A bounty awaits (wealth management potential in Asia)

The rapid growth of Asia's middle class offers enormous potential for financial planning in the region.

By Michael Laurence

Arun Abey, executive chairman of Australian-based financial planning group ipac Securities, takes what initially seems a surprising tactic. He encourages competing Australian firms to follow in ipac's path of establishing financial planning businesses in Asia. 'Frankly, quality competition will help us grow the market,' Abey says.

Abey is keen to promote among Asia's burgeoning middle classes and higher-income investors the concept of holistic financial planning, long practised by ipac. In short, this approach to financial planning involves a financial planner gaining a thorough understanding of an investor's aspirations, needs and goals; identifying a long-term asset allocation for their investments to maximise their opportunities with the least possible risk; and suggesting ways to protect their wealth.

'We want to understand the investor as a whole – to provide full advice,' Abey says. 'We do not act as a broker, providing bits and pieces of advice.'

For much of the emerging Asian market, this represents a significantly different approach to making investment decisions. Many Asian investors favour highly conservative bank accounts, yet at the same time speculate to a surprising degree in stocks and property.

Abey has great expectations for the growth of ipac's Asian business. 'I have no doubt that our collection of Asian businesses in terms of private clients will be bigger than our Australian private client business in 10 years,' he says. This should be seen in the context that Abey views Australia 'as a long way' from being a mature market.

The tremendous promise for financial planning in Asia comes from a combination of factors that all seem to be coming together at once: the blistering growth of its middle classes and the rapid ageing of its population against a backdrop of minimal social security nets and a savings rate that far outstrips the rest of the world.

Peter Promnitz, region head for Asia Pacific for Mercer – global consultants in investments, human resources and superannuation pensions – says Asia faces a massive challenge in terms of creating retirement savings for an ageing population. He points, for instance, to the ramifications of China's one-child policy and South Korea's extremely low birth rate.

The growth of Asia's middle class is well documented. The Chinese affluent, urban middle class already holds almost 10 per cent of income that can be disposed of on luxury goods – despite numbering just 1 per cent of the population, according to 'The value of China's emerging middle class', a special report published in The McKinsey Quarterly, 2006.

'And over the next 20 years,' states the report, 'more people will migrate to China's cities for higher paying jobs. These working consumers, once the country's poorest, will steadily climb the income ladder, creating a new and massive middle class.'

India is another story of fast-growing personal wealth. 'Hundreds of millions of Indians are being lifted out of desperate poverty to create a massive middle class in the cities,' reports 'Tracking the growth of India's middle class', a special report published in The McKinsey Quarterly, 2007.

And the number of high-wealth individuals (HWI) is, not surprisingly, expanding at a staggering pace. World Wealth Report 2007, published by Capgemini and Merrill Lynch, lists Singapore, India and Indonesia as the countries with the world's fastest growing numbers of HWI. Other Asian high-growth regions that have particularly fast growing numbers of super-wealthy residents are South Korea and Hong Kong.

David Thomas, chief executive of Think global – a consultancy specialising in promoting the use of Australia's financial services expertise overseas – believes that Asia represents a huge opportunity for Australian financial planners, and that this should not be lost. Thomas was a financial planner in Hong Kong for eight years.

Financial planning businesses establishing themselves in Asia have to deal with regulatory regimes that range from the highly developed to the rudimentary. Asian countries such as China, India, Indonesia and Malaysia have limited investment opportunities, according to Opportunity knocks – unlocking the wealth management potential in Asia pacific, published in 2007 by Deloitte.

Thomas says another of the challenges for Australian financial planners entering Asian markets is the importance that many local advisers place on up-front commissions and on the sale of products.

And he says financial planning to many Asians can mean investment advice rather than a holistic approach to fi-nancial planning.

Abey likens the current state of the financial planning market in Asia to Australia 20 years ago. 'Except,' he forecasts, 'Asia will catch up to us within five years.'

Mercer has 1000 employees in Asia providing advice ranging from corporate structures, employee remuneration and development of investment processes. Promnitz says the emphasis in China at this point is on getting the corporate structure right.

