China private banking debate: Wealth managers look to a world of opportunity

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EXECUTIVE SUMMARY

• As money becomes increasingly portable, wealthy mainland Chinese want a truly global wealth management service offering   • Shanghai, through innovation and its soft-power status, will join the global private banking hubs of the future: London, Singapore and New York   • Chinese lenders are opening private banking branches across Asia, Europe and North America to cater to wealthy clients   • Substantial wealth will be passed from the first to second generations of wealthy Chinese  • Technology is unlikely to replace face-to-face service in private banking  • Wealthy clients will pay for complex advice such as trusts, family offices and inheritance planning but less for more basic services

Elliot Wilson, Euromoney What are the biggest challenges and opportunities facing the global private banking industry today? 

KH, CMB The main challenges for our industry are threefold. First, while we are based in mainland China, more and more of our clients are thinking about having global investment exposure, ensuring that, to meet their demands and needs, we become more of an international financial service provider. To that end, we now have a number of offshore branches, starting with our Hong Kong private wealth centre, which opened in 2012, and our latest centre, in New York, which opened in 2016.

The second challenge is the need to invest heavily in our new global IT platform, which allows us to provide internet and mobile banking to customers around the world. Finally, there is the issue of trust. Our clients trust us, but we need to ensure that we are able to provide them with a secure, robust suite of financial services, wherever they are in the world. 

YJ, ABC The need to develop complex financial services that cater to an increasingly diversified customer base is a major challenge for us. At Agricultural Bank of China, we have only been providing private banking services for the past five years, so the challenge has been creating a suite of products that compete with the best that our domestic rivals have to offer.

The next challenge is to be able to compete on the international stage. It’s a slow-burn process – we are still lagging behind some of our rivals – but we are catching up, and we are geared toward offering a genuinely first-class private banking service to our global client base over the long term. 

NP, UBS There are all kinds of challenges facing the global wealth management industry in general. There’s the backdrop of regulation, which is there to protect clients, but which is also something that banks need constantly to address and comply with, and which creates added complexity in anyone’s business model. Clients demand ever more from their private banks, from watertight risk control systems to superior investment performance, none of which is inexpensive or simple to deliver. 

Euromoney How do you determine, as a wealth management provider, where you put your money to work, domestically and globally? Do you find the client or do they find you? 

KH, CMB We’d like to believe that we are good at both: putting our money to work to ensure we operate the best possible service at home and overseas. We rolled out our first private banking products in 2007, and in recent years, our wealth management division has developed in leaps and bounds. We still face the challenge of competing with the best Chinese and international private banks in the global market. That is why, in recent years, we have continued to branch out, judiciously opening up new offices in the right cities, for instance. We aim to open new offices tailored to high-end clients in Singapore and Los Angeles later this year, which will cater to high net-worth clients from China.

YJ, ABC Through our ‘1+1+N’ service model, we provide a professional one-to-one service to private banking clients. We now have more than 60,000 private banking clients on our books, with whom our wealth advisers have a strong, stable business relationship. Of course, thanks to China’s economic development, and the parallel national expansion of individual wealth, more and more clients are eligible for private banking services. We have developed a variety of ways to find new clients and to extend exclusive private banking services to them.

Euromoney When does a wealth manager go from being a local outfit with some international scale, to a genuinely global servicer provider? 

NP, UBS UBS first opened a branch in London in the early 1900s, so we’ve been doing this for some time. In my view, you truly become a global player only when your business is more global than local. UBS made a major push into western Europe in the late 1990s/early 2000s, at the same time that it expanded further into Asia Pacific. Allied to the acquisition of Paine Webber in the US in 2000, these decisions transformed us from a bank that booked clients mostly in Switzerland, to one that booked clients all over the world.

KH, CMB I believe that if your private banking services are good enough, you can be considered a global private bank. At China Merchants Bank, we are regularly awarded the prize of the best private bank in mainland China. Maybe in the long run we will manage to compete on level terms with the likes of UBS in the global arena. 

