Mr Nakamura. 

“Our aim is to provide a reasonable rate of return for the liquid portion, limiting losses and allowing them to raise money fast to jump into opportunistic investments in case of market dislocations in illiquid assets.”

His investment philosophy is to exploit sources of what he calls “unconventional beta”, by concentrating on passive investing, but adding in a few twists to exploit obvious market anomalies. The key principles he employs in his multi-asset portfolios involve re-calculating risk and re-balancing assets to respond to triggers, once risk indicators start to shift quickly.

Within the emerging equities segment, Mr Nakamura tends to buy into firms involved in “Asia’s new economy”, particularly those “crucial to the eco-system around Apple products”.

Along with other senior bankers, Fan Cheuk Wan, head of investment strategy and advisory Asia at HSBC Private Banking, has sought to reassure clients about Chinese growth prospects, expecting a stabilisation of risk to take hold after the recent Chinese Communist Party Congress, which led to a senior leadership reshuffle and a renewed focus on profitability and economic growth.

“This is helping restore investor confidence,” says Ms Fan.

She says that following the visit of US president Donald Trump to Beijing, the market has been given added impetus by the government’s loosening of restrictions on foreign ownership of financial services firms.

“These are significant measures, enabling greater participation in the finance sector by foreigners. It will help mitigate risk and encourage openness, by encouraging international best practices and the integration of China’s financial market into the global economy,” says Ms Fan. “China is moving to a more global, integrated market-oriented system and this is being welcomed by the investment community.”

Despite keeping a keen eye on these local issues, most Asian investors are however moving to much more broadly diversified portfolios, she says. “When the GFC hit the Asian market 10 years ago, many investors suffered meaningful losses due to over-concentration in the home market or individual positions.”

Since then, most have changed their approach, embracing a “more robust investment approach to seek portfolio diversification”.