According to Promnitz the provision of holistic financial planning in mainland China is most definitely limited at this stage. But he forecasts that demand will greatly rise in response to expectations for fast-growing retirement savings.

Three years ago, the Chinese government established a voluntary corporate pension scheme, the Enterprise Annuity system. 'It is coming from a very low base,' Promnitz says. 'But once momentum is picked up, the scheme will accelerate past Australia's funds under management in superannuation.'

Noel Maye, chief executive of the Financial planning standards board in Denver, Colorado – which owns the certified financial planner (CFP) certification program outside the US – says that the concerns of Asia's emerging middle classes are the same as Baby Boomers anywhere. These involve educating children, managing their own wealth (including savings for their own retirement), and looking after ageing parents.

And just as in the West, Maye says Asia faces ageing populations that are living longer. 'Their needs [because of ageing] are greater and more complex,' he says. The CFP program in Asia is offered in mainland China, Hong Kong, Japan, South Korea, Taiwan, Indonesia, Malaysia, India and Thailand.

Another key reason why Asia represents such fertile territory for financial planners is the sheer level of household savings.

Deloitte's 2007 book Opportunity knocks – unlocking the wealth management potential in Asia pacific, states that the world's highest household savings rates are in Singapore (33 per cent of household income), Indonesia (28 per cent), India (22 per cent) and China (16 per cent). These figures, based on OECD statistics, leave the attempts at savings by Australians and Americans looking extremely miserable.

As ipac's Abey says, there is no problem in persuading Asians to save for their retirement: '[But a problem is that] the money in lazy bank accounts is huge.'

Derek Young, chief executive of ipac Asia, says, 'We are actually bringing a new language to Asia: the concept of financial planning.' And then he asks with a laugh: 'How do you translate asset allocation into Mandarin?'

One approach that ipac has adopted in dealing with cultural differences is to recruit some financial planners from Australia's Australian–Chinese community and bring them back to Asia.

Founded 25 years in Australia and bought by AXA Asia Pacific in 2002, ipac established businesses in Hong Kong and Singapore in January 2003. These offices have 25 financial planners among their 90 employees.

Today, ipac in Australia has $16B under management; $5B for private clients. And the Asian private client business has $500M under management – 10 per cent of its Australian private client business. Yet, as discussed, ipac's Abey expects the Asian private client business to be bigger within a decade.

Australian financial planning group Professional Investment Services (PIS), whose headquarters are on the Gold Coast, is a pioneer in terms of an Australian company offering financial planning in Asia. The location of its Asian offices include mainland China (Beijing), Hong Kong, Singapore, Malaysia and Thailand. PIS began its push into Asia by opening an office in Singapore six years ago.

PIS chief executive Robbie Bennetts likes to think his group's Chinese business will one day be bigger than its Australian operation. PIS develops its business in Asia by gaining referrals from local accountants.

Bennetts emphasises that an important factor for PIS is the reputation of accountants for professional and ethical conduct.

One point that concerns Bennetts is that some Australian financial planners offer their services in Asian countries such as Singapore without first gaining local licences. 'They don't realise they are breaking the law,' he says. 'And it's not showing much empathy.'

David Thomas of Think global says Australian financial planning firms operating in Asia have tended to focus more heavily, at least initially when opening a new office, on Australian expatriates because 'these are the low-hanging fruit'. But Thomas emphasises that the greatest long-term opportunities are from serving the Asians themselves.

Bennetts says at first his group concentrated on Australian expatriates, and then expanded to serving local Asian residents. A similar path has been taken by ipac, with Young emphasising that Australian expatriate clients remain highly significant contributors to its businesses in Hong Kong and Singapore.

Barry Lambert, founding chairman of the Count Financial Group, has built the core of Count's listed business on the concept of assisting accountants to provide financial planning services.

Lambert says that while Count is mindful of the growing personal wealth in Asia, Australia's superannuation system provides great opportunities for financial planners within Australia.

Count will only move beyond Australian shores when the right opportunities with suitable partners arise. Lambert says it is inevitable that Count will move into Asia one day. Count director and former CPA Australia national president Jocelyn Martin represents CPA Australia in Asia.

