Innovating in Asia Wealth Management A local perspective Chris Ryan
Asia Pacific markets can be divided into three size/maturity categories; Large, mature Hong Kong, Singapore, Australia, Japan. Large, developing China, Korea, Taiwan, India. Small, developing Thailand, Malaysia, Indonesia, Philippines. 2
Asian markets (ex-japan) offer high potential growth rates, limited competition and attractive margins compared with many other markets. Assets under management in Asia ex-japan have grown by more than 30%per annum over the last 8 years (source; Cerulli). Total AuM ex-japan (wholesale, retail and institutional) is now over USD3.2 trillion. Japanese market, although slow-growing, is USD1.6 trillion. Wholesale margins are 40% higher on average across the region compared with the Australian, UK/European and US markets (source: Cerulli) Scale is building and markets formerly closed to offshore/foreign funds are opening to both. China, Thailand, Philippines, Malaysia have all opened to foreign investments in the last 3 years. Vietnam, Indonesia are still very limited, officially. All other markets are already open. Pension systems developing in many markets across the region with particularly attractive opportunities in Korea and China. Success in both will require a stronger local product range and, potentially, a change of business structure to be successful. Wealth management is emerging quickly across the region, with laws permitting banks, insurers and fund companies to participate in this market enacted in all major markets. 3
Hong Kong Large mature Pros Cons The future? Yes/no Wealthypopulation, universal access to investments, mainland China money, ease of doing business Singapore Magnet for regional HNW assets, large and growing private banking segment, best regulation in Asia Pacific, multiple tax treaties Australia Large savings pool, with equity bias. Mandated savings at high levels, fragmented market, fees still attractive, mature REIT market, pension market brings new opportunities Smallishpopulation, vast array of investment alternatives for investors,banks declining interest in distributing funds compared with other investments, confused regulatory environment, competitive but no bias towards locals Small population, small domestic retail market, concentrated and opaque institutional market Moderate-sized population but growing,difficult for foreigners, heavily intermediated although abating recently Greater flows of mainlandchina money, rapid growth in HNW segment, entry of mainland China fund companies, Hong Kong economic resilience Think Switzerland of Asia. Increasing financial influencein the region, particularly SEA. Some interest from mainland China Steady growth, ageing boutiques looking for an exit, gradual opening of access to foreign funds, increasing interest in Asia, landboundreit managers (with a couple of exceptions) 4
China Korea Large developing Pros Cons The future? Yes/ no Very largepopulation, rapidly increasing savings pool, equity investment culture, progressive regulatory relaxation, mandated fees at high levels Entrydifficult without a JV and JVs unworkable (usually ), distribution dominated by large banks, investment talent getting expensive, concentrated institutional market, need strong connections Expected regulatory changes will open up market, perhaps faster than most expect, development of QDII market is restarting and will continue, product level JVs attractive, definite REIT opportunities, more institutions will emerge, including insurers Largepopulation, local Complexregulatory environment, Gradually increasing personal wealth, product mix moving distribution costs high, fees strong interest in regional investments, from yield to equity, modest but not moving down, developing pension asset base plus some overseas local content rules can restrict equity. Large, active outsourcing, no overseas institutional investors, investments for pension funds development of universal pensions Taiwan Savvyinvestors, fragmented distribution system, good net fee levels, low costs, approachable regulators, decent AuM in retail market Competitive,fragmented distribution (yes, again), product turnover, availability of outsource partners poor, Luxembourg AML regulations, government tax changes aimed at some offshore investors Market will consolidate, need to be in this wave. Taiwan has regional ambitions and will trade local access for regional access, improving relations with mainlandchina, 5
Small developing Thailand Malaysia Pros Cons The future? Yes/no Large population, low costs, bigger retail AuMthan Singapore,access to foreign markets improving rapidly, banking distribution diversifying suppliers, low competition Moderatesized population, increasing wealth, banking distribution system quality, national pensions system, investor confidence growing, high margins Philippines Large population, low costs, risingaum, increasing access to international markets, banking distribution improving, surprisingly large institutional segment Feeson money market and bond funds low, institutional market very concentrated, slow regulator, political issues, King s health Local content rules, slow regulator, talent leakage to Singapore, small institutional market (except EPF) Product mix still in favourof bond funds, regulator inconsistency, talent availability Developingwealth management market, large banks getting stronger, increased foreign participation, either acquisition of existing player or product-level partnership with large existing player Shariabusiness opportunities, developing wealth management market, growing preference for equity, REITsand overseas investments Margins on equity funds healthy, overseas funds, increasingly diversification of bank distributors 6
