Strong, sustained growth in Asia-Pacific’s wealth base continues to come with a dark side: high costs and a low return on assets for the region’s wealth managers.
But the payback for houses investing in the region is likely to be “substantial” in the long term, particularly if they focus on less wealthy and less sophisticated investors, says Boston Consulting Group in its 2011 wealth report.
Innovation from product providers will be critical to helping global wealth managers expand their footprint in the onshore wealth market, the consultancy argues.
Wealth grew faster in Asia-Pacific ex-Japan than anywhere else in the world in 2010, rising 17.1 per cent to end the year at $21,700bn, according to BCG. At double the global average increase of 8 per cent, that compares with 10.2 per cent in north America (to $38,200bn) and 4.8 per cent in Europe ($37,100bn).
BCG defines wealth as financial or bankable assets, excluding privately held businesses, property or other illiquid holdings, such as art or wine. Currency appreciation in Asia-Pacific adds a tailwind that may not be evident in regional comparisons. Using end-of-year exchange rates, the region’s wealth increased 22.8 per cent.
Wealth in the region has also grown more concentrated, with the proportion of total assets held by US-dollar millionaire households increasing by 2.9 percentage points in Asia-Pacific, compared with 1.3 points in north America.
Singapore’s 170,000 millionaire households give the Lion City the highest concentration of any country, at 15.5 per cent, according to BCG. The 200,000 with $1m account for 8.7 per cent of households in Hong Kong, with Switzerland and Qatar falling in between. China sits far down the list in terms of concentration but boasts 1.11m total millionaires, third behind Japan (1.53m) and the US (5.2m).
Still, Asia-Pacific’s wealth management market remains “revenue-challenged”, says BCG managing director Tang Tjun, a Hong Kong-based partner and a co-author of the wealth report.
Assets managed by private banks and others in Asia-Pacific increased 12 per cent in 2010, marking the second straight year of double-digit growth, according to the report, titled Shaping a New Tomorrow: How to Capitalise on the Momentum of Change.
But return on assets held steady at 73 basis points, the same as in 2009. North American private banks fared much better in comparison, raising ROA from 84 bps to 92 bps in 2010, while European offshore institutions saw ROA of 89 bps and European onshore institutions 76 bps. Only north American brokers saw a decline in ROA, falling from 83 bps to 78 bps.
Cost-to-income ratios were higher for Asia-Pacific wealth managers in 2010 than for nearly all other segments.
The region saw ratios remain at 81 per cent, while European offshore and onshore institutions saw small declines to 69 and 65 per cent respectively.
Asia-Pacific’s ratios are “too high”, says Mr Tang. Prior to the crisis, they were in the 55 to 60 per cent range, thanks in part to strong sales of structured products.
BCG’s findings reflect concerns that have been acknowledged by regional wealth management leaders in recent years.
“Both increasing competition in Asia, as well as the regulatory and client behaviour changes in and after the financial crisis, have put a strain on private banking economics,” Shayne Nelson, chief executive of Standard Chartered Private Bank, said in March.
Indeed, the shift away from high-margin products and towards plain vanilla ones is coming through in the revenue lines, says Mr Tang.
“I think wealth managers have tried to manage and control costs, but the profitability isn’t there because they’ve been challenged on the revenue model, particularly when the bulk of the business has been very transactional based.”
Scott Johnson is associate editor of Ignites Asia, a Financial Times service where this article first appeared