Lambert points out that the tremendous opportunities for financial planners within Australia perhaps underlines the basic reason why the numbers of successful Australian financial planning groups offering their services in Asia remains relatively small at this stage.
Financial planning by country

Singapore
Financial planning environment: This is the most mature market in Asia in terms of understanding the need for financial planning, says Derek Young, chief executive of ipac Asia. 'The principal reason is the government knows that people should save for their retirement.'

Young says Singapore's government has recognised that the amount of savings in Singapore's pioneering and mandatory Central Provident Fund, founded in 1955, is not enough to fund the retirement of its citizens. 'The government has taken steps to raise awareness that individuals should be saving for their retirement,' Young says.

Regulatory environment: Young describes Singapore's regulatory regime as strong, and points to the Financial Advisers Act that specifically covers those giving financial advice.

Robbie Bennetts, chief executive of Professional Investment Services (PIS), agrees that Singapore has a high standard of regulation of financial planners. 'It's modelled after Australia's system,' he says. 'There are very serious consequences for financial planners who don't behave themselves. The regulator is tough on [for example] churning.' (Churning involves recommending that clients unnecessarily sell one investment product to buy another in order to earn more commissions.)

A corporation carrying on business as a financial adviser must hold a financial adviser's licence, unless exempted. Individuals giving financial advice must hold a representative's licence, unless working for an exempt corporation.

Hong Kong
Financial planning environment: Hong Kong has long catered to managing the personal wealth of high-wealth individuals (HWI), largely through private banks. Yet Hong Kong is three to five years behind Singapore in the community's recognition of the need for financial planning, says Derek Young of ipac Asia.

Most of the financial planners in Hong Kong work for large banks and insurance companies.

Since 2000, all employees in Hong Kong have had to enrol in its pension scheme, the Mandatory Provident Fund. And Young says there is a growing acknowledgement that people must save for their retirement.

Hong Kong also has a well-developed corporate pension scheme.

Regulatory environment: Young says there is a reasonable regulatory regime for financial planners, and a review is under way about how to more definitely regulate them.

Robbie Bennetts of PIS describes the standard of regulation in Hong Kong as 'quite mature' against what he regards as the 'quite immature' development of its investment products.

Hong Kong's wide-reaching Securities and Futures Ordinance, which came into operation in 2003, is designed to improve the quality of the investment market and to improve protection of investors.

Mainland China
Financial planning environment: Derek Young of ipac Asia says mainland China presents a challenge for foreign financial planners offering their services. The regulatory regime is weak, there are restrictions on investments outside China, and the recognition of the need for financial planning advice is not strong.

Another challenge in mainland China for financial planning is the amount of local speculation on emerging businesses and property development.

Peter Promnitz, region head of Asia Pacific for Mercer, points out that a Chinese venture partner is required for such activities as funds management and the provision of trustee services.

Regulatory environment: Robbie Bennetts of Personal Investment Services (PIS) says the Chinese mainland has a 'web of regulation' that can differ from region to region. Nevertheless, Bennetts has high hopes for his group's move into mainland China: 'There are wonderful growth opportunities.'

Malaysia
Financial planning environment: Young describes Malaysia as 'immature' in its recognition of the need for financial planning. 'It is about 10 – 15 years behind the trend setting Singapore,' he says. 'But it won't take Malaysia long to catch up.'

Robbie Bennetts of PIS says the standard of investment products available in Malaysia is generally poor, and there is the need to educate advisers away from the practice of selling one product to dealing with a range of products.

Malaysia has long had an Employees Provident Fund for private-sector employees and public servants who don't have a pension.

Regulatory environment: Derek Young of ipac says Malaysia is learning about regulation from places such as Australia. Indeed, he points out that Australia has created something of an export industry, with former ASIC regulators working as consultants in Asia to help develop their regulations.

Bennetts describes regulation of financial advice as at an 'immature' stage of its development.

The Securities Commission, Malaysia, regulates those working in the financial markets. There are licences covering financial planners, investment advisers and investment representatives. However, key exemptions from licensing requirements exist.


Reference: February 2008, volume 78:01, p. 36 – 41