Opinion: Baoshang Takeover Marks Sea Change in China’s Wealth Management Industry
The takeover of Baoshang Bank is a controlled experiment. The regulators’ takeover of Baoshang has broken the implicit guarantee that China’s government will be there to cover all investor losses whenever a financial institution runs into serious money problems. (Although the central bank and the banking regulator have taken over Baoshang, their plan at the moment is to only cover investor losses up to a point.)
How will this change affect how the public invest and how will the wealth management industry evolve to handle it?
There are four major parties in the industry: end customers, boutique investment institutions, banks’ wealth management departments and banks’ asset management departments. Wealth management is usually part of a bank’s retail finance business, whose main responsibilities are to raise funds by selling investment products and to help clients select the best products in which to invest.
Banks’ asset management services manage banks’ wealth management products. Boutique investment houses are mutual funds, private funds and the asset management departments or subsidiaries of securities companies, which provide research services to commercial banks’ asset management departments and make investments on their behalf. In addition, banks’ wealth management departments can also sell products developed by these boutique investment firms.
There are three aspects worth examining. The first is risk, in terms of what part of the industry bears the actual risk. The second is information — how is it conveyed along the industry chain? The third is capital — how does capital flow along the chain and what drives it?
Before 2016, the implicit guarantee existed in every link of the chain, with the odd exception. We could call this period the completely guaranteed era. During this period, boutique investment institutions were the main bearers of risk, because they had to guarantee the profits and principals of the money that commercial banks entrusted to them to invest. Commercial banks’ asset management department only needed to compare the bid prices of different boutique institutions, and appoint the most suitable institutions as their representatives. During this period, these boutique institutions had the most information and bore most of the risk, and the capital flow was driven by yields, which meant the larger the scale of the business, the better its profit margins. This situation also introduced plotters of Ponzi schemes and proved to be fertile ground for the outbreak of defaults in the peer-to-peer lending business a few years back.
The implicit guarantee of boutique investment institutions ended in 2017. At the time, China began to experience a credit crunch in which a large number of bonds, trust products and fixed-income products defaulted, putting banks’ asset management businesses under great pressure. Defaults also happened in private funds that were sold by banks’ wealth management departments, whose managers had to pressure asset managers to pay back their investors and comfort their clients.
Risk had migrated to the banks’ asset management and wealth management businesses. Banks began to need more information so they could play a more active role in controlling risk. At the same time, customers were growing warier of products sold by banks’ wealth management departments on behalf of other institutions. Although customers still expected their investments and returns to be fully guaranteed, they had to sign a document that acknowledged they were aware of the risk of losses. As a result, they favored wealth management products developed and sold by banks, which remained the only place where the implicit guarantee still existed.
During this period, the growth of banks’ wealth management products carrying an implicit guarantee was limited by the government’s new asset management rules released in April 2018. The banks lacked confidence and methods to create new wealth management products and only slightly modified their products, which resulted in a situation where banks’ wealth management departments lacked products and the asset management departments lacked money.
Banks still needs new wealth management products. But the key for them now is managing risk.
What’s the future of wealth and asset management industry? With the end of the implicit guarantee, the end customer is now the major bearer of risk. It’s a watershed moment in the industry. Consequently, the most important part of the industry will no longer be the investment products it produces and sells, but the customer service it provides.
“How do you allocate assets” will become customers’ first question. Therefore, asset allocation services will be the gateway that attracts traffic from the entire asset management industry chain, and consulting and investment services will be critical to attracting more customers. As to this transformation, the application of fintech will be crucial. Banks’ wealth management businesses that can complete the transformation successfully will have great opportunities ahead, and their wealth management and asset management services will converge.
Shi Lei is president of Shanghai-based consulting firm Attractor Adviser Ltd.
Editor’s note: This commentary has been edited for length and clarity.
Translated by Liu Jiefei (firstname.lastname@example.org)
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