The wealth management market in Asia is presenting a significant growth opportunity for many banks in Hong Kong. This is being driven by a number of factors including the outlook for increased economic growth and wealth generation in the region, the fact that Asia is a relatively new wealth management market, and policy changes in Hong Kong and the Chinese Mainland that will support the continued development of the industry.
Over recent decades, there has been a significant level of emerging wealth in Asia, particularly in China, that was created by first-generation entrepreneurs and business owners. That wealth is now being passed down to the second and third generations. At the same time, the Chinese Mainland’s GDP has grown significantly creating new first-generation wealth. All of this is creating more opportunities for the wealth management sector.
Mainland China market outlook
Given these developments, many Hong Kong banks have focused on the China market. Traditionally, this has been through the offshore model, where the bank and booking centre for the wealth management business is based in Hong Kong. The bank targets onshore clients who have capital assets in Hong Kong, and provides them with investment advice, access to a broad range of products and, for ultra-high-net-worth (UHNW) clients, access to estate planning and trust services.
The potential of China’s wealth management sector is being shaped to a certain extent by policy developments. At the 20th Party Congress held in October last year, a number of themes emerged, including:
an increased focus on high-tech industries, real economy and science, which will drive more wealth generation
which includes opening up the China market to increased international trade and collaboration with foreign institutions, including foreign banks. In this context, Hong Kong is well positioned to play a role as a ‘super connector’
which aims to raise standards for those on lower incomes and increase the size of the middle class
Another driver for wealth management is the shift away from traditional forms of investing. Historically, people in China have saved cash, invested in risky products or put their money in property. Real estate investment is likely to have a diminished role going forwards, partly because of the fall in values but also due to the China government’s policy that “Property is for living in and not for speculation”.
As household savings are redirected from property into financial investments, Chinese investors will need better wealth management services, especially as there is also an increasing emphasis on wealth preservation and succession planning. It is expected that investors will start to seek more holistic wealth-planning advice and portfolio construction capabilities, and will also look to have investment holdings that are more diversified, to spread their exposure to risk.
To play a part in the growing China market, foreign banks have been positioning themselves in two ways. One is the offshore model, as described above where the client’s account may be booked in Hong Kong or Singapore, and another is the onshore model: over the last decade, a number of multinational banks have established securities entities and locally incorporated banks onshore so they can deliver private wealth management services in China. This has been a long process, and also a learning process for many of them, given that domestic wealth managers have much a larger customer base, distribution strength and a deeper understanding of onshore clients’ needs. However, this long-term plan has started to pay off and foreign banks are now seeing more interest in their products and services.
Foreign banks with onshore presence seeking to seeking to capitalise on growth opportunities in the wealth management sector should ensure that they develop products and services that are relevant to customers’ evolving needs, continue to broaden their distribution capability and continue to invest in their brand to increase recognition and differentiation in a high competitive market.
Hong Kong market outlook
Wealth managers based in Hong Kong are broadly optimistic about growth in the sector in the next few years. In last year’s KPMG PWMA Hong Kong Private Wealth Management Report, 67% of survey respondents said that they expected to see annual growth of between 6% and 10% in the next five years, with 22% of respondents anticipating growth of between 11% and 20%.
Furthermore, the reopening of the border in early 2023 has been a very positive development. The long period of travel restrictions created significant pent-up demand, and now clients from the Chinese Mainland can come to Hong Kong to open accounts and explore other wealth management services.
The Hong Kong government has also introduced a number of policy incentives. These include the new family office tax regime, which provides a profits tax exemption for qualifying transactions in Hong Kong and encourages UHNW families to set up a family office in the city. These clients tend to have complex requirements including assets in multiple jurisdictions, succession planning and insurance needs.
Another incentive, announced in this year’s Budget, are changes to the Capital Investment Entrant Scheme. This scheme allows individuals to gain residency in Hong Kong if they invest a certain amount in local assets, including equities listed in Hong Kong. Such programmes should attract more capital to Hong Kong, which will in turn drive the demand for wealth management services.
