Jul 14, 2020 03:20 PM

Opinion: Greater Bay Area Market Wide Open for Wealth Management Industry

Joel A. Gallo is CEO of Columbia China League Business Advisory Co., a Guangzhou-based management consulting firm, and a former executive at Deloitte, E&Y, PwC, and EMC Corp.

Wealth management connect, ambitious in scope and clever in design, is the latest in a series of connect schemes intended to fashion ever-closer economic ties between Guangdong province, Hong Kong and Macau – a vast urban zone known as the Greater Bay Area (GBA). The unveiling of this pilot plan signals Beijing’s willingness to pursue forward-thinking initiatives and is the first of many in the name of financial modernization.

The program is intended to ease cross-border flow of capital between its 70 million residents by presenting mainland and offshore customers an extensive menu of wealth management products to grow and preserve assets not currently available.

“Wealth management connect will be beneficial for firms like Ping An and China Merchants Bank as more capital will flow into China seeking higher returns, at the same time it will be positive for Bank of China Hong Kong and others due to investor needs for diversification and lower valuations of stocks in Hong Kong,” according to Liu Yanhua, advisor to the Tsinghua University School of Economics and Management and Haitou Global in Beijing.

Banks with a footprint on the mainland and the offshore centers of Hong Kong and Macau clearly stand to benefit, whereas institutions without a reliable partner on the other side of the border remain at a competitive disadvantage. Not to outdone by players with already established links, companies without current partners are considering tie-ups, including joint ventures as a way to enter the arena and grab market share.

But the longer-term legacy of wealth management connect may be that it accelerates the maturation of the asset and wealth advisory industry while simultaneously boosting the level of investment sophistication of retail investors. In the Chinese mainland, this sector is largely driven by the whims of individual investors that embrace a short-term trading mentality versus a longer-term investment outlook, where sub-par performance returns are avoided and outright losses are shunned.

To illustrate the point, consider the recent bull run in China’s equity markets, whose tempting returns exert an inescapable gravitational pull, prodding investors to even borrow money just to be able to participate in the market’s upside.

Over the years, retail customers have poured into wealth management products with guaranteed or implicit returns, creating an unrealistic expectation that investments defy gravity and rarely lose value. As China’s asset and wealth management sector has slowly shifted closer to an industry-recognized definition akin to other parts of the world, it has been difficult for retail customers to wean themselves off a misguided expectation for guaranteed returns.

This poses a thorny challenge for portfolio managers and advisers who field incessant customer inquiries, including threats of redemptions whenever funds invested in public equities take a temporary dip. To combat some of these growing pains, Hong Kong firms may provide financial literacy and advisory services to mainlanders.

A chief component will be to educate mainland investors about other financial vehicles that are either nascent in use or not currently in vogue. Active investment strategies dominate in China, where it is not uncommon to see hot money pursue star managers or advisors, while equally chasing new-fangled investment themes. To be sure, even in Europe and North America, hot money will still chase outstanding performers. But a key difference is that active strategies – who promise to consistently outperform the market often disappoint – continue to lose market share to passive strategies such as index-tracking mutual funds and ETFs.

As the playing field in the GBA is blown wide open, mainland firms will need to skillfully navigate the unfurling current if they are to attract customers and amass assets under management. This will sway wealth managers to adopt more mature behaviors including improved risk management, engage in a superior customer journey and leverage fintech to automate and simplify client touchpoints with their financial advisor.

Asset and wealth management is a highly commoditized business worldwide but profit pools in China make managers in other regions green with envy. However, over time, heightened investor sophistication and industry maturation will place pressure on fees, as customers search for fee models where they pay for services that add incremental value to their portfolios. Looking further ahead, a more discerning customer will demand greater product sophistication and experiment in increasingly complex financial instruments.

The long-term significance of wealth management connect is its modernizing effect on the industry by forcing firms jockeying for position, to adopt a series of more mature and institutional behaviors. Equally meaningful is improving the level of financial literary and raising the bar of investment sophistication for the legions of retail investors that rely on the industry to grow and preserve their nest egg.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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