The year 2015 marks the conclusion of the “12th Five-year Planning” and the commencement of the “13th Five-year Planning”. The New Normal of macroeconomy leads to the accelerated financial reform, rocketing development of wealth management institutions, high demands of high net worth individuals (HNWIs) and rapid changes in technologies. All of these push the private banking into a new era of development. Industrial Bank (IB) and the Boston Consulting Group (BCG) jointly released the comprehensive development report of private banking in China – “China Private Banking 2015: Set Sail to Win” – hoping to push the prosperity of wealth management in the new golden ten years for the industry.
On August 18, 2015, IB and BCG held a press conference in Beijing, announcing the joint release of the comprehensive development report of private banking in China -- “China Private Banking 2015: Set Sail to Win”.
As is pointed out in the report, the private wealth in China will hit RMB 110 trillion in 2015, and there are 2.01 million HNWI families, accounting for about 41% of the private wealth. Laying stress on analyzing features of HNWI customers and their wealth management needs under the New Normal of economy, the report puts forward the competition situation and differentiated development routes of high-end wealth management market in China in the future. In the meantime, some ideas are also advanced for the private banking to embrace the “internet+” age.
When analyzing the development of private banking, Vice President Chen Jinguang of IB indicated that compared with the position of commercial banks as a whole in the entire Chinese finance industry, the penetration rate of China’s private banking among HNWIs was only around 8%, with a great room of development, and considering the increasingly booming needs of HNWIs for receiving individualized and integrated products and services, China’s private banking was in a period of strategic opportunities. Private banking is not the upgraded version of wealth management. In terms of its business nature, it stresses more on offering integrated financial services for HNWIs across industries, products and borders.
David He, Partner and Managing Director of BCG and person-in-charge of China Finance Think Tank, indicated that after developing at a high speed for 8 years, China’s private banking has entered into a new historic stage of development following the initial stage of building institutions, teams and brands and the fast development period highly depending on products of rigid repayment and high returns. In 2015, China’s private banking is confronted with a complex external environment characterized by the transformation of macroeconomy, reform of financial market, more complicated and diversified customer needs, and increasingly intense cross-sector competition, private bankers must define and position the private banking in a manner more comprehensive and objective. On the other hand, they must cultivate the capability of tailored intensive operation and strive toward the five development directions, namely open products, diversified services, professional teams, internet-based thinking, and globalized capacity resorting to refined management measures, with the vitality and momentum of business development guaranteed by flexible mechanisms. In this way, they can really return to the business origin of “managing wealth for others based on their enjoinment under their entrustment”.
Six main features of HNWIs under the New Normal of economy
The needs of HNWIs in China become increasingly complicated and diversified, which can be seen in the following aspects: investment areas changing from simple to diversified, risk appetite from being conservative to accepting some high and medium risks, products from standardized to customized, investment demands from individual service to family-oriented comprehensive service, investment vision from focusing on domestic investment market to developing overseas markets, and service mode from domination of offline service to combination of both online and offline service. In essence, the financial needs of customers are returning to “professional investment and wealth management” and “integrated financial service”.
Investment areas changing from simple to diversified
The investment areas of private banking customers are extending from products related to savings and fixed incomes (including trust products with quasi-fixed incomes) and real estate gradually to diversified areas such as secondary market, cash management, trust and PE/VC. According to the survey results, every interviewee covers nearly 4 different investment areas on average, and those HNWI customers with investable assets over RMB 30 million take stock, trust and real estate as the most important investment means.
Risk appetite changing from being conservative to accepting some high and medium risks
As indicated by the survey results, 68% of the interviewed customers are willing to assume certain risks, a ratio increasing significantly compared with the statistics of customer survey conducted by BCG in 2012. Against general background where the wealth management and financial markets become increasingly mature under the New Normal of economy, the private banking needs to enhance the rational understanding of customers to risks/returns, guide customers to manage their radical investment enthusiasm, make rational investment, and find a reasonable balance point among products of low risks and high risks.
