The Challenges and Opportunities for Wealth Management in Indonesia
Hubbis, together with Swiss private bank Bordier & Cie as our exclusive event partner, assembled a group of prominent wealth management experts in Jakarta in July for a private discussion on the development of the Indonesian private banking and asset management market for high net worth individuals.
What are the main opportunities that will continue to drive growth in wealth management in Indonesia? What are the key challenges to building profitable businesses? Is regulation helping or hindering? Is there enough local talent? Is the capability of technology solutions understood and is digital transformation taking place? Is the best strategy to be independent, or for local firms to partner with international names? What will the industry look like in the next five to 10 years?
These and other seminal matters were considered in some detail by our learned group of experts, whose core conclusions were that great opportunity lies ahead, but that the regulators need to liberalise – and soon - and that the industry must develop both its talent and its onshore proposition.
The Key Takeaways
Progress needed to boost the onshore investment proposition
For years there have been discussions about opening up international investments to Indonesia for distribution onshore, but so far there has been little to no progress. While there is modest liberalisation for insurers who can now get 20% of invested assets in overseas assets, the asset management industry remains seriously hampered.
But local opportunities are lacking
The domestic capital markets are relatively thin, especially compared to the size of Indonesia’s economy and population.
Moreover, performance has been lacklustre
Why are deposits still so popular? Because the average rate for the past decade has been over 7% and remains at almost 5%, and meanwhile the equity and debt markets have been volatile for the past eight years.
Perhaps the regulators should liberalise first relating to segments, to permit greater flexibility for private banks and asset management dealing with high-net-worth (HNW) and especially ultra-HNW clients, with liberalisation for the mass affluent sector to follow later.
Why the need to restrict institutions?
Why restrict financial institutions and intermediaries from offering more access to foreign assets, when there are no restrictions on individuals sending money offshore? And why not offer a wider range of investment opportunities onshore as part of the draw of funds back to the country in the tax amnesty so that much of that hard work does not simply unravel?
Nurture and retain talent
High-quality relationship managers can easily move to Singapore to ply their trade. To build and retain a skilled, professional talent pool of bankers and advisers locally, the regulators must help diversify the product range and industry must address education, training and compensation.
To maximise the potential of the RMs, they need sufficient maturity as well as expertise; otherwise they will struggle to build the relationships they require with their clients.
Second and third generations await
The wealth management industry must develop its proposition and communication methodologies to gain maximum traction with the second and third generations of wealth in the country, especially as these individuals are worldly and well educated from Western colleges and as some 70% of HNWI’s private wealth remains onshore, and that percentage is likely to rise.
Offshore is less compelling
The offshore proposition is also challenged, for example in nearby Singapore, by fast-rising costs and rapidly proliferating regulation, both of which lead to margin compression. Developing the onshore product and service suites is therefore increasingly important.
The younger generation clients need younger-generation RMs who not only have the product expertise but who can engage those clients in meaningful dialogue. These RMs must also approach the business more holistically, to see their role as encompassing the fullest range of their clients’ personal, family and corporate financial and advisory needs.
To be successful RMs therefore need to work to leverage internal resources for the maximisation of client service and revenues for their financial institutions.
To develop the onshore private banking/wealth management proposition, leading local financial institutions can consider partnerships and alliances with established offshore firms, thereby leveraging their product range, expertise and talent.
“For years there have been discussions about bringing offshore funds to Indonesia, but so far this is still not possible,” observed one guest, on opening the discussion. We have seen some liberalisation, for example life insurers can invest 20% of their total invested assets overseas, but it remains off-limits for asset managers and banks to distribute international products.”
But why is offshore product required? “Because,” the same expert added, “the Indonesian capital markets and the range of local investment products are too narrow compared with the money available.”
Another expert observed that for the past roughly eight years, the Indonesian market has been very volatile, and the best performing asset class has been cash.
Lacklustre markets for too many years
“During that time,” he observed, “most of the customers have been disappointed with the outcome of buying into mutual funds, investment-linked life insurance products, and so forth. This year the Indonesian equity market is up less than 3%, whereas US technology delivered 30% and China H shares delivered 30% on a year to date basis. That is why people prefer deposits or equivalents. Regulation will help, for example the 20% rule for life insurers, but trust and performance need to be achieved before this industry can fulfil its potential.”
Having said that, he added that an emerging market fund launched in early 2018 had secured a huge over-subscription. “If the right products are available, there is plenty of money here, so we need diversification, clearly there is a huge opportunity and life insurers are well placed right now to exploit that particular opportunity.”
Divide and less rule
Segmentation is required, came another voice. “In a country of 260 million, the regulators need to consider the needs of each segment of wealth,” she said. “But the big picture issue is that the regulators need to address the size, the distribution, the product diversity, and the regulators are also not yet working in a coordinated manner between themselves, so they need to align better.”
An invitee highlighted the ongoing success of some technology-driven e-commerce platforms, such as Bukalapak, Tokopedia, Go-Jek and others, which have garnered millions of clients, but with very small amounts of money so far.