Japan India Why leave out some markets? Pros Cons The future? Yes/no Large savings base, large population, large distributors Very large population, gradually opening markets, reasonable AuM. Indonesia Large population, some HNW opportunities. Low net fee levels,highest costs in Asia, institutional arbitrage of retail funds, NHW market concentrated with securities companies, sluggish markets, investors and distributors. Foreigners leaving. Product mix dominated by very low fee money market and bond funds, mostly used by corporates as a tax arbitrage. Product innovation very difficult due to limited securities and tight regulation. Distributors also manufacturers. Unstable regulatory environment, low fees on local money market and bond funds, equity funds dominated by locals but small AuM. Ageing population means increasing appetite for yield rather than equity. Niche opportunities in REITS and private equity. Significant opportunity to sell offshore funds/strategies through securities companies (e.g. Nomura, Diawa) Regulatory relaxation has been much slower than other markets. If regulationchanges permit better access to foreign investments, opportunities for partnerships with strong locals. Some HNW distribution opportunities through international banks (e.g.citi, HSBC) but regulations unclear. 7
Multiple locations Local expertise is critical Time zones and communication issues Multiple regulations Different business practices and settlement processes Licensing and reporting differences between markets Multiple languages Centralisation where possible but be aware of cultural issues Local reporting must be done in local languages 8
State clearly the level of ambition make it live through action at all levels Ambition Control Build a creative culture that rewards new ideas and focuses on solutions Creativity Alignment Align the motivation of shareholders, clients, employees and management. Establish control mechanisms at all levels measure, communicate and escalate 9
Market events are forcing wealth management firms to address key strategic questions Key Questions Issues for Consideration How will investors regain trust with their wealth managers? Does the cost structure need to be realigned? Where will growth come from? How and when will the industry rebound? Cost Efficiency Risk Management Client Profitability What s the future shape of the industry and operating models? Distribution Strategy Strategic Partnerships Client-specific strategy and approach will depend upon firm level priorities and business model 10
Approach is based on an understanding of sources and uses of information for key activities Front-Office Middle-Office Back-Office TBOR IBOR ABOR SBOR Trading Book of Record Investment Book of Record Accounting Book of Record Settlement Book of Record Outsourcing Trend Retained In-house Increasing trend towards outsourcing Generally always outsourced Value Features Attributes Focus Portfolio Management Investment Accounting Fund Accounting Safekeeping Frequency Intraday P&L Daily P&L T + 1 T + 3 Data Intraday Positions Start-of-Day Positions & Cash NAV Positions & Cash Measurement Trading Gain & Loss GIPS Compliant Manager Performance Usage Trading Investment Accounting ( Shadow ) Key Benefits Single Pricing Consolidated Reporting Data Integrity Investor Reporting NAV Performance Funds Books and Records Fact Sheets Robust Control Infrastructure Process Efficiency Lower Total Cost of Ownership (TCO) N/R Custody Books and Records Asset Servicing 11
Service solutions delivered in multiple formats including IT and business process outsourcing HIGH Differentiating Value to Firm LOW Oversight tools to monitor service providers 1 Asset Accumulation Asset Management Trade Processing Oversight and Service Level Monitoring Operations Middle-Office Investment Operations Support Vendor Management 2 Investment Operations wrapper to provide multiproduct access Data Warehouse Sales & Marketing Distribution Research Portfolio Management Order Management Confirmation & Matching Accounting Reconciliation Custody Fund Services Client Services 3 Information Glue Client Service Trading Reporting Performance Investor Reporting Compliance Security Setup Reference Data Management Shareholder Servicing Administration 4 Services provided in ITO or BPO format by Citi or other provider Asset Manager Core Info. Tech Outsourcing Business Proc. Outsourcing 5 Integrated Service Model 12
Creating value through enabling growth and reducing total cost of ownership (TCO) Enabling Growth (Indexed) Disguised Client Example Optimizing Costs (Indexed) Baseline Revenue 100 Baseline Cost 100 New Products 3 Rationalized Standard Platforms 5-7 Labor Arbitrage 10-12 New Markets 5 Increased Distribution 7 Cost Avoidance (Unmet Need) Redundant Capabilities 5-7 10-15 Target Revenues 115 Target Cost Structure 60-70 Notes: Analysis based on analysis of before and after financials of a large asset manager. Revenue growth is based on net new assets Cost model is based on fully loaded FTE, Tech and overhead expense 13
Entry into Asian markets can be complex. Greenfields in some locations, acquisition in another and joint ventures in another. Regulations are diverse but reasonable in most locations. Before taking on any market, look at the fee pool, cost structure, accessibility and ease of operation The largest markets by demography are not always the most attractive. Margin and accessibility is critical. You can reduce the timeframes and increase you chance of success by outsourcing as much as is practical. Help the business to focus on the investment processes, the clients and distributors. The critical issue under this business model will be vendor management. Ensure that you have the right people and enough of them to avoid disruption to the business. 14
Designing the operational model around the opportunities will deliver faster, better quality results. Focusing on variable costs will reduce the risk of establishing new ventures. Markets in Asia are expanding rapidly and as margins fall in Australasia, firms need to look at Asian opportunities whilst the European and US firms sort out their difficulties of the past couple of years. 15