PwC Asset and Wealth Management Conference 2016 Management, examined the developments in the asset...

November 2016

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PwC Asset and Wealth Management Conference 2016Redefining Asset and Wealth Management

PwC Asset and Wealth Management Conference 20162

PwC Asset and Wealth Management Conference 2016 3

On 22 November 2016, PwC hosted its 10th Annual Asset and Wealth Management Conference. This year’s conference, Redefining Asset and Wealth Management, examined the developments in the asset and wealth management industry over the last 10 years, helped frame the outlook and trends for the next decade, and looked at the changing nature of investors, regulators and managers across the industry.

As industry players continue to focus their strategy across the region during a time of great uncertainty and a changing geo-political environment, the panellists and audience were asked to evaluate the forces within and without the industry and the impact these forces would have on their business.

To offer a fresh perspective on the economic and political context in which we all operate, our plenary speaker was Mr Andrew Browne, Senior Correspondent & Columnist for The Wall Street Journal. His thought-provoking analysis for our audience of 300 delegates started with the undeniable fact that we have just been through “a political earthquake”. He cited Robert Kaplan, who said recently that we had reached the end of a 70-year, US-led global order.

Mr Browne went on to argue that President-elect Trump is a completely different character from his predecessor: “We will have a transactional president in the White House”, for whom trade is a zero-sum game. He speculated on some possible future scenarios:

1. Tariffs on imports from China and Mexico would lead to higher consumer prices in the US, hurting the blue collar demographic. China could retaliate against US manufacturers, as well as the agricultural sector. This could lead to a recession.

2. Despite protests during the campaign, China is not manipulating its currency. If anything it is overvalued. China’s economy is slowing down and it is fighting back with stimulus packages. While there won’t be a balance of payments crisis, there could be a problem on the funding side. There will be a hit to China’s banks unless it can get credit under control.

3. North Korea is the number one geopolitical issue in this region, but the South China Sea is also a big deal. Thucydides said that “interest, fear and honour are the three causes of war”: these are present in spades for China.

4. John F Kennedy’s “city upon a hill” speech encapsulated the idea of US exceptionalism. Mr Browne feels that we will hear very little about the US human rights agenda under Trump. This will make China feel more secure and therefore more prepared to do deals. But this will be offset by a general sense that the US is now an enigma.

Our speaker concluded that these are perplexing times and that we are probably heading into a couple of tough years in Asia Pacific. But, he added, “long term, who can’t be optimistic about the potential of the region?”


Views from the top: what to expect in the next 10 years

The panel was asked to discuss its top of mind issues, the major developments of the last ten years and what to expect over the next ten years.

This has been a fascinating time for the Asset and Wealth Management (AWM) industry. The much more direct involvement of retail investors has major implications for policy makers. We have seen the rise of Alternative Investments, ETFs and quota schemes such as RQFII and QDII. There has been huge growth in Asset and Wealth Management, as well as regulation and protectionism. It is harder now to sell a fund into Korea, for example, than ten years ago. There are a lot more competitors and many more sophisticated investors.

Thirty years ago, the number of mutual funds was 10% of what it is today. There was barely an AWM industry in most of the region, and the few retail clients were mostly rich expats. Regulators did not exist then and compliance was not an agenda item for AWMs. The first open-ended fund in China was launched about 15 years ago; now there are tens of thousands of such funds.

Globalisation has had a big effect on investment opportunities, with the tech sector playing a significant role. While protectionism is always a concern, we should acknowledge the increased free flow of capital and that retail investors are no longer limited to domestic investments. The future should be seen as an extension of the past: growth is likely to be exponential. But the past decade has seen a rapid shift away from complex products – investors will even hold treasury bonds with negative yields.

Fintech, the panel agreed, is one of the reasons for optimism. It will accelerate growth. The mobile internet caught everyone by surprise. The average mobile user spends two thirds of their time on their device accessing social media. This represents a new distribution network, especially for younger investors.


As well as making us better investors – because we can absorb much more information – technology also influences our relationship with the investment world. Our ability to check how our investments are doing at any time is truly transformative. But this raises interesting contrasts: we can buy almost any consumer product or service online anywhere in the world and have it delivered to us. And yet, buying an Indonesian equity fund or a South American small-cap product can be very difficult! Distribution and regulation are still cutting off 90% of funds from 90% of investors.

There was discussion on the importance of customer experience and access. Tech will help optimise the distribution system in this regard, but this does not necessarily mean radical disruption. One panellist commented on how he was struck by the number of physical bank branches he encountered on a recent visit to Silicon Valley! Clearly, we need to balance innovation with human preferences.

