Wealth Markets in China

Transcription

1 Report Wealth Markets in China The Beginning of the Race for China s Rich

2 The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit This report was sponsored by the China Banking Institute (CBI). BCG established the CBI as a platform for collaboration and interaction with China s banking industry. Its mission is to contribute significantly to the development of the Chinese banking industry and to help the banks become successful modern organizations. It does so through developing leading-edge insights tailored for all segments of the banking industry in China; engaging in constructive dialogue with decision makers and thinkers on innovative solutions; sharing local and international best practices, trends, and opportunities with banking executives in China; and providing executives with a window to BCG's global expertise in banking strategy.

3 Wealth Markets in China The Beginning of the Race for China s Rich Alain LeCouedic Cherry Leung Frankie Leung Holger Michaelis Tjun Tang October 2008 bcg.com

4 BCG Offices in Greater China Beijing The Boston Consulting Group (Beijing) 15/F, East Tower, Twin Towers, B-12 Jianguomenwai Avenue Chaoyang District Beijing, Phone: Fax: Hong Kong The Boston Consulting Group International, GmbH 34/F, Shell Tower Times Square, Causeway Bay Hong Kong Phone: Fax: Shanghai Boston Consulting (Shanghai) Company Ltd. 21/F, Central Plaza 227 Huangpi Bei Lu Shanghai, Phone: Fax: Taipei The Boston Consulting Group (Greater China) LLC 61/F, Taipei 101 Tower 7 Xin Yi Road, Sec. 5 Taipei, 110 Phone: Fax: The Boston Consulting Group, Inc All rights reserved. For information or permission to reprint, please contact BCG at: greaterchina.mkt@bcg.com

5 Contents BCG Financial Institutions in China Note to the Reader Foreword A Rapidly Growing Wealth Market The Emerging Private Banking Landscape in China Building a Successful Wealth Management Business 1. Design Value-creating Operating Model and Wealth Advisory Process 2. Set Up Well-structured Customer Prospecting and Acquisition. Provide a Compelling Product Offering. Create Programs to Recruit and Develop Talented Relationship Managers. Establish a Clear Brand Promise for Private Banking Operations. Build Out the Necessary IT Platform. Management of the Business-model Economics WEALTH MARKETS IN CHINA

6 BCG Financial Institutions in China The Boston Consulting Group (BCG) is pleased to present this report which constitutes the most recent in a series of publications produced on the dynamics of China s financial services industry, and the implications for local and overseas players. BCG is a general management consulting firm that is a global leader in business strategy and that has helped companies in every major industry and market achieve competitive advantage by developing and implementing winning strategies. Founded in 1963, the firm now operates 66 offices in 38 countries. BCG started operations in China about 25 years ago, with projects for multinational companies entering the country. Soon afterwards, BCG began serving Chinese enterprises and Government entities. In 1993, BCG opened its first office in China located in Shanghai well ahead of other major international management consulting firms. Financial Institutions has been a cornerstone of BCG s business portfolio in China for many years. BCG serves a select number of leading foreign multinational and domestic Chinese clients in the banking, insurance and securities sectors. In particular, the firm has assisted, and continues to advise, several large state- and privatelyowned banks in their wide-ranging reform and commercialization efforts. Cooperation with these and other clients typically start from enterprise-wide strategic themes such as understanding customer needs by segment, corporate and business strategy, and competitive differentiation. Subsequently, BCG teams, assisted by a global network of experts and advisers, have also been instrumental in helping our clients build deep professional capabilities in key areas such as capital strategy, risk management, information technology, marketing, and sales force effectiveness. Consequently, BCG China sees itself as a bridge between Chinese and foreign business cultures and practices. BCG leadership firmly believes that success in China requires a deep understanding of both business perspectives and the ability to meld them into a unique way of doing business in China.