Euromoney What markets will be key to your development in the long term? 

KH, CMB We are always looking to expand our horizons. The main focus of our operations outside the mainland remains Hong Kong – but our operations and network in the UK, US, and southeast Asia, thanks to our office in Singapore, are growing all the time. In large part, that is because more and more clients from China are keen to make their wealth both global and portable.

The process in China is that clients start by allocating part of their wealth to Hong Kong. From there, they move into other markets, notably the US, Canada, Australia and the UK. The view from our head office in Shenzhen is that it is vital for us to offer, in the long term, a truly global and diversified private banking service to our clients. 

Euromoney From a global perspective, is UBS constantly considering that question: how to manage your resources best, and in which markets you should be putting those resources to work? 

NP, UBS When you come to think about how you invest and grow in a specific market, a number of factors come into play. You have to be interested in the market’s size and growth potential. Is it saturated or is there a big opportunity there? And does it have the right legal structure you require to operate in any market? For us it’s a question of prioritization. In the emerging-market space you’ll find us trying to grow our franchises in countries as diverse as Russia, Israel, Turkey, Saudi Arabia, Brazil and Mexico; all markets with very significant potential and where wealth is being realised from entrepreneurial activity, where we can get to a really meaningful footprint and where our products will really resonate with the customer.

The longer we have gone on, the clearer it has become that the best way to expand overseas is to build up our own platform. Buying in foreign banking talent can be a short cut to success – and there are some highly capable individuals and teams out there in key markets – but it can also be a costly business. - Kevin Huang, China Merchants Bank

Euromoney What’s the metric you use to determine if market A or market B is more or less interesting than it was a year ago?

NP, UBS The starting point has to be how fast you think the market will grow. We spend a long time sizing markets, thinking about future GDP growth and the vibrancy of domestic entrepreneurs, and then we hire in the right people. 

As we progress in markets that are important to us, we might move through a cycle of installing a representative office, then perhaps an advisory office. And if a market is particularly convincing, it may ultimately become a booking centre in its own right.

Euromoney Do you see wealth management as representing opportunities or challenges for global wealth management providers – or a mix of the two?

DB, W-X For us, it is a mix of both. The challenge of technology is that it enables the client to be online, mobile-friendly, and to be able to access things moment-by-moment, all within the confines of an industry that for a long time has been relatively slow moving. It has long been seen as safe and reliable and steady and based on trust. But clients increasingly demand openness and transparency, pushing to know more about fees and financial transparency. Wealth managers have all that information; the challenge is how to convey it to customers in a client-friendly way.

The other challenges are international in scale: the mobility of wealth, the ability of people to travel, their expectancy that they should be able to get the same high level of service in multiple jurisdictions. Thus, knowing your clients culturally as people, and being able to provide the full gamut of services to them, wherever they go, is a huge challenge, as well as being a huge opportunity to a provider who can do it well. 

Euromoney These days, we often see global private banking and wealth management service providers scaling back for various reasons, while regional or local providers, often those in emerging markets, are busy scaling up. Is there a pattern developing here? 

DB, W-X It depends on the market and its scale and opportunity. US and European banks used to go to Asia and say to clients: ‘This is the service we offer’, rather than getting to know the clients better. That has changed recently. Some international providers are trying to get to know their clients far better and to cater to their needs, leading to consolidation in some markets. That’s happening everywhere: smaller providers in the UK are consolidating, due to the pressure to service clients locally and internationally, while making the huge investments in technology that new and existing clients increasingly demand. Another change is online advisory, which is becoming commonplace in Europe and US, but which still remains rare in Asia. 

Euromoney Turning to the issue of organic versus inorganic expansion. If you are a wealth manager who wants to expand by breaking into a new market or region, should your aim be to buy in the knowledge, the clients, and the technology that you believe you will need, or do you take a longer view, and build it yourself?