Contrasting the East Asia region and the wider world from an asset management point of view, the panel argued that East Asia is more attractive as a long term business, but that more providers of capital are needed. Infrastructure will be a key area of growth to lift general standards of living, but attracting capital will mean addressing issues around documentation, dispute resolution, enforceability and assurance more generally.

Another difference is that the AWM industry is separated by jurisdictions – there isn’t really an Asia-wide industry, as there is in Europe. Not many firms have the appetite to be a major player in more than one country, especially with the huge disparities in stages of development and levels of protectionism in certain countries. Client behaviours are also different: in the US and Europe, people buy a portfolio and hold it long term. In China, for instance, there is a focus on real estate and the US dollar. People want to know about the latest hot investment product. To change this mind-set requires education, as the industry has been saying for quite some time.

Investor education is a key task because of buyer behaviour. People always want to buy at the peak and sell at the bottom. When they go overseas they are exclusively focussed on property. They need to be taught about trade-offs and managing short-term liquidity.

However, this may not be just a matter of education, but also one of trust. The industry needs to do more to convince investors that a diversified portfolio held over 30 years will out-perform and is a more prudent choice. People are becoming aware that domestic funds are not the only answer, but a confidence issue remains.

A contrarian view was that regional investors are being very logical: if you had bought and held in China, Taiwan or Japan over the last few years you wouldn’t have made any money. For this reason, investors here have decided that this is a trading market. In fact, real estate plays the role that mutual funds play in the US. But this means that investors are missing the opportunity to invest in some interesting foreign equities.

The panel then looked at the issue of Shanghai versus Hong Kong as a fund hub. It was argued that the hub exists in cyberspace and so the only question is where people will choose to live. This brings in issues that are not industry-specific. One view was that Hong Kong would remain the regional hub, but that its power is decreasing as we enter a more ‘federalised’ world. Fund managers need to take a country-by-country approach, but who really understands all these markets? It was also mentioned that Shanghai is very well placed thanks to Stock Connect and other such schemes.

Continuing to focus on China, the importance of brand names was underlined. Investors there are looking through distributors to understand who the underlying fund manager is – and in a fund-of-funds they want to know exactly who they are investing in. This issue of trust and brand is relevant in the context of fintech: unless they find a brand they really trust, fintech will not replace the human factor for investors.

On the issue of regulation, it was argued that greater investor protection must be welcomed but that the unintended consequences of the cumulative effect of regulation around the world can be an issue. While allowing people to invest all over the world and investor protection are worthwhile aims, risk cannot be regulated away. So, instead, we should look at how we can reduce it. Global standardisation would be hugely beneficial, but clearly there are political challenges.

One view from the panel was a future that becomes more ‘Amazon-like’, where investors can go online and see just about every fund available. The alternative view is that the industry becomes more fragmented, with various passport schemes protecting each country’s AWM sector. The real risk then is that the industry grows more slowly than the population and wealth it is there to serve.


Shaping Regulation for Growth

Asked to summarise current developments in regulation, the panel considered the fact that the theme of next year’s World Economic Forum in Davos will be The 4th Industrial Revolution. Asset and wealth managers exist to service people in a digital, on-demand economy. Customers can pick and choose everything online, and prices are completely transparent. Should they act differently with AWM products? The concern is that customers are becoming very impatient.

The panel argued that the importance of regulation grows in step with the AWM industry, due to an accumulation of wealth and an aging population. It is healthy for regulators to have more representation in the financial stability debate, as there are important investor protection and market integrity issues. AWM is a trust business.

Europe, it was explained, is going through an interesting period in terms of regulation. For the last few years the focus has been on a post-GFC agenda of market stability. While this is still important, we see the pendulum is moving. The European Commission (EC) has launched a very ambitious agenda of capital market union in Europe. The European Union (EU) is not getting the financing it needs for SME and infrastructure growth and is therefore looking at capital markets as a source.

An important initiative for regulators is to promote mobile access to overseas funds. Mutual Recognition of Funds (MRF) has been launched in Hong Kong and China and there is a desire to extend access to more markets. There are different legal systems and all kinds of complex rules, but regulators are putting a lot of resources into tackling this. Fintech offers much promise for increasing reach: the fund industry is aware that many back office systems are heavily manual compared to other markets. Regulators, one panellist commented, are open minded - regulations are tech neutral. Distribution channels are another issue: they are very concentrated and intermediated in banks in Hong Kong.