7 Note to the Reader About the Authors Alain LeCouedic is a partner and managing director, Cherry Leung is a principal, and Frankie Leung is a partner and managing director; all three are in BCG s Hong Kong office. Holger Michaelis is a partner and managing director in the firm s Beijing office. Tjun Tang is a partner and managing director in the Hong Kong office of The Boston Consulting Group and the head of the firm s Financial Institutions practice area in Greater China. Acknowledgments Several leaders in BCG s Financial Institutions practice made important contributions to this year s Wealth Markets in China report. We would like to thank Victor Aerni, Ranu Dayal, Christian de Juniac, William Yin and Anna Zakrzewski for their invaluable advice and support. We would like to thank the members of the editorial and production teams, including Jade Cheng, Bonnie Fong, Sarah Jiang, Carolyn Jiang, Chen Haibin, Gu Li, Liang Yu and Zhan Hui. We also acknowledge the BCG consulting team that led the effort to produce this year s report: Wendy An, Valeria Bruno, Kelly Chen, Yvonne Liu, Minji Xu and Edison Zhang. For Further Contact As always, we welcome your feedback and invite you to discuss the findings with us. Alain LeCouedic Partner and Managing Director BCG Hong Kong lecouedic.alain@bcg.com Cherry Leung Principal BCG Hong Kong leung.cherry@bcg.com Frankie Leung Partner and Managing Director BCG Hong Kong leung.frankie@bcg.com Holger Michaelis Partner and Managing Director BCG Beijing michaelis.holger@bcg.com Tjun Tang Partner and Managing Director BCG Hong Kong tang.tjun@bcg.com WEALTH MARKETS IN CHINA

8 Foreword Against the backdrop of the start of the financial crisis in the US, the growth of global wealth measured as household financial assets (AuM) in 2007 was estimated at 4.9 percent, compared with 7.5 percent in However, Asia Pacific excluding Japan still recorded a strong AuM growth, by 13.6 percent in 2007, when measured in local currencies. In particular, China continued to have the highest percentage increase in AuM, at 27.8 percent when measured in local currency terms and 36.8 percent in USD terms, boosted by very strong economic growth, stellar stock market performance and the appreciation of the Renminbi in However, the full impact of the global financial crisis on Chinese wealth in 2008 has yet to be seen. China has a relatively young but fast growing wealth market. On the demand side, a group of first generation entrepreneurs has rapidly emerged in recent years from the nation s strong economic growth. These clients have limited experience of private banking, few of them have family offices but they control very significant personal assets. They tend to hold onshore assets and have traditionally liked to invest in real estate. Generally, they prefer to make investment decisions largely on their own, focusing either on high return but potentially higher risk short-term investments or on their high holdings of cash. Over time, particularly given the stock market turbulence of 2008, this could change significantly as clients begin to explore longer-term, disciplined asset allocation and diversification into both onshore and offshore markets. Consequently, demand for quality wealth management advisory services for both onshore and offshore offerings is likely to continue to grow in the future. and most had launched premium banking services (to customers with more than RMB 500,000 in AuM) and/ or private banking offerings for clients with more than RMB 10 million or USD 1 million in assets, most of the services were seen as merely an upgrade of normal retail offerings and not significantly different. In 2007, many of the Chinese banks launched or started to prepare formally for launching private banking operations. Many made significant commitments to strengthen their services to the high net worth clients through more distinctive product services and developing an attractive private banking proposition. At the same time, foreign banks were permitted to apply for local incorporation and granted full access to renminbi services for local customers in Major foreign banks have opened, or are in the process of opening, private banking offices in mainland China. The race for the wealth management business has officially begun. Foreign banks increasingly are turning their focus to tap opportunities with wealthy Chinese clients, utilizing both onshore and offshore private banking models. In this special supplement to our report A Wealth of Opportunities in Turbulent Times: Global Wealth 2008, we provide an update to the Chinese wealth management market, covering: A rapidly growing wealth market The emerging private banking landscape in China Building a successful wealth management business 2007 was a milestone year for banks operating in private banking in China. Although Chinese banks had been increasing their focus on the wealth management market