DB, W-X It depends on the aspiration of the provider. There are just different challenges. If you buy, there can be cultural issues. Does the business you want to buy fit with the ethos of your company? On the flipside, growing your presence organically is often a longer and harder transition to make. Very rarely does a company that has been purchased just carry on. Rarely after an acquisition is it a case of business as usual. 

KH, CMB This has long been a key question for us: whether, as we expand overseas, we should build up our own platform and train our own bankers – or whether we should acquire a local bank in each new market, and buy the talent and resources in. The longer we have gone on, the clearer it has become that the best way to expand overseas is to build up our own platform. Buying in foreign banking talent can be a short cut to success – and there are some highly capable individuals and teams out there in key markets – but it can also be a costly business. So the focus has been, and will continue to be, on securing local operating licences in new markets and then relocating mainland talent to those jurisdictions, or hiring in local talent, as we see fit. That is likely to be the best option for us.

The process of learning about and adapting to each new market has been highly rewarding. At first, typically, when entering a new market, we hire a clutch of highly talented local private bankers. But as we get to know a new market – understand its intricacies, how it works, where the challenges and opportunities lie, what regulations and rules we need to follow – we begin to focus on developing our own mainland employees and in building up and honing their skill-sets. It’s all part and parcel of ensuring that China’s private banking industry develops in the right way and over the long term. 

YJ, ABC It’s important to note here that our wealth managers know and understand our customers. There is a very good and very solid mutual trust between client and account manager, in large part thanks to the fact that we are becoming an increasingly international-minded bank. So if a customer has a question, our domestic managers and overseas managers can work and cooperate together to answer it. This allows us to extend the best possible global wealth management solutions to our customers, wherever they may live and work.

It’s also important to note that China’s financial system still remains quite enclosed, separated from the wider global financial system, meaning that global private banking norms and investment methods cannot always be directly translated to the mainland market. On the mainland, clients typically demand higher returns on their capital than we can guarantee for them in western markets. But what is vital for us is that wherever we operate, whether in mainland China or overseas, the priority was, is, and always will be ensuring that we offer the highest possible quality of private banking service to our client base. 

NP, UBS When we bought Paine Webber, it gave us a foothold in the US and enabled us to rival established domestic players. It is difficult to buy a business and make sure there is the right cultural fit and alignment in terms of services and people, but it is a surefire way to accelerate within a market. When entering a market, you need to decide what kind of player you want to be. Do you want to offer an entirely domestic offering – in the UK you’d need to provide pension and tax wrappers and that can be expensive and cumbersome to build up. On the other hand if you want to focus on the internationally wealthy from London, you may not have to build up the same domestic expertise.

Euromoney As wealth becomes more portable and technology pervades the industry, will new wealth management hubs emerge, or will the big centres remain the ones we have now? 

KH, CMB The financial centres that matter will remain, the likes of London, Singapore and New York. Perhaps in the long run, Shanghai can be added to that list. Shanghai is developing fast, securing a well-earned reputation as a centre of innovation, entrepreneurialism and soft power. In the future, it will emerge as a genuine focal point for global investors, sucking in capital in all its forms and becoming a true global trading hub. 

NP, UBS Another important factor in determining what will become a global financial hub or not, is its regulatory environment: its legal framework, depositor protection framework, transparency, overall stability. I have confidence that new financial hubs will emerge down the line, and Shanghai may well be one of those. I also think these hubs will become less important because of technology making access to them easier. In the old days, you had to visit a city to use your bank account; now, you do not. That will open up the potential for new financial centres but only if they can offer the right expertise and regulatory framework.

YJ, ABC I agree with that prognosis. Shanghai is the most international mainland Chinese city. We have more private banking branches based there than in any other mainland city. And much of the country’s financial innovation emerges from Shanghai. There are many global wealth management hubs that will retain their allure for decades to come – the likes of London and Singapore among others. But Shanghai is set to become a major wealth management hub in its own right as Chinese wealth expands and becomes more embedded in the years and decades to come. Shanghai will remain a major long-term focus for Agricultural Bank of China, both in terms of commercial banking and wealth management. 