Commenting on pension regulation, it was noted that next year will mark ten years post-GFC. This has led to a more robust and resilient financial system, globally speaking. That said, pension savings still need to be safeguarded. Central banks and bodies such as the Financial Stability Board have tended to lead, but asset managers and other market participants need to be better represented in the regulatory space. There are more regulations to come, so the industry needs a dialogue with the public sector. This will help regulators get a better perspective of those market behaviours that may be harmful, thus restoring confidence.

The EC is also working hard to ensure transparency around cost and performance. Regarding risk culture in the banking sector, there are new policies to ensure that the risk structure is implemented throughout the organisation. An increase in the use of independent board members has been observed.

The panel then discussed the regulatory environment in Singapore, Hong Kong and the region – and how it may develop. In Singapore, as in the US, there were initially exemptions for hedge funds managers with a small number of investors and Assets under management. However, since the GFC, the regulatory space has changed dramatically. Some jurisdictions have a registration system, but Hong Kong has always required fund managers engaging in securities to be licensed. The ultimate goal for Hong Kong’s MPF system is for full portability and member freedom – Australia’s experience with its superannuation system has shown this to be a positive. Open architecture that embraces good pension solutions will help capture stable performance over the long term – but this needs a lot of public and private sector collaboration.

On the issue of an accessible global fund industry, the panel felt that the removal of cross-border barriers is dependent on the political dynamic. UCITS has been one of the few successful structure in Europe, while Brexit saw a country removing itself from an open market. The future Trump administration may lead to an unwinding of possibly excessive post-GFC regulation.

In terms of fintech and its implications for pensions, it was argued that Latin America has led the way in electronic processing. Pensions are all about social inclusion: the aim is a good pension solution that looks after customers. If fintech helps, it is to be welcomed. Regtech is another buzzword, especially in Europe. It is particularly relevant in the context of Blockchain, which needs to be regulated in a balanced way so as not to kill off the opportunities it represents.

Investor education was the last topic touched on by the panel. It was noted that when the MPF was launched, many people went for the most risky fund options. Hong Kong’s Investor Education Centre is working with regulators on the issue of financial literacy. World Bank specialists and behavioural psychologists are also involved: only a very disciplined person will save steadily for 40 years.


Understanding the demand of a new breed of investors

The panel started by discussing where the new breed of investors comes from. China is, of course, the obvious answer: the recent UBS/PwC Billionaires report found that a new billionaire is created in Asia every three days. Tech, real estate and the retail & consumer sectors are important sources for this new breed. It was argued that the Chinese private banking model is surprisingly similar to more mature markets, even though it has really been around for less than ten years. One difference, however, is that in China wealth tends to be created rather than inherited, with the IT and manufacturing industries playing a large part. Also, 70% of the newly rich are under 45. These investors tend to be confident and very aggressive in their positions.

In developed markets, the panel commented, investors are much more familiar with bonds and equities. In China, on the other hand, real estate has tended to be where the money flows. However, more and more Chinese High Net Worth Individuals (HNWIs) are beginning to pay attention to global asset allocations. One panellist noted that 50% of their clients intend to invest more in global markets.

The regulatory pressures around this growing percentage of offshore investment were then discussed. On 14 November, the State Administration of Taxation (SAT) and the State Administration of Foreign Exchange (SAFE) signed a new agreement to control outbound flows. With a declining RMB, there is greater outbound pressure, and yet the maximum capital outflow per year remains US$50,000 per person.


It was argued that private banking clients are getting less attention as banks have more clients overall and have to deal with more paperwork. There are also apparent conflicts of interest: some clients have been losing money while banks have continued to earn. Wealthy clients now want independent, transparent and qualified advisers, along with simple cost-efficient products. The trend among these clients is towards independence in product choice. They are also being drawn more towards tech – as this may serve them better than a mediocre banker. The panel then considered whether these increasingly sophisticated customers would abandon banks in favour of private and family offices. The desire for independence would drive this trend. The same dynamic means that robo-advisors will grow in importance for those who can’t afford family offices. As well as independence, there is a demand for transparency and a better understanding of how products are structured. Many of these wealthy clients may not be knowledgeable in this regard because they have traditionally invested in real estate.

It was also noted that there is more and more demand for other traditional family office services, such as estate planning. Clients want a wider range of services and better reporting. This is where fintech comes in: reporting is often so bad that some wealthy clients are unable even to find out if they are making money or how their portfolio is made up. There is also a need for investor education among HNWIs.