9 A Rapidly Growing Wealth Market The wealth market in China continued to grow rapidly in 2007, though the true effects of the financial crisis in 2008 have yet to be felt in the numbers. In 2007, China became the clear leader in the Asia Pacific excluding Japan in terms of AuM size, with Chinese households owning about US$3.2 trillion in financial wealth. Indeed, the Greater China region comprising of China, Hong Kong and Taiwan markets is now home to approximately 44% of the wealth in the Asia Pacific excluding Japan region. (See Exhibit 1.) Wealth in China has outgrown the global market significantly over the past five years, with growth rates at 25.0% CAGR (against a very healthy global average of 13.4% and an average of 17.4% across Asia Pacific excluding Japan). Between 2006 and 2007 alone, BCG research estimates Chinese wealth grew at a staggering 36.8%.This is despite Chinese households holding a very high percentage of their wealth in conservative investments (primarily cash at 63% of total financial assets), though this has been declining we will cover this in more detail later in the report. (See Exhibit 2.) WEALTH MARKETS IN CHINA

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11 The growth of Chinese wealth has been driven primarily by three sources of wealth creation: Savings: Financial wealth holdings have accelerated due to a recent surge in personal income as a result of strong economic growth (urban income per capita grew by 17% in 2007 according to government statistics) and a high savings rate of 56 percent compared with the rest of the world. AuM growth from savings accounted for 16 percentage points of the total. (See Exhibit 3.) Market performance: A surge of IPOs lifted the Shanghai Stock Exchange Index substantially during the year, leading the index to more than double, although market tumbled towards the end of This strong stock market performance contributed 12 percentage points of the total growth. The appreciation of renminbi: The continued revaluation of the Chinese currency was responsible for 9 percentage points of AuM growth in Continued growth in the Chinese market is expected to be supported by strong ongoing growth in the Chinese economy and liberalizing market conditions. BCG projects annual growth of household financial assets in China at approximately 20.5 percent over the next several years, resulting in AuM reaching an estimated US$8.1 trillion by Indeed, the Greater China region as a market is expected to reach a very sizeable US$11.6 trillion in AuM by (See Exhibit 4.) BCG estimates that the number of financial asset millionaire households in China grew to approximately 391,000 households in 2007, recording growth rates of 19% CAGR from 2002 to 2006 and an astounding growth rate of 34% from 2006 to In comparison, the number of millionaire households in Asia Pacific excluding Japan grew to around 1.3 million households in 2007, with 674,000 or 52% of these high net worth households located in the Greater China region. Consequently, China and Greater China have become increasingly important to international private banks as they seek growth outside of their home markets. WEALTH MARKETS IN CHINA

12 Wealth in China is highly concentrated. BCG research indicates that less than one percent of households in China hold more than 70 percent of the nation s personal wealth. Even amongst these households, the richest 0.1 percent of the nation (with financial assets of more than US$1 million) control approximately 45.2 percent of China s wealth. (See Exhibit 5.) Over time, we observe that the rich continue to get wealthier. Since 2002, households with AuM greater than US$5 million have steadily grown their share of the nation s wealth from 17.7 percent to account for 24.4 percent of total household wealth in Indeed, the wealth of each of these established wealthy households has grown rapidly and in addition, the numbers of established wealthy households have grown also from a mere 18,000 in 2002 to more than 64,000 in (See Exhibit 6.) More generally, over the past five years, we have seen a rapid rise in the number of financial asset millionaires in China to reach 391,000 growing at 22% CAGR, placing China fifth in the world in terms of millionaires, ahead of many of the world s developed countries and only behind the US, Japan, United Kingdom and Germany. Over the next five years, propelled by the continued rapid expansion of the Chinese economy, BCG estimates that the number of Chinese millionaires could reach 858,000 by (See Exhibit 7.) Much of the wealth in China has been created in the course of the rapid economic expansion of the past two decades. Different from those in the United States and Europe, the wealthy in China comprise of primarily entrepreneurs who have made their money from rapidly growing industries such as real estate, manufacturing, commodities and retail. (See Exhibit 8.) We observe two major groups of wealthy clients in China: established entrepreneurs who have generated substantial wealth through IPOs of their companies, and emerging entrepreneurs who are still building their businesses. In 2007, many IPOs and especially offshore listings helped the growth of wealth amongst China s 10

