The Chinese government has repeatedly demonstrated its commitment to enhancing trading integration and market fluidity across the Greater Bay Area (GBA). Both have proven to be key to the region’s economic development as it continues to evolve into a global hub for technical and industrial innovation.
Banks and wealth management firms have an unprecedented opportunity to participate in the region’s expansion. The time to innovate and to establish a presence is now, and this series of three articles, which includes unique and proprietary data from Avaloq, can help to align industry executives with key drivers impacting business development in this dynamic market.
The past and the future of the GBA
Financial policymakers think of the region as having a north and a south. To the south, Hong Kong and Macau have long traditions facing outward towards international partners, while the powerhouse of economic development and innovation takes place primarily in the nine cities to the north.
The northern cities have an estimated combined annual savings of $567 billion, while Hong Kong and Macau’s is estimated at $119 billion. Combined, the GBA is the richest megalopolis in the world, and as China continues to develop wealth creation in the region, the pool of private investable wealth may more than double over the course of the next decade.
Regional integration took a major step forward in 2014 when the Shanghai-Hong Kong Stock Connect initiative enhanced trading and clearing fluidity between the mainland cities and Hong Kong. In 2016, the Shenzhen-Hong Kong Stock Connect extended that framework.
Just last year, the Wealth Management Connect initiative expanded the scope of these integrations much further by creating a platform for cross-boundary investment accounts held directly by individual retail investors, a fact of enormous significance to wealth management firms and banks serving the region. This initiative may serve as the basis upon which future conduits for wealth creation will be modeled.
Wealth Management Connect will enable Hong Kong and Macau investors to buy investment products sold on the mainland (the Northbound Scheme), and allow investors in the mainland provinces to buy products sold in Hong Kong and Macau (the Southbound Scheme).
To take advantage of this, private investors open a “dedicated remittance account” with a cross-boundary remittance function in their region of residence, and a “dedicated investment account” outside of it. The accounts are paired, and each investor should have only these two accounts.
Initially, individual investors will be limited to portfolios of ¥1 million. Most analysts believe this limitation is designed to get the initiative off to a smooth start, and that it will be lifted as the system matures.
The two schemes are designed to further establish the RMB as an international reserve currency. While some Southbound activity will be traded in the asset’s currency, the remittance accounts will convert assets to RMB, and most transactions are expected to originate and conclude entirely in RMB.
We expect the Chinese government to continue to build upon this deep experience, and to not only lift the protective account quotas established during the initiative’s introductory phase, but to leverage the expertise they are developing into a broad, permanent, regional transformation.
What this future holds for wealth managers
Investors seem to wholeheartedly agree with this prognostication. Demand for boundary-less investment opportunity is huge, indicating that the market is confident in the future and sees great potential. An HSBC survey of GBA investors found that an astonishing 82% of them plan to embrace the investment opportunities opened by the Wealth Management Connect initiative.
This presents an historic pivot point for the wealth management industry. Avaloq recently conducted an international survey with affluent to ultra-high net worth individuals, asking, among other things, penetrating questions about their approach to wealth management, what they wanted most from their advisors, and what they expected in the near future. To give us a good proxy for sentiment in the GBA, we have averaged the data we have from China and Hong Kong, with the weight in Hong Kong's favour. All of the GBA statistics presented in this report were arrived at using that weighted average.
Our data paints a clear picture. At the topmost level, we discovered that 78% of GBA investors feel that they control the management of their investments. Only 12% of them interact with a professional.
But an astonishing 34% of them plan to work with an advisor in the future.
Demographically, many of these people are younger, and the vast majority acquired their wealth themselves and in recent years. In some ways, this makes them significantly different from “traditional” clients. But in just as many ways, they have exactly the same needs that wealth management clients have always had.
Banks and firms serving them will be more likely to succeed if they are able to cater to the full spectrum of their expectations.
Cases for successfully bridging the data divide
One of their most important modern expectations is that they want a seamless digital experience with their banking and investment management providers. When we asked those with advisors what might make them switch to a different one, 28% said they would switch if their advisor was “reluctant to modernize” and did not “adopt new technologies”.
Most wealth management firms in the Greater Bay Area are rising to this challenge, as we’re seeing a burst of investment in financial technology (fintech) and cybersecurity, with some surveys suggesting that 9 out of 10 businesses are investing or planning to invest.
However, it is crucial to understand that demand for a modern digital experience should not be equated with a desire to interact only with an elaborate app. Interactivity through apps and websites is important, but these clients are highly cognizant that those technologies can serve them well in only limited areas of their relationship with their bank and investment advisors.
They still want the traditional high-touch service that most firms have built their reputations upon. In fact, when we asked, “How important is highly personalized service?” an incredible 93% of them said that they either “must have” it or that they “would switch” to get it. An equally astonishing 46% said they would switch their advisor if they failed to adapt to their changing situation or needs.
In other words, GBA prospects and clients want their banker and their advisor to listen to them attentively and to provide advice and services tailored to their personal needs, which has always been the case in the wealth management industry. The only thing that is truly new is that they want deliverables and interactions to be digitally savvy and on pace with the innovations they see all around them.
Now that we have a top-level executive overview of the opportunity and the essential elements banks and wealth management firms will need to successfully compete, in the next two articles in this series we will turn our attention to proprietary Avaloq research that provides precise insights into how wealth management firms can best meet these demands to establish themselves now and to prepare for the significant wealth expansion that is almost certainly to come in the near future.