The Asia-Pacific region is emerging as the leading destination for wealth management and private banking globally, driven by the increasing numbers of high-net-worth individuals (HNWI) and their need for financial advice to help plan family wealth and succession. The younger generation in particular are looking for technologically advanced and highly customized banking and wealth management solutions.
The relaxed, pro-investment regulatory environments and well-developed infrastructure in Singapore and Hong Kong have long been attracting a large amount of capital from around the world. However, there are now significant growth opportunities in the rapidly growing affluent and middle-class populations of mainland China and India. It is anticipated that 54% of Hong Kong's wealth management AUM (assets under management) will come from mainland China by 2025.
Mainland China is the largest market in Asia-Pacific with 59% internet penetration and the highest mobile banking adoption at 78%, initiatives like Wealth Connect and online-only banks, strong growth in wealth management platforms, and a growing upper middle-class keen on robo-advisory.
Many of the large global banks already have a strong presence in Asia-Pacific and have recently begun placing more focus on wealth management and private banking, attracting HNWIs with their global capabilities and access to international markets and products.
Hong Kong, in particular, has grown in stature as a wealth management centre, owing to a large concentration of ultra-HNWIs driving the demand for digital financial services. Over the next five years, AUM in the city is expected to grow at 5% to 10%, while the continuing liberalization of mainland China's financial services sector is also expected to allow Hong Kong to further develop as an international wealth and asset management hub in the Greater Bay Area.
Family offices are an important segment of the wealth management industry, and their presence is often reflective of a market's overall capabilities and robustness. With more wealth being transferred to the next generation via family succession, and new wealth being created by young entrepreneurs using technology, this client segment is likely to be another key growth driver for Hong Kong's wealth management industry.
Hong Kong has one of the world's most sophisticated IT infrastructures with strong internet and smartphone penetration. Leading banks in Hong Kong have spearheaded a wave of technological enhancements over the past two years, driven by rapid wealthtech growth, high demand for offshore wealth management, and good government support for virtual banking, cross-border collaboration and new payment mechanisms.
Attracting more family offices is a top priority, with the Financial Services Development Council publishing a white paper in July 2020 that sets out a number of recommendations to create a more conducive regulatory environment for family offices.
Meanwhile, in September the Securities and Futures Commission provided further guidance on the assessment of the corporate structure and investment process of corporate professional investors, particularly the investment vehicles owned by family trusts or family offices that engage investment professionals to manage their investments.
The updated guidance will allow more single-family offices run by experienced professionals to qualify as corporate professional investors and be eligible for certain exemptions related to sales suitability, client agreements and disclosures, which should help to further promote the growth of Hong Kong as a family office hub.
The younger generation typically has different investment strategies and preferences to other client segments. For example, they have a higher interest in environmental, social and governance (ESG) issues, impact investing, and cryptocurrency. Industry executives are targeting younger clients with private wealth management professionals of a similar age and, critically, a digital mindset.
The focus on the transfer of wealth to the younger generation also presents an opportunity for Hong Kong to further develop its family office capabilities by learning from other experienced markets. For example, the European and US markets have clients that have transferred wealth across seven or eight generations and, therefore, may have more diverse investment strategies and demand more mature and sophisticated solutions.
In contrast, the relatively recent wave of wealth creation across Asia means that family wealth has mostly been passed down only one or two generations. The continued development of capabilities, such as wealth, estate and succession planning services, will leave Hong Kong well placed to service mature European family offices exploring investment opportunities in mainland China and the broader region.
Hong Kong’s relatively relaxed regulatory environment also makes it an attractive hub to establish trusts and family offices. There are no legal restrictions on the transfer of Hong Kong assets to trust entities, except for the transfer of certain assets, such as shares in Hong Kong companies and immovable property that are subject to Hong Kong stamp duty.
Supported by a deep pool of liquidity and robust financial infrastructure, Hong Kong continues to attract the bulk of investors, including family offices, bank subsidiaries and corporations to establish their private offshore trusts or companies in the city.
As wealth transference becomes a priority for the HNWIs in Asia-Pacific, banks must focus on augmenting their succession planning services to HNW families, accelerating digital adoption, partnering with more fintechs for advanced solutions, and strengthening the digital capabilities of their advisers.
In parallel, they must accelerate long-delayed digital and middle- and back-office transformation programmes to increase process efficiencies and drive down their operating costs. Compared with born-digital financial services companies, traditional banks with wealth management businesses have high-cost income rations that affect their “cost to serve” customers – those who are increasingly more sensitive to fees charged.
As the rest of Asia sees wealth increase among the mass affluent and further up the customer continuum, what is tried and tested in Hong Kong can be transposed to other regional markets.
Larry Campbell is a partner and the head of financial services strategy at KPMG Asia-Pacific.