An expert remarked that the government appears concerned that opening the doors to foreign assets will result in a renewed flight of money offshore. “But they actually need to be thinking about how to make Jakarta into a financial hub,” he said. “The tax amnesty has taken place and the next steps are to recognise that money is fluid, it needs to find places to settle, it is always looking for better returns.”
Contradictory rules and practices
So why block this entirely natural and understandable need for the institutions? After all, individuals can transfer money in and out with no restrictions, but institutions cannot do it for their clients. “In other countries,” the same expert added, “there are actually more restrictions on individuals but for institutions there is far greater flexibility, as we see in India, for example. Indonesia is the other way around. Institutions are prohibited, whereas individuals can freely open accounts anywhere in the world and transfer and transact. It is all rather contradictory.”
Money, like water, finds its own level
“Money will flow out, that is the habit of wealthy and ultra-wealthy investors the world over,” said another guest. “As long as the funds flowing out are documented, registered, the government should not be afraid of that happening. Ultra-HNW wealth is the most active in sending money out, and that segment is growing fast in the emerging markets.”
“We need to improve the proposition for these people, to provide a more holistic offering,” he continued. “The banker should be able to advise the client on stocks, bonds, structures, asset management, just the same as on offer in Singapore, where Indonesian clients can cover every aspect. We need to address this rapidly, because once the tax amnesty is over there will be another major outflow. We need progress, we need products, because now the banks operating out of Singapore, they are in hotels serving clients here, but all the real business is done over there.”
Boosting the local and international proposition
“If you have an arm in Singapore and in Indonesia, you can offer offshore and onshore, holistically,” said another guest. “But your competitive position will be better onshore, because in Singapore you are fighting with every global bank, but we need more products, more sophisticated investment opportunities, more comprehensive life insurance alternatives, such as offered in Singapore. It is actually quite simple.”
Another invitee expressed frustration that the regulators have not managed to segment. “Why can they not have clear differentiation, like in Malaysia?” they wondered. “Or we need to categorise and decide what constitutes the type of investors that are allowed a more liberalised approach.”
“Yes,” agreed another guest, “in Singapore we have developed sort of a mapping tool for clients, so they answer a questionnaire and with that we can determine what is important for them in their lives. It is actually more than just financial, it is also about what is important to them, so that we can manage the money according to who they are really, what they actually want.”
Building the talent pool
An issue in Indonesia, another expert claimed, is the mobility of the RMs. “If RMs stay a long time, the client stickiness tends to be positive,” he observed, “but these days the RMs are moving around so fast, so the level of relationship is weakened. It is vital to have more product, but just as essential to have a deep understanding of the clients, and indeed their next generations. This is the kind of engagement that can be worked on and significantly improved here. We need to see a major change in the way the RMs and the banks approach the HNW and ultra-wealthy clients here, or the money will simply keep flowing out.”
Another guest remarked that to deal with HNW and ultra-HNW clients requires a mindset, maturity and a deep range of skills. “Finding bankers here that can truly engage with these types of clients is not easy,” he said. “There are too many generalists and not enough specialists. These UHNWIs are business people, so if they say I am planning to do an IPO, it is not good to say, ‘sorry, that is not my area of expertise’ you need to be able to engage the client on the concept of the IPO and then bring in the investment banker, having already engaged the client, so in areas like that is where you can add value. Seasoned bankers can do this, and they win client loyalties.”
He added that service is not helping the client with trivial matters, it is offering knowledge-based insights and advice. “All of us here today are clear and we want to develop this high net worth market, and to do so we need to offer genuine expertise and professional proposition. Remember that many of the younger generations of these families are incredibly well educated in the West, and they need to be able to return to Indonesia and communicate with RMs who offer considerable sophistication. But they struggle to do so. Compensation is one key area as well that must be looked at here, as it is not fit for purpose.”
Reaching out across generations
The discussion turned to these younger clients, the second and third generations of Indonesia’s wealthy families.
“They represent that growth ahead,” observed one guest. “They are indeed smart and fully exposed to the international world, far more so than a decade ago, so we urgently need to upgrade and upskill our younger RMs, to speak their language, to be able to properly communicate with them. Do they want good quality private banking services locally? Of course, they do, because 70% of their assets are still here, and their families so we need to understand them, to appreciate what they want and what products and services we should be offering. These are the generations who will make a critical difference to our industry as we look ahead.”
Turning over the stones
Another experienced banker observed: “Amongst those younger generations in HNW families, some of them will ask us to find private bankers other than the ones their father uses, they seem to prefer the boutique banks rather than the big names who have left the impression that they are churning for fees.”
A guest remarked that the inherent danger of many private banks is indeed the commission-based structures that almost pushes the RMs to push. “I am out of private banking now,” they explained, “but the problem was being kind of fake, making relationships because you must sell rather than trying to create a relationship that will endure. In Zurich, some of the private bankers own the relationship, they will not let the bank dictate. But in Singapore for example they just need to achieve the targets. RMs here need to understand that the clients will endure here, whichever bank they are with, so they should put their objectives and needs first, and the rest will follow.”