DB, W-X There will always be things other than finance that are attractive about these cities. It’s not just about where money is managed, but also about where people want to live, have their homes, the cultural aspects, the traditions of those countries and cities. So being present in global cities and having local knowledge is very important. Having local knowledge about taxation and property and so on is important, but, as the wealth in Asian continues to increase, there will naturally be a focus on the softer elements of those cities: are they hubs of culture and knowledge and entertainment? Shanghai in particular, in that sense, is a city that isn’t just about finance or even just about China; it could become increasingly attractive to people across the world. 

Euromoney Let’s turn to generation change. In China, the second generation is just starting to take over from the first generation, a process that will only accelerate over the next 10 years. Are the second generation of wealthy mainland Chinese entrepreneurs typically interested in taking over from their parents? 

YJ, ABC Over the next decade or two, a huge amount of recently accrued wealth will pass from the first generation of wealthy Chinese to the second generation. This is a huge opportunity for China, for the client, and also for financial service providers like Agricultural Bank of China.

From our point of view, the key is to gather together our wealthiest clients and to have a face-to-face conversation with them. The key here is communication: understanding what the first generation wants, and what the second generation wants – and then tailoring our solutions to meet their needs. Take a top billionaire who wants in the long term to pass on his wealth to his son or daughter. This is always going to be a long, complex and convoluted process, involving the transition of a huge amount of wealth from one pair of hands to another. So it is vital to ensure that we meet face-to-face with all parties, listen to what they want, and offer them the best possible tailored advice. In the case of many of our clients, if not most of our clients, this process is likely to be stretched over a period of many years, and even many decades.

Many of China’s first-generation wealthy are still in the prime of their careers; some, it’s fair to say, haven’t even begun to consider the prospect of passing their wealth on to their offspring. Then you have to think about what second-generation family members actually want. Many, it is true, want to inherit their parents’ companies and assets and capital and build on those strong corporate foundations. But others will have a different mind-set to their parents. They may have different hobbies and interests. They may have no interest in accruing capital or building companies, and far more interest in philanthropy or the arts or simply in living a quiet, if comfortable, life.

There are other differences too. First-generation clients are more likely to want to meet us face to face to discuss investment decisions and options, while second-generation family members are far more likely to communicate with us – with their banking provider or providers – over the internet. Then there is education. First-generation clients are more likely to have been educated in the mainland and to be relatively reluctant travellers. Second-generation clients are far more likely to have had an overseas education. At the same time, they are far less likely to seek out financial advice from their successful parents and far more likely to come to their financial adviser for help in terms of how to manage and grow their own wealth.

KH, CMB Our private banking division is separated into three distinct classifications of client. There are high net-worth (HNW) clients, possessing at least Rmb5 million ($750,000) in bankable assets with our bank; private-banking clients with over Rmb10 million in bankable assets with our bank; and a smaller band of ultra-high net-worth (UHNW) clients, with upward of Rmb50 million in assets.

Moreover, we offer different types of service and advice to clients in each of those bands. Every year, we kick off our annual Wealth Forum. Almost all the attendees are first-generation UHNWs but increasingly a major point of discussion involves how best to pass on their wealth to the next generation.

Then there is our second-generation Elite Forum, another annual get-together, at which we educate younger mainland Chinese citizens on how to get involved in the family business, how to manage the capital accumulated by their parents. Not only that, we teach them softer skills too: social conventions, how to dress, how to dance, how to widen their skills and interests, philanthropy, international travel and culture, and so on. It’s kind of an educational vacation, wherein we teach second-generation wealthy what private banking is. This kind of education is very welcome in China and, as it’s an education that wasn’t always available for their parents, they like it.

Finally, there is the Overseas Forum, at which we provide clients of all stripes – foreign and Chinese, young and old, first and second generation – with advice on how to invest overseas. 

Euromoney What is the difference between the advice you provide to first- and second-generation business leaders?

