Bruno Lee of HSBC talks about some of the big-picture trends in the retail wealth management industry in Asia, as advisers and customers learn from the financial crisis.
Date: Jan 2010
Previously, he said advisers had a misconception that retail customers are generally risk-takers and swing from one extreme to another, for example from cash to equities. While there is some truth to this, it only applies to a relatively small percentage of the investor universe.
However, a large number of investors are missing out on the opportunity of using a more disciplined asset allocation approach, for example by using building blocks such as fixed income instruments to help reduce the overall volatility of a portfolio.
Lee said that taking a more diversified approach would be beneficial to customers as well as their advisers.
Simply put, in situations where advisers are pushed to make recommendations to their customers about which equities to buy – the answer often being emerging market stocks – these relationships will always result in the customers being unhappy at least 25% of the time over a certain time period.
In such cases, Lee said assets like fixed income can help balance not only overall portfolio returns but also the relationship.
Changing client requirements
In terms of what customers now want from their wealth management relationships, Lee said he has seen preferences change in line with the external financial environment.
At the retail level, there is now a clear differentiation between simply providing information for the customer when they need it versus educating them on what they might need.
Lee said this is important given that retail customers often lag the market, witnessed by them shying away from making investments in stocks in 2009.
This makes it critical for advisers to help their customers act rationally and look at the facts of any opportunity, rather than waiting for customers to come across opportunities themselves.
The benefits of asset-based fee models
Noteworthy about the development of the Asian wealth management industry has been the remuneration model – where advisers tend to get most of their rewards from commissions they generate from product sales. However, Lee said that the future should see a combination of transaction and asset-based fees.
That type of model would help to remove some of the potential conflicts of interest between advisers, customers and the organisation, in turn enabling all parties to be better aligned.
This is essential if the industry is to grow in a more sustainable way, said Lee.
For example, he said, advisers relying solely on commissions from product sales in 2008 and 2009, or from investors switching between mutual funds during that time, would have seen their revenue falling around 70% to 80% in some of the more extreme cases. However, the market might only have dropped by 30% to 40%.
Advisers receiving remuneration based on the assets in customer portfolios would have fared much better.
Another advantage of asset-based fees can arise in a quarterly portfolio review, for example, because customers would not have to worry that their advisers are simply looking to make a sale to generate a commission.
Such fee models have for a long time been used in markets like the US, and Lee said this should be the future in Asia.