Products changing from standardized to customized
What customers with investable assets of RMB 6-30 million care the most is the product yield, and some standardized products with guaranteed liquidity and relatively high product yields can meet the demands of these customers in a desired manner. HNWI customers with investable assets over RMB 30 million attach greater importance to the liquidity of capital and overall yield, and they are more inclined to choose those products and services customized and combined according to their own needs.
Investment demands changing from individual service to family-oriented comprehensive service
Of the interviewed customers, 84% get married and have kids, so it becomes a major area of concern for them to pass on wealth. Specifically, about 21% of them have begun to make arrangement for the inheritance of their property, and 37% have not but will consider recently making arrangement for the inheritance of their property. This indicates that the family-oriented wealth management will have a broad prospect in the future.
Investment vision changing from focusing on domestic investment market to developing overseas markets
As revealed in the analysis of purpose of overseas investment, the most important reasons that private banking customers make investment overseas are the relative isolation of overseas assets from domestic assets and improvement of security guarantee, accounting for 38%. The following ones are the needs of wealth appreciation and hedge against domestic risks, accounting for 37% and 32% respectively. In addition, for HNWI customers with investable assets over RMB 30 million, it is an important reason to make it easy for their business development overseas.
Service mode changing from domination of offline service to combination of both online and offline service
The service capacity and quality of the team of private banking customer managers still stand at the core of HNWIs' needs: 54% of the HNWIs take the essential qualities and professional capabilities of private banking customer managers as the foremost criteria for choosing a wealth management institution, and 65% of private banking customers will still choose a customer manager as the chief contact in the future. However, changes have already appeared quietly in addition to the trends remaining unchanged. Under the current circumstance that the internet tide sweeps across China, as revealed in the survey, the HNWIs are gradually stepping into the “Digital Generation”, and nearly 80% of China's HNWIs are using digital financial products and services.
Differentiated development routes of high-end wealth management institutions under the comprehensive financial situation
The high-end wealth management market in China shows a competition situation where a variety of institutions are flourishing. Specifically, the market is dominated by private banking institutions, which are followed by securities companies and trust companies. Private banking and third-party wealth management institutions are both regarded by customers as supermarkets of financial products or integrators of diversified wealth management products.
With the progress in a market-oriented finance industry, the bonuses brought by licenses will disappear gradually, and various institutions will develop step by step based on their own resources and qualifications under an easier regulatory environment, and establish differentiated positions in terms of customer group, product and service. Generally speaking, the report points out, commercial banks will explore the high-end wealth management market in depth and stride toward all-round service-oriented private banking. Third-party financial management companies will develop all-round service-oriented and independent consulting service-oriented models in parallel, and meanwhile they will face the challenge of shuffling. If they can overcome the shortcomings such as low brand recognition, indefinite regulation prospect and weak group collaboration, they may have direct impact on the private banking institutions in the banking system. Trust companies will exploit the first-mover advantages in the area of assets management thoroughly and exercise their specialized strengths in some specific areas, becoming product specialists in the high-end wealth management market. Fund companies will, making use of their investment and development capabilities in the secondary market, make differentiated business operation based on product innovation, compete with others in the wealth management market, and scrabble for the position of product specialist in the high-end wealth management sector. Securities companies will develop in obvious hierarchy, and large brokerages with the capabilities of investment and development and advantages in investment banking will stride toward US-style all-round brokerages. Yet, insurance companies will come into the arena slowly as powerful challengers, attaching importance to both product specialist status and consulting service.
Private banking embracing the age of internet
It is pointed out in the report that a large number of leading private banking institutions overseas have begun internet-based improvement on the weak points of the conventional business models, for instance, customized investment advice, analysis and simulation of investment portfolio, and real-time interaction. Meanwhile, enterprises represented by “financial technology” companies are entering the segments of private banking by decomposing the business value chain, attracting customers with excellent experience and high cost-performance ratio.
No matter from the perspectives of market development and customers' needs, or from application of technologies and horizontal competition, it is unavoidable and inevitable for China's private banking to embrace internet, which will boost the profound improvement and reform of private banking models.