NP, UBS In my experience, two factors require you to act differently. One situation is when a client wants to sell a business. The second is when the family becomes large, which leads to the need to think about the governance of the family, to establish family charters that determine how wealth is split, particularly in the case of illiquid or corporate assets. On top of that, structures like trusts or funds or corporates structures need to be built, which house the family’s wealth and determine how that wealth is managed. 

Euromoney Do you think the way high-end wealth advice is dispensed will ever really change? Will it become increasingly online rather than face-to-face?

KH, CMB The challenge we face in China is the same one we face in markets all over the world, which is that the level of regulations that gird the products we offer clients is becoming ever-more stringent. To offer a client a specific investment portfolio, we need to meet our clients, educate them intensely about the product and then sign an agreement with them. This requires a lot of face-to-face interaction with our clients, both in China and in older, more mature, markets like Hong Kong or London.

In my mind, technology will never entirely replace face-to-face communication. Clients seeking high-end private banking advice will always want to meet you, get to know you, get a measure of your bank and your team and your ability to help them grow their wealth. Likewise, ever-stricter regulations surrounding the wealth management industry ensure that you need, as a financial institution, to know that your client knows 100% exactly what you are offering them. There can be no grey areas.

NP, UBS It’s not the case that everyone, including wealthy people, will want to do everything online. They want to be online and to be able to communicate quickly and efficiently, but they still want advice to be personal to them, so I would be careful with the suggestion that technology will completely replace the personal adviser.

DB, W-X Any product that is comparatively simple will in the future not demand a premium on fees. Inheritance planning, trusts, family offices – those kinds of services will continue to demand a premium. Wealthy clients will not pay more for a relatively straightforward service, while they will pay an added premium on incredibly complex transactions and for securing the best possible advice. 

Euromoney In that sense, the way they interact with their financial adviser is still a little more old-fashioned – face-to-face or over the phone rather than online?

DB, W-X A 40-year-old is going to have a very different view from a 25-year-old about how they want to live their lives. Understanding that middle group is going to be key as they will be the inheritors of a lot of wealth. The transfer is already very complicated within families, but it may well get even more complicated as people live longer and you have several generations inheriting at the same time. 

Euromoney What are the pros and cons of family offices, and what are the best ways of avoiding the pitfalls when you are considering setting one up? 

KH, CMB It’s worth sharing some data here, so the reader has a better and clearer understanding of China’s private banking industry. Back in 2004, there were fewer than 15,000 genuine HNWs in mainland China. As of the end of 2015, that number had mushroomed to well over 1 million, while the number of UHNW individuals also accelerated rapidly to well over 50,000.

At China Merchants Bank, we opened our first wholly focused family office business in 2013, the same year that we rolled out a dedicated service to UNHWs. It remains very difficult to establish a bona fide family office in mainland China, largely because there are very strict rules on what constitutes investment banking. But the same restrictions do not, of course, extend to overseas markets. Thus an increasing number of our mainland clients are approaching us overseas and asking if they can set up a dedicated family office in the likes of Hong Kong and to a lesser extent in London or Singapore, where family offices are a long-standing part of the financial landscape – and are indeed a sign of a healthy, robust and vigorous wealth management industry. So while we are still relatively new to family offices, we are now rolling them out overseas, offering them to clients with at least Rmb50 million in income and assets. 

YJ, ABC Family offices are of course an integral part of the financial landscape in Europe and North America, as well as parts of Asia. In China, the reality has long been a little bit different. First generation HNWs and UNHWs, having tended to build their businesses from scratch, are happy to plough most, if not all, their income and financial resources into their own companies. In this way, they have in the past operated a kind of family office, albeit one that is almost wholly undiversified. These individuals typically have less trust in bankers. They prefer, wherever possible, to both make their money on their own and to manage it too, trusting themselves to make the right and correct investment decisions.

This is changing, albeit slowly. Second-generation family members are more likely to turn to their financial advisers – lenders like us – to provide them with financial advice. They trust professional bankers more, looking to us to provide them with guidance on how to nurture and expand their wealth. Sometimes that means helping them to set up trust businesses, but increasingly that also means, particularly in offshore markets, helping them to form family offices. This is a slow process, and family offices in China remain in their infancy. But it is a market that, in the decades to come, will only grow and grow. 