For independent asset managers, without a large roster of clients and not tied to any one IT platform, tech is critical. The quality of reporting that it makes possible is a differentiator that will make such businesses more and more successful.

Another development in this market is that foreign asset managers now have options beyond joint ventures for entering China. Many are setting up WFOEs as a way of basing themselves onshore and gaining access to a lucrative institutional market. There are now more regulations in the AWM industry, as regulators continue to assess at what pace they should open up the market. One new opportunity is to enter the China interbank bond market – this is very attractive for overseas institutional investors, as there will be no quota limit.

Private Banking was valued like a luxury brand in the beginning. But now investors find that the difference between banks is less important than the difference between bankers. The quality of the advisor is key. The market, the panel concluded, is huge and the demand from HNWIs is very diversified. For those billionaires with very complex demands, a family office may have the advantage. Some private banks are not evolving fast enough to survive – particularly when it comes to embracing tech to deliver better reporting.


Some insights from the world of social media

To conclude the conference, our guest speaker, Mr. Ray Chan, Co-founder and CEO of 9GAG, shared his perspectives on the world of social media. More than 150 million people view 9GAG content. It has 30 million followers each on Facebook and Instagram. But, its co-founder points out, getting a lot of users is easy - getting an active customer base is difficult. The focus has to be on sharing what users want to see. Staying up to date with young people is important, but some things never change. People want to have fun. The taste may change with time and with their age. Most of 9GAG’s users are in the age group of 13-25. The biggest countries are the US, Germany, the Netherlands, the Philippines and Indonesia.

While some may describe the business as intangible, Ray questions the use of this word. For young people the difference between physical and virtual is less and less important. Brand matters more. Although 9GAG is an online business, they still regularly talk to their end-users. They have no problem resorting to traditional means, such as talking to customers by phone, so that they can understand young people’s needs.

Final words of advice:

• It’s really old school to talk about a ‘tech business’. Tech is in every business - even law firms or banks.

• There are a lot of empty slogans – but all that matters is giving people what they want.

• If you are following a new trend you heard about on Bloomberg, it is probably too late.

• Founders have to know what they want and be very hard working. But, if the market is growing, even an average team can make a good return. If you don’t know the market, make sure you have a great team.

Can you see the similarities with the Asset and Wealth Management Industry? After all, AWM is also about serving the customers. The key is to understand the customers’ needs, build trust in serving them and at the same time maintain a sound risk culture.


Survey questions result

How confident are you on the future of the asset management industry in Asia?

Very confident – huge growth from now until the end of time

Fairly confident – we will have decent growth for a few years before things settle down

Neither confident nor unconfident – we will continue to grow steadily

Fairly unconfident – our market position offers few opportunities for growth

Very unconfident – we are pulling out of Asia or parts of it

How is the political environment in the USA and Europe affecting your plans in Asia?

Hugely – we are not making any long-term decisions until Brexit is sorted and we have a clearer picture of the new US presidency

Moderately – we held off on some decision until after the US election but now we are moving forward

Slightly – we are aware of the political environment but it has negligible baring on our Asia plans

None

agree that asset managers are moving centre stage in financial services industry

78%notice an increase in regulatory interest and oversight towards your organisation over the last five years

87%

0% 10% 20% 30% 40% 50% 60% 70% 80%

17%

71%

11%

2%

0%

0% 10% 20% 30% 40% 50%

12%

42%

38%

8%

Compliance and legal

Support and admin functions

Sales and marketing

A balanced mix of the above

Fund manager and research

Other please specify

Over the next five years, where do you

see your largest headcount increase

in Asia coming from?

Raising money outside China for onshore investment (QFII and RQFII funds)

Raising money inside China for offshore investment (QDLP, QDIE funds)

Accessing the MRF

Accessing the stock connect programmes

Raising money inside China from HNWI/institutional investors for onshore investment (PFM)

Raising money inside China from individual investors for onshore investment (FMC)

Not interested in accessing China

If you are interested in accessing the China market,

what aspect are you interested in

accessing?

29%

7%

12%32%

18%

3%

19%

26%

11%

15%

18%

10% 1%


How confident are you on the future of the asset management industry in Asia?

Very confident – huge growth from now until the end of time

Fairly confident – we will have decent growth for a few years before things settle down

Neither confident nor unconfident – we will continue to grow steadily

Fairly unconfident – our market position offers few opportunities for growth

Very unconfident – we are pulling out of Asia or parts of it

How is the political environment in the USA and Europe affecting your plans in Asia?