Another invitee said he sees considerable similarities in the relationships between Singapore and Indonesia and that of Hong Kong and China. “Although the Chinese government is intent on developing Shanghai, they appear to prefer to work alongside Hong Kong as like Indonesia, China has similar challenges such as currency stability and current account deficit, so they know they can’t open up the economy as quickly as many would like to see. But what you can do is to have a lot more onshore-offshore collaboration. So, we have the Shanghai-Hong Kong Stock Connect, the cross-boundary investment channel that connects the two exchanges. There are also other accommodating regulations, such as the QFI regime. Indonesia needs to find ways in which there is access to overseas investment opportunities without causing concern to the government here. And digital platforms and access are essential, especially for the younger generations we are talking about here.”
Building the onshore offering
“As financial services become more global, people have access to more and more products and ideas, and I think the future here in Indonesia is people who have created their wealth here keeping more of their wealth here,” said another expert. “I think a strong part of the future is the growing onshore propositions, not just here but across the world and certainly we can see that in this region. I certainly like the idea of collaboration between the offshore and onshore models.”
The offshore proposition is also challenged, for example in nearby Singapore, by fast-rising costs and fast-expanding regulation. “Both lead to margin compression,” said one banker, “but trying to fight that by offering the lowest cost transactions and services is not the way forward, we believe the relationship is the key to the future, encouraging people to understand that there is value in what we are offering and move away from the transaction-driven business model.”
Adapt, survive, expand
He added that foresight and the ability to change and adapt are essential for the wealth industry, as in any other sector. “Who would have thought, even a decade ago,” he pondered, “that there would be such a strong future onshore in Indonesia, but there is and banks that are inert will not survive and prosper if they cannot see the changes ahead and position themselves properly.”
The challenge of managing this type of individual was also discussed. “We now have some two-third of our team in the Millennial generation,” he reported. “We find that to recruit, motivate, and retain talent is a different ballgame from in the past. Money and the package is only part of the solution, as we find this generation needs to feel they serve a purpose So it is not just the way we handle the clients, it is also vital for our futures to handle our teams and people in a sustainable manner, to understand them better as well. If we don’t do that then they will fly away.”
“Training is also vital,” came another voice. “We all need to understand that whatever we do in this industry, for the client and in terms of compliance, will affect us and the firms we work with in the future. We need more understanding of the products, more knowledge of the markets and we need to think out of the box, we must be bold.”
Another expert explained that sending their RMs for training in Singapore is part of the plan for future success. “We send them to Singapore to learn not only about the products, but also how they serve the clients in the HNW and priority segments,” she explained. “And we instil the sense of relationship with our Singapore operations, as part of the team building.”
And another guest explained that the range of product knowledge must be as wide as possible, encompassing investment opportunities, markets, structures, insurance, in short, the whole range of opportunities that can be offered to clients in Indonesia.
“It is not only about building relationships,” he observed, “as these clients need and want returns, so they will be loyal to those who achieve that for them. We are seeing this increasingly in Indonesia, that people are less ‘sticky’ to one asset manager, so we need to find a very good reason why they want to stick with us.”
He explained that for the second and third-generation clients, new product ideas are vital, so for example many want to buy into start-up businesses, fintechs, they also want to feel as if they are part of something happening around them, not just for returns but for their sense of purpose. And offshore investment is as much about diversification, so that they are broadly invested inside and outside Indonesia, so again it is important to find the right products to achieve that for them.
Seeing the big picture
Another perspective came from a consultant who observed that no private banker today can know everything. “They must be expert generalists, but the vital skill is to be able to connect the dots, to see the big picture,” he commented. “Can the RM build the ability to pick up the knowledge, either by talking to people, by reading up, by doing research, in order to come up with the range of possibilities for their clients. In the Asian culture we work hard, study hard, but we do not necessarily ask the right questions and then devise the right solutions.”
He also advised wealth management firms to encourage collaboration internally, for example the private bank RM with the corporate bank to serve the HNW clients in all facets of their personal and corporate lives. “For onshore banks,” he added, “one big advantage that you have is the balance sheet, it is a big competitive advantage compared to the global private banks competing here, as they do not take deposits. In summary, connecting the dots, seeing the larger picture, making yourselves as competitive as possible, those are all central to the future proposition.”
The final word went to our exclusive Hubbis partner for this discussion event, Evrard Bordier, Singapore CEO and Managing Partner of Swiss private bank Bordier & Cie. “Thank you kindly for your invaluable insights today, we have learned a lot and we are open for discussions with wealth industry practitioners here in Indonesia. We remain open and receptive to collaboration here in Indonesia and elsewhere in this dynamic region, and we are delighted to have had the chance to meet you today and to hear your insights into how this market can, and I believe inevitably will evolve and thrive.
More from Evrard Bordier, Bordier & Cie