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15 entrepreneurs. US$23.6 billion and US$3.4 billion were raised from overseas and local listings in (See Exhibit 9.) A typical wealth portfolio in China is structured quite differently from those in mature markets. We see that portfolios of Chinese high net worth individuals (HNWIs) tend to be highly bi-polar. Firstly, they hold significant levels of cash to provide security though this has declined in recent years. This type of portfolio structure is common to other parts of Asia as well, where a significant part of the wealth in the rest of Asia Pacific excluding Japan is held by ethnic Chinese households with potentially similar attitudes to financial investments. (See Exhibit 10.) Secondly, wealthy customers in China also tend to be highly speculative and have a high tolerance for risk potentially a characteristic inherited from their entrepreneurial backgrounds. They often pursue higher-risk investments and in their private banking portfolios, they tend to buy significant volumes of higher risk financial market trades (For example, in direct equities, foreign currency structured trades). China recorded a soaring equities market in 2007, boosted by strong economic and IPO activities. Although the market has declined in the last quarter of 2007 and in 2008 as the financial crisis intensified, trading volumes of stocks and funds at securities firms grew very substantially in 2007 over prior years; stock trading grew five fold and trading in funds more than quadrupled from 2006 to Warrants are also gaining popularity after their introduction into the market in August Although warrants trading volumes in 2007 were only about 17% of stocks, this was already three times as large as in 2006; whilst trading value of more conservative but lower return bonds grew by 23% in from 2006 to (See Exhibit 11.) WEALTH MARKETS IN CHINA 13

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17 The Emerging Private Banking Landscape in China China s booming economy has created very rapid growth of wealth in recent years and promises strong potential for the future. Despite the many challenges to the global economy from the global financial crisis, most economists still believe that China s GDP will continue to grow in the range of approximately 8 to 10 percent in 2008 and Commercial banks that have built businesses in the wealth management area have benefited from growth of the wealth market. In 2007, net fee income as percentage of banking business of major commercial banks reported a healthy growth of between ~50% to ~100%. However, current level of net fee income by local banking players still significantly lags behind major banks in developed markets. There is tremendous room for Chinese players to raise wealth management fee income to help support the growth of net fee income in the future. Up until only recently, immature market conditions in China posed a significant hurdle for the growth of wealth management business. Foreign players have been constrained by strict regulations; only limited offerings could be offered to the onshore market. Many international banks have used traditional offshore private banking centers, where regulatory constraints are significantly easier, to serve Chinese wealth held outside of China. Local players, although they facing less restriction from the government, have product offerings that are principally constrained to local onshore investments. In the past, the banks that were authorized to offer Qualified Domestic Institutional Investor (QDII) funds were not able to offer more attractive investment opportunities to investors in China. However, as investors are now allowed to invest in equities through QDII funds beyond just fixed income notes, investments for international markets are expected to gradually grow over time. However, the game has recently changed when the Chinese government allowed foreign banks to be locally incorporated and to provide local currency retail business and wealth management services to local Chinese individuals. Although advantages for local banks still exist, foreign banks that are locally incorporated also offer their own strengths in wealth management (given their prior experience, institutional knowledge, breadth of products, complementary offshore and onshore offerings, brand and prestige) and are expected to pursue the private banking business as this is more accessible to them given their limited retail branch network. In recent years, many Chinese banks have launched and developed their onshore private banking operations. Typically, these are traditional onshore banking operations with a focus on providing wealth management services to HNWI clients with enhanced service levels and differentiated branding from premium banking services. Product offerings have been limited to enhanced retail-like products and services. However, given the rapidly increasing competition and growing demand of enhanced wealth management services, Chinese banks have accelerated their plans to build their private banking businesses. Since 2007, many Chinese banks and foreign banks have announced the establishment of private banking operations in China. (See Exhibit 12.) WEALTH MARKETS IN CHINA 15