NP, UBS The term ‘family office’ can mean many things. I would challenge any client at any wealth level to think hard before going down that route, as a family office needs to be tailored to their needs. They are costly things, and first of all, you need to determine what level of investment expertise you want to have in-house. Are you looking for someone simply to hold your hand as you select a wealth manager, or are you looking for someone with the capability to manage portfolios directly with the family office. It’s vital not to rush into things; to take stock and think of all the implications, as family offices are costly things both to set up and to run. 

DB, W-X The minimum investment in technology, when setting up a family office, is very high. The key challenge is that it has to be the right construct for you. If you are happy with your current wealth manager, why are you looking to employ someone to come in-house and do it there? Family offices are very complex, and they often become more so over time. You may start off with a relatively simple arrangement, and as the family wealth and the family size grows, you move into more complex areas such as philanthropy.

We’re going to see a huge and complex transfer of wealth in China that the country hasn’t been through in the recent past. Family offices in this context are going to become more important. They are well established in Europe and America, but less so in other parts of the world. That will be a huge development. Family offices are very expensive to run and to develop. For individuals with, say, $10 million to $20 million in investable assets, a family office structure is out of their reach but they will still have the same issues and concerns. I’ll be intrigued to see how Chinese banks like the ones represented here adapt to those challenges.

Then there is the challenge of how to adapt your service offering to the next generation of business leaders. And this may not mean millennials, but people in their 40s and early 50s who did not grow up with WiFi and mobile phones

Euromoney Of all the manifold opportunities and challenges facing the global wealth management industry, which, in your view, are the greatest? 

KH, CMB In terms of the global market, the biggest challenge is the ongoing focus of many governments to pursue a policy of negative interest rates. That creates a challenge for all savers, all the way up to HNWs and UHNWs. How can you guarantee outsized returns for your wealthiest clients when it’s so hard to find assets and instruments that genuinely add value to a wealth portfolio. At the moment, global economic conditions are not favourable to the private banking market. In this scenario, the challenge is how to ensure that we can provide genuine value to our clients.

The second major challenge involves the seemingly never-ending growth of regulations. Wherever you turn these days, you find new regulations, whether you’re talking about China or any other market, whether developing or developed. Higher compliance costs mean a higher operating cost, and the resulting challenge is how to offer high-end services to our most valuable clients, while still managing to post a profit ourselves. 

YJ, ABC Clients in mainland China are often focused wholly on ensuring that their wealth grows substantially every year. To this end, we seek to offer a full range of financial services to our wealthiest clients, from broking and trusts to asset management and insurance. The next challenge, one that will exercise our thinking more and more in the years to come, is how to offer the best possible investment advice in overseas markets to our elite clients. Wealthy mainland clients typically demand outsized returns and access to foreign markets, but these demands are often conflicting. Foreign markets, particularly big cities like Hong Kong and London, are viewed as safe havens for capital, but, on the flipside, capital deployed in those markets are unlikely to generate the kind of rates of return clients might be used to in Beijing or Shanghai. 

NP, UBS The biggest challenge in emerging markets is that clients need to take an international view, they need to diversify assets, and they need to use major financial centres and leading wealth providers like UBS, to ensure they are making the most of their total wealth. 

DB, W-X I think, both inside and outside China, clients are increasingly likely to be women, but all are going to have a different approach to technology. This will be an incredibly important growth area, and how wealth managers adapt their customer relationship management mechanisms and their back-office systems in order to reach these people, and to service them appropriately, will be a huge challenge in the next few years. Referrals and recommendations will continue to be a significant part of growth but as potential and existing clients move more online, how wealth managers attract clients there will be key too. In this context, robo-advice will be a key way that the rising and aspiring rich could well be attracted into the entry-level of wealth management before their real wealth accumulates.