The Hong Kong wealth management industry is currently dominated by advisory mandates but demand for discretionary mandates will surge in coming years, according to research by GlobalData. Saloni Sardana explores the outlook for the lucrative market.
Because most wealth in Hong Kong is sourced through a combination of earned income and entrepreneurship, it is unsurprising that advisory mandates are currently the most popular form of investment management.
However, GlobalData’s annual Global Wealth Managers survey shows one third of wealth is invested in discretionary mandates, an all time high for the Hong Kong wealth market.
A number of European and Swiss brands renowned for their discretionary portfolio advice have recently managed to attract Asian HNW wealth.
Lack of time is the key driver for this expected growth. Several HNW clients in Hong Kong are busy executives or owners of multinational firms making them short of time.
As many of these clients are due to retire shortly, there is a greater desire to dedicate their time to leisure and obtain professional advice to manage their wealth.
But GlobalData’s Wealth in Hong Kong: HNW Investors 2018 report stresses that asset management needs to also be an integral part of the discretionary service offering.
While wealth management is the biggest reason why wealthy clients approach investment managers, demand for planning and advice services is also projected to rise.
Tax, retirement and holistic financial planning are closely correlated to clients’ wealth and hence wealth managers should provide a “bundled discretionary service” made up of both wealth and asset management, GlobalData says.
Hong Kong wealth facts at a glance:
- Total assets in Hong Kong’s wealth management industry reached HK24.27trn ($3.12trn) by the end of 2017 according to the Hong Kong Securities & Futures Commission (SFC).
- Some 42.8% of local HNW population are expatriates
- Almost one third (31%) of HNW wealth is held in bonds, making it the most popular asset class followed by equity
- The introduction of the Common Reporting Standards (CRS) means there is an increased demand for tax advisory services.
Even though Hong Kong is a prominent offshore centre, with close economic ties to mainland China, a large number of HNW investors hold a lot of their liquid assets abroad.
Hong Kong has served as gateway for investment into Asia and for foreigners. Similarly, it also connects investors in Hong Kong and China to sophisticated investment opportunities outside of the country.
The US and UK are considered key booking centres for offshore investors based in Hong Kong. China is typically not a popular booking centre for these clients, as Hong Kong’s HNW investors can easily invest in Chinese public companies through exchanges such as the Shanghai-Hong Kong Stock Connect.
Most offshore investments are made in equity, meanwhile bonds dominate domestic portfolios. This means HNW investors are looking abroad for higher returns, and investing locally for safer investments.
To succeed in Hong Kong wealth managers should:
Target female investors- The HNW female segment constitutes 22,000 females and is expected to grow.
Target expats- Several HNW individuals in Hong Kong are expats and wealth managers should on-board and serve these lucrative clients effectively.
Offer a package service- Demand is not only strong for advisory and discretionary mandates but also for other vital other services such as tax, pensions and general financial planning.
Focus on bond and alternative investments- A growing desire to invest in opportunities based on the principles of socially, responsible investing means wealth managers should focus on offering alternative investment opportunities.
Common reporting standards
As with many offshore centres, implementation of the CRS regulation could be an issue for Hong Kong.
Hong Kong was among many jurisdictions to adopt the Organisation of Economic Co-operation & Development (OECD)’s CRS regulation in 2017, with 2018 being the first year of automatic exchange of information.
The combination of Hong Kong being one of the world’s biggest offshore centres, coupled with implementation of CRS has increased the demand for tax advice.
Wealth managers therefore should make tax advice a key part of their discretionary offering.
CRS also matters for Hong Kong’s wealth industry because of the number of expats residing in Hong Kong.
Roughly 16% of the expats residing in Hong Kong have been resident in the country for a maximum of two years. This implies these newer expats may have reporting obligations in their home markets.
“Understanding what and where assets need to be declared is of particular importance so as to minimise any impact on the portfolio,” GlobalData says.
GlobalData predicts a rise in bonds and alternative investments showing a growing affinity of HNW individuals to move towards less risky investments and generate a social impact.
Research by Private Banker International shows that while demand for planning services is on the rise, a significant talent gap exists which is threatening the country’s ability to service a growing clientele from Greater China.
David Shick, head of private banking Greater China at Julius Baer bank, says: “We have a very limited talent pool in Hong Kong. The clients are growing faster than the number of practitioners in the market.”
Shick attributes the industry’s talent shortage to graduates having a choice of many other industries that are equally attractive for employment to them.
Francis Liu, regional market manager for UHNW Greater China at UBS Global Wealth Management, tells PBI: “Talent is a key challenge. The industry is growing at a rapid pace but there is a very limited pool of talents.
“But [the economy] is still relatively young and it is hard to find seasoned, experienced, young bankers,” Liu adds.
In order to bridge this shortage in talent Hong Kong’s Private Wealth Management Association (PWMA) launched an apprenticeship programme with Hong Kong’s monetary authority in 2017.
It is an eight-week programme which lasts two summers and targets students. If the apprentices perform well, they will be offered a job at the end of it.
Because Hong Kong is part of Greater China, much of its outlook depends on the performance of the Chinese economy, the experts tell PBI.
Hong Kong’s wealth management landscape is quite bullish. UBS Wealth Management, predicts GDP growth of about 2-3% in coming months.
Shick comments: “As China is the second largest economy, demand for wealth services is growing rapidly. We can see a very strong demand for asset diversification in China.”
Liu echoes this view. “For the outlook for greater China specifically, we are very optimistic that we will continue to see that growth in the market. This is specifically in the tech sector.”
Hong Kong’s wealth management industry outlook
Experts’ views coupled with GlobalData’s research indicate that demand for services and wealth management are on the rise in Hong Kong.
A broad and diversified discretionary offering is the key to growth in the region. The offerings should encompass both wealth and asset management services and tax advice to help the growing expat community deal with their compliance obligations from CRS.
Wealth managers should find ways to encourage more investment into the country, than offshore investment opportunities through providing higher risk/return reward opportunities domestically.
Providing more training opportunities will help entice talent and enable wealth managers to serve a growing demand for all types of wealth management in Hong Kong.