18 The opportunity for foreign banks to enter and compete with local banks will mean enhanced competition for Chinese high net worth clients. Wealth management is a market that foreign banks can access more easily than the mass retail market: high-net-worth customers can be served from just a few outlets in any city; a selected few and highly attractive customers can be targeted in focused districts; capital requirements and investments are lower; existing know-how, systems and experience can be leveraged against the local competition. We are seeing onshore foreign banks begin to gain traction with HNWIs. Although their presence in China is still small at the moment, many are actively rolling out wealth management products and a rapid expansion of their market presence is expected. (See Exhibit 13.) However, local Chinese commercial banks also have their own competitive advantages. Firstly, they do have strong, existing customer franchises that are rich in high net worth customers, although they will have to work hard to overcome organizational constraints and tap these highly valued clients. Secondly, Chinese banks have an extensive service network that could enhance accessibility and convenience for customers. Thirdly, we expect Chinese banks to leverage their deeper understanding of the Chinese market and customer needs to offer products and services that will cater specifically for Chinese HNWIs demands e.g., specialized investment products, trust set-up and management services. Finally, Chinese banks have strong access to talent and many relationship managers that have strong connections with local customers they will be able to train and develop this talent into private bankers was a milestone year for the start of private banking in China. Going forward, we observe three key challenges that the foreign and Chinese banks will face in order to win: 16

19 Migrating from a product-driven servicing model Expanding product offerings Tackling organization and human resources issues Migrating from a Product-driven Servicing Model. Chinese HNWIs generally do not like to disclose their wealth, either for fear of investigation over the source of their wealth, or for concerns over attracting public attention to their wealth. Consequently, in selecting their private banks, they can be quite careful about approaches to banking security and client privacy, from how they are introduced to their relationship managers to the reputation of their private bank, from the domicile of their private banking accounts to how they access their accounts. Many Chinese HNWIs have yet to experience entrusting their wealth to a third party to manage. As we outlined above, many HNWI clients tend to be highly participative in the management of their wealth, yet another indicator of the continued need to build trust. We also observe that many Chinese HNWIs are demanding in their target returns yet can also demand guarantees on their principal. Given many Chinese HNWIs tend to be first generation entrepreneurs who have built their own companies from scratch, they are used to being in control and making decisions. They want to be involved in the investment process. Many have a strong belief that they are personally capable of generating good investment returns, and enjoy the experience of evaluating and making speculative investments. Given these characteristics, wealth managers need to consider how to configure their traditional business models to better serve the rapidly growing segment of wealthy Chinese entrepreneurs, which require differ- WEALTH MARKETS IN CHINA 17

20 ent client advisory approaches, service models, product offerings, organization set-up and economic models. However, the sales approach of Chinese local banks has been traditionally product-driven and relationship managers may not yet have been able to project a professional wealth advisor image to the HNWIs. Wealth managers in early stage wealth markets are often product-driven, with a narrow bundled product set offering from the banks who charge high upfront commissions. (See Exhibit 14.) As the markets gain maturity, they gradually move towards a financial consulting model. Markets like Korea could be considered at this stage. The banks provide a broader product choice; selling effort is also based more on needs rather than being driven by sales targets. There is typically a mix of upfront and renewal commissions. As markets mature even further (such as in the UK and US), banks tend to provide a more extensive product range for clients, relationship managers tend to be more experienced and are able to provide quality financial advice, product offering by segment. Banks can provide more flexible pricing and commissions, and advanced platforms for clients and relationship managers to access account information easily, gather timely information and perform account administration. Expanding Product Offerings. Typical products in China tend to be quite different from the traditional European private banking discretionary offerings. As an example, reflecting on the highly bi-polar nature of asset allocation of many Chinese wealthy clients, both capital markets trades (such as FX derivatives) and structured products are highly prevalent in the offshore portfolios of Chinese HNWIs. On the one hand, capital markets trades satisfy their desire to be participative in their investment approach; on the other hand, structured products enable private banks to target and offer alternatives to the large allocations to cash holdings. (See Exhibit 15.) With their participative investment approach, many Chi- 18