Private banks that plan to meet the demand of new family offices setting up in Hong Kong will need to ensure that they can provide the breadth of services that UHNW families will need in addition to wealth advisory capabilities including trust services and succession planning, wealth preservation and insurance solutions, access to a network of tax and legal advisors, and for selected clients the ability to meet their ESG related and philanthropic needs.
Themes and challenges
A number of other themes will shape Hong Kong’s role as a hub for the wealth management sector.
Virtual assets will continue to be an interesting area, especially as Hong Kong has introduced more regulatory clarity, including licensing requirements to operate a virtual assets trading platform and clear rules around the sales and suitability obligations for wealth managers if they plan to provide their clients with access to virtual assets. It is early days for these types of assets in the private wealth management sector, but potentially an emerging trend over the next few years. Private wealth managers should gauge their clients’ appetite for virtual assets, particularly UHNW clients who may be trading on virtual asset exchanges directly or gaining access via hedge fund investments, and explore building linkages with licensed exchanges in Hong Kong and updating suitability rules and portfolio advisory tools to accommodate this emerging asset class.
Over recent years wealth managers in Hong Kong have invested heavily in digital propositions. These have developed from simple propositions such as giving clients the ability to buy and sell equities and other products to providing clients with educational content, research and actionable investment ideas. Banks have also invested in AI to better understand clients’ needs and interests, which is also giving relationship managers more information to enable them to have more insightful discussions with clients. Looking to the future, private wealth managers should start exploring the use cases for large language models and generative AI across the bank, whilst being mindful of the risks of this emerging technology, as it is likely to have a significant impact on client servicing, market and data analysis and risk management.
While the Chinese Mainland will likely remain the key driver of Hong Kong’s wealth management sector, the emerging wealth across the rest of Asia is also creating a growing middle class is providing a further and growing market. Associated with this segment is the growth of the robo-advisory landscape across Asia, which while still small in absolute terms has been growing steadily. Private wealth managers, particularly those with an affiliated asset management business, should assess if robo-advisory tools can be deployed to provide a lower cost distribution channel in developing markets.
Another theme that will impact the wealth market is the shifting demographics in the Chinese Mainland and across the rest of Asia as wealth passes down to the second and third generations. These younger generations have different requirements, especially when it comes to ESG and sustainable investing. Currently, there is a scarcity of products in this space to meet the rising interest, so there is an opportunity for Hong Kong wealth managers to differentiate themselves in terms of offering a range of ESG and sustainability products. Private wealth managers should seek to understand their clients’ ESG perspectives, priorities and needs during client onboarding or during periodic portfolio reviews, have a robust product due diligence process supported by appropriate data feeds, and develop reporting tools and dashboards that allow customers to track the impact of their investment in terms of their specific ESG priorities.
Wealth managers in Hong Kong will also need to manage ongoing challenges. For example, there is pressure to increase efficiency and manage costs while also pursuing growth opportunities and increased revenue to maintain, and ideally reduce, the bank’s cost-income-ratio. Additionally, scarcity of talent is likely to remain an issue for the foreseeable future as banks compete for experienced relationship managers and individuals with product and regulatory expertise. Private wealth managers will therefore need to continually look for opportunities to reduce variable and fixed costs, for example by consolidating support activities and infrastructure across booking centres and at the same time build an operating model, products and services suite. They should also create a corporate culture that will develop, attract and retain the best relationship managers and client-facing staff.
The next couple of years will be exciting times for the Hong Kong wealth management sector as competition intensifies, further opportunities in the Chinese Mainland emerge, new technologies become available, and wealth providers navigate the challenges and risks associated with operating in the sector.
An in-depth view into the current industry landscape, growth opportunities and trends along important themes of technology, regulation and talent
An in-depth view into the current industry landscape and growth opportunities