Hugely – we are not making any long-term decisions until Brexit is sorted and we have a clearer picture of the new US presidency

Moderately – we held off on some decision until after the US election but now we are moving forward

Slightly – we are aware of the political environment but it has negligible baring on our Asia plans

None

agree that asset managers are moving centre stage in financial services industry

78%notice an increase in regulatory interest and oversight towards your organisation over the last five years

87%

0% 10% 20% 30% 40% 50% 60% 70% 80%

17%

71%

11%

2%

0%

0% 10% 20% 30% 40% 50%

12%

42%

38%

8%

Compliance and legal

Support and admin functions

Sales and marketing

A balanced mix of the above

Fund manager and research

Other please specify

Over the next five years, where do you

see your largest headcount increase

in Asia coming from?

Raising money outside China for onshore investment (QFII and RQFII funds)

Raising money inside China for offshore investment (QDLP, QDIE funds)

Accessing the MRF

Accessing the stock connect programmes

Raising money inside China from HNWI/institutional investors for onshore investment (PFM)

Raising money inside China from individual investors for onshore investment (FMC)

Not interested in accessing China

If you are interested in accessing the China market,

what aspect are you interested in

accessing?

29%

7%

12%32%

18%

3%

19%

26%

11%

15%

18%

10% 1%


PwC Global Asset Management NetworkPwC helps organisations and individuals create the value they are looking for. We are a global network of firms in 157 countries with more than 250,000 people who are committed to delivering quality in assurance, tax and advisory services.

Providing organisations with the professional service they need, wherever they may be located. Our highly qualified, experienced professionals listen to different points of view to help organisations solve their business issues and identify and maximise the opportunities they seek. Our industry specialisation allows us to help co-create solutions with our clients for their sector of interest.

PwC has continued to support Asia’s asset and wealth management industry as it undergoes a period of major transformation and change. Besides assisting our clients navigate these challenges and opportunities, we continue to pursue dialogues with regulators, industry bodies and governments, enabling us to stay close to the strategic and emerging issues impacting our clients, deliver advice that is both relevant and timely, as well as helping shape policy development.

Across Greater China and Singapore, we are located in these cities: Beijing, Hong Kong, Shanghai, Singapore, Taipei, Chongqing, Chungli, Dalian, Guangzhou, Hangzhou, Hsinchu, Kaohsiung, Macau, Nanjing, Ningbo, Qingdao, Shenzhen, Suzhou, Taichung, Tainan, Tianjin, Wuhan, Xiamen and Xi’an.

For more information visit pwchk.com


A special thank you to all of our speakers for sharing their insights

Alice LawChief Operating Officer and Executive DirectorMandatory Provident Fund Schemes Authority

Andrew BrowneSenior Correspondent & Columnist The Wall Street Journal

Blair PickerellFund Industry Veteran

Camilla ChenFounding Partner, Chief Client OfficerFountainhead Partners

Christina ChoiExecutive Director, Investment ProductsSecurities and Futures Commission

Glen QiuChairman and Chief Executive OfficerPerseverance Asset Management

Jessica CutreraFounder, Managing Director, Head of Operations and ComplianceEXS Capital

Kevin HuangHead of Global Private BankingChina Merchants Bank

Ray ChanCo-Founder and CEO9GAG

Sridhar ChandrasekharanGlobal Chief ExecutiveHSBC Global Asset Management


PwC Contacts

Marie-Anne Kong

PwC HK Asset and Wealth Management Leader Tel: +852 2289 2707 [email protected]

Florence Yip

PwC Asset and Wealth Management Tax Leader for Asia PacificTel: +852 2289 1833 [email protected]

Carlyon Knight-Evans

PwC HK Partner Tel: +852 2289 2711 [email protected]

Colin Shaftesley


Helen Li

PwC HK Partner Tel: +852 2289 [email protected]

Jane Xue

PwC China Asset and Wealth Management LeaderTel: +86 (21) 2323 [email protected]

Jeffrey Chung


John Wong

PwC HK Tax Partner Tel: +852 2289 [email protected]

Josephine Kwan


Keith Chau


Maria Tsui


Nathalie Dogniez

PwC Luxembourg PartnerTel: +352 (0) 494848 [email protected]

Paul Walters


Shirley Xie

PwC HK and China Consulting LeaderTel: +852 2289 [email protected]

www.pwchk.comThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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