21 nese clients like their RMs to bring interesting trading ideas to them and to participate in the decision-making of what to invest in. In the Chinese onshore wealth market, regulations limit the scope of offerings, making it difficult for wealth managers to differentiate their onshore offerings. In addition, China has underdeveloped domestic capital markets. Its bond market is still emerging, and other basic financial instruments, such as futures, have yet to be introduced. Consequently, product offerings are quite limited. Further, many HNWIs in China prefer to make direct investments in real estate. Entrepreneurs, for example, might buy entire apartment buildings, sometimes keeping them empty until they find an opportunity to sell them. Tackling Organization and Human Resources Issues. One of the biggest challenges for most Chinese banks in setting up private banking operations remains an organizational issue. Two major issues are prominent: firstly, organization of the business units; secondly, talent recruitment and management. Firstly, Chinese banks tend to be organized around geographic (and to a lesser extent product) business units and decisions are often made with limited coordination with other parts of the organization. Wealth management is a highly client-oriented industry, where clients expect specialized and high priority servicing and customized offerings. Whilst a bank may set up a dedicated private banking business unit to handle high net worth clients, it is often extremely challenging to encourage geographic branches which control clients to either transfer their best clients or provide the much-needed support for products outside the mainstream offerings. Secondly, almost every bank, Chinese or foreign, is seeking new talent to identify and service customers. WEALTH MARKETS IN CHINA 19

22 Banks ability to recruit sufficient professional private bank relationship managers to offer superior advisory services remains a significant issue. As the wealth management market is very new, it is very difficult to recruit experienced relationship managers in the market. To address the talent management issue, banks need to build a strong and effective training system to develop newly hired relationship managers (RMs). In addition, we observe that creating a robust wealth advisory process to use with clients can help immensely to guide and scale the private banking business. Such a wealth advisory process could be given to all relationship managers and client-facing staff to follow, and enables the bank to industrialize and assure quality in client interactions, especially when experienced RMs are in short supply. 20

23 Building a Successful Wealth Management Business China s wealth management is immature but offers very substantial potential, from both the underlying growth in the financial assets of Chinese households and the rapidly increasing penetration of private banking services into this market. We observe seven key building blocks as being critical to successfully differentiate against competitors, and to win and better serve clients in the China market. (See Exhibit 16.) 1. Design value-creating operating model and wealth advisory process 2. Set up well-structured customer prospecting and acquisition 3. Provide a compelling product offering 4. Create programs to recruit and develop talented relationship managers 5. Establish a clear brand promise for PB operations 6. Build out the necessary IT platform 7. Ensure active management of the business-model economics 1. Design Value-creating Operating Model and Wealth Advisory Process Many Chinese wealthy clients have limited experience with real private banking. Today, most are served by retail priority banking services and are not aware of the differences with private banking services. Many have expressed dissatisfaction with the product push approach by WEALTH MARKETS IN CHINA 21

24 retail banks wealth management offerings and this has made it more challenging for private bankers to earn their trust. To stand out from competitors and win the trust of their wealthy clients, banks must establish an effective client servicing model. To do this, RMs should focus more on client experience rather than pure profit-driven product push; and banks should develop a clear and industrialized wealth advisory process that can be followed through by RMs, from understanding client needs, to proposing, agreeing, reviewing, and emphasizing client needs rather than meeting the bank s or the RM s revenue and profitability targets. Appropriate client loading by client segment (e.g., by wealth band, industry/hnwi type), advisory and expertise consulting is also needed. (See Exhibit 17.) Clients investment characteristics and needs differ widely across three main investor types: Self-directors, Participators and Delegators. Self-directors typically manage their assets by themselves with limited input from private banks; Participators rely on investment advice provided by their private banks and make the final decision themselves; Delegators rely heavily on banks and asset managers to manage their assets, often on a discretionary or mandate basis. In China, we observe that "Participators" are the most prominent client segment as described earlier, Chinese HNWIs are typically the first generation entrepreneurs who are interested in managing their own wealth, yet require the advice of a professional institution. Depending on the target client segments, private banks will need to align their operating models to work with the needs of each segment. (See Exhibits 18 and 19.) 2. Set Up Well-structured Customer Prospecting and Acquisition Typically, Chinese banks do not provide systematic customer prospecting and acquisition support to their private banking RMs, such as through targeted marketing events to enable them to effectively access and build relationships with target clients. RMs mainly rely on their personal network and prior client books which may not 22

25 be sustainable for long term relationship management. HNWIs tend to be attracted to exclusive and prestigious events: for example, golf rounds with celebrities and famous CEOs; organized one week children s summer camp in a desirable foreign location, Ferrari rides and Formula 1 race track days; premium watch and jewellery exhibitions and promotions. In addition to events targeting to bring in new networks of relationships, private banks need to launch frequent but relatively lower cost events on an on-going basis to maintain client relationships and promote dialogue with existing clients e.g., wealth information seminars, luncheons and dinners. As most Chinese private banking operations are established from their parent commercial banking business, there are tremendous opportunities for them to obtain referrals from other business units within the bank. The private banking referral system represents one of the most crucial areas to source new wealthy clients, through better leveraging the banks client relationships across business units. (See Exhibit 20.) However, most banks have not yet established a comprehensive and effective referral system in particular, as highlighted earlier, it is very challenging to encourage retail branches to refer and transfer their best clients. In addition, current referral systems in leading universal banks face several challenges: a lack of awareness in the referring unit, limited communication of the referral system, lack of transparency on referral successes, insufficient management attention and personal relationships between employees. Nonetheless, formal referral incentive systems can help to encourage business units with potential target wealthy client relationships and successful case examples have been observed in other markets. (See Exhibit 21.) Indeed, enabling personal relationships to develop internally within the bank, and expressing and demonstrating top management commitment can often be as important as the referral incentives themselves in galvanizing the organization to work together. 3. Provide a Compelling Product Offering In the China market today, many players offer typically undifferentiated products with similar pricing to the retail segment. Assembling a broader range of products with differentiated pricing that appeal to wealthy clients is important to attract and acquire HNWI clients. In addition, ensuring the private bank has access to some differentiated and unique products is helpful to developing an attractive WEALTH MARKETS IN CHINA 23

26 client proposition. For example, beyond traditional products (e.g., equities, managed funds, structured products, QDII), private banks could develop attractive private-equity-type investment products in the China market that are highly favored by HNWI clients. Typical private banking product offerings are broadening and in parallel, clients are becoming increasingly demanding as they request new services such as entrepreneurial wealth management, trust structures and family offices. Demand for innovative funds such as private equity, niche investment theme equity funds and hedge funds are also on the rise. At the same time, clients are also looking for life-style services such as art investment and real estate services from their wealth managers. (See Exhibit 22.) 4. Create Programs to Recruit and Develop Talented Relationship Managers In an immature wealth market like China, it is very challenging to recruit sufficient talented private bankers as the pool of experienced candidates is limited; many potential recruits will come from different backgrounds e.g., priority retail banking, corporate banking, high end real estate agents, who may not possess the full range private banking skill sets needed. Clearly, this is a challenging issue to resolve and banks will need to expand the team step-wise, providing time to train new private bankers and engage new recruits to merge with the institution s business culture. For example: recruiting strategies need to be thought through carefully to attract the best talent; on-boarding and training programs set in place to bring new recruits up-to-speed quickly with the bank s wealth advisory process, relationship and sales initiatives, and private banking products; career development and performance management to carefully nurture and develop the private banker. One initiative that has proven particularly effective in rapidly raising productivity of private bankers and to enable the scaling up of the private banking organization, is the use of a teaming approach for client relationships. For example, a senior RM takes the lead on new client recruit- 24

27 ment and managing the highest value relationships, whilst other more junior RMs in the team share responsibility for serving all clients. New and less experienced RMs can get up the learning curve in a shorter time with guidance from the senior RMs and senior RMs can provide overall operation direction for the team. Small teams mean that senior RM is also visible to all of the team s clients. Overall, both the senior and junior RMs are incentivised based on both the team s and the individual s performance. (See Exhibit 23.) We have observed RM productivity double when moving from individual RMs operating on their own, to teams of 4 or more RMs with a senior RM leading the team. 5. Establish a Clear Brand Promise for Private Banking Operations There are a number of branding and marketing issues for private bankers in China. Firstly, wealthy Chinese are not too aware of wealth management services: many tend to ignore the marketing advertisements given the plethora of communications; others can be somewhat cynical about offers of advice from domestic banks, especially as much of this in the past has tended to be product-led. Secondly, the brands positioning of Chinese banks, which usually have operations in the retail banking, tend to be relatively undifferentiated. Thirdly, the private banking business tends to be an aspirational business, supported by a unique brand position that draws in clients. Consequently, an emerging private banking business needs to establish a strong private banking brand distinctive from the institution s own retail operations and differentiated from the competitive offering of its peers. However, branding also needs to be more than just an image identity and relate consistently to both the marketing experience and the client experience. Many banks struggle to deliver on the promise created by their brand which leads to declines in client confidence and satisfaction. (See Exhibit 24.) 6. Build Out the Necessary IT Platform Today, many Chinese banks customer information management systems could be considered inadequate for a WEALTH MARKETS IN CHINA 25

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29 holistic wealth management offering. Typically, these systems need to be able to capture a broad range of relevant customer attributes, far beyond merely product-related data; to enable the analysis of customer behavior and preferences; and to identify wealthy customers and place them into differentiated customer support segments. Further, platforms to support wealthy customers must be able to provide a holistic picture of the customer s entire relationship with the bank across all products and channels. These systems need to be complemented by integrated sales, service and self-service delivery platforms that allow convenient and efficient access by RMs and clients alike. To build out the required platform infrastructure, banks could acquire and integrate technology vendors solutions to their systems, ranging from providing front to back, front to middle, or just the front solution only. (See Exhibit 25.) 7. Management of the Business-model Economics Finally, in any business, and even more so in wealth management, superior management of the economics is critical. Additional products and services always come at a cost. Although it is much more expensive to serve wealthy customers, banks can reap the rewards of much larger and more complex relationships, all of which should translate to higher bottom-line profitability but only if the economics are carefully managed. In China, this is vitally important as most banks are used to serving only mass market retail customers and expect the economics to be similar. Talented and experienced relationship managers demand higher compensation. Priority and higher-service banking require new processes and additional overhead. More complex products require more sophisticated capabilities and investments. Integrated views of customer relationships require investments in new or modified systems. And so on. Serving customers with an inappropriate business model for that segment almost certainly will be unsuccessful and/or unprofitable, as either the cost of providing the higher service level will not be fully recouped in the revenues that can be generated. Or, customers with higher levels of wealth will feel under-served and move to competitors. WEALTH MARKETS IN CHINA 27

30 Over the past five years, BCG has benchmarked the wealth management businesses of approximately 100 financial institutions across the world. We have observed that all regions and all types of business models can be profitable, although wide variations exist across competitors. (See Exhibit 26.) Good management of the economics is critical. Some key success factors include: Ensuring careful customer segmentation and tailoring the value propositions and business models to these segments Maintaining discipline on how you serve customers, including not allowing accounts smaller than your minimum balances and being vigilant on prices Controlling costs tightly almost all top performers have low-cost manufacturing and operations and can reinvest the savings in driving sales and marketing In summary, it is possible to make money with different business models, value propositions, and targeted customer segments. The key is to ensure that one is clear about which segments to pursue, what the unique competitive advantages might be, and how to align all aspects of the business with the bank s strategic goals. T he rising wealth in China is creating many opportunities for Chinese and international banks to prosper in serving high net worth clients. The next several years will certainly be an exciting period. Whether institutions will succeed or not depends on many factors, but most importantly, the critical driver will be whether they develop the right business models with the right economics to serve their target segments. There are many issues faced by wealth managers, but the banks who can overcome the obstacles today will be able to build the platform for the future to succeed in this very important and strategic market. Being disciplined in managing RMs, evaluating their performances regularly, and paying for real revenues delivered 28

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32 BCG Greater China Financial Institutions Leadership Douglas Beal Hong Kong Tel: Alain LeCouedic Hong Kong Tel: Frankie Leung Hong Kong Tel : leung.frankie@bcg.com Holger Michaelis Beijing Tel : michaelis.holger@bcg.com Tjun Tang Hong Kong Tel: tang.tjun@bcg.com William Yin Hong Kong Tel: yin.